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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2003
FNB BANCORP
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
000-49693 92-2115369
(Commission File Number) (IRS Employer Identification No.)
975 El Camino Real, South San Francisco, California 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 588-6800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock as of May 12,
2003: 2,437,043 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
March 31 December 31
2003 2002
--------- -----------
Cash and due from banks $ 18,084 $ 17,804
Federal funds sold 13,115 2,395
--------- -----------
Cash and cash equivalents 31,199 20,199
Securities available-for-sale 67,093 75,963
Loans, net 286,965 284,889
Bank premises, equipment, and leasehold improvements 11,119 11,280
Accrued interest receivable and other assets 8,881 9,503
--------- -----------
$405,257 $401,834
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand, noninterest bearing $ 92,039 $ 88,495
Demand, interest bearing 49,208 52,480
Savings and money market 119,858 116,879
Time 90,075 89,552
--------- -----------
Total deposits 351,180 347,406
Accrued expenses and other liabilities 2,960 3,225
--------- -----------
Total liabilities 354,140 350,631
--------- -----------
Stockholders' equity
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 2,437,000 shares at March 31, 2003
and December 31, 2002 26,492 26,492
Retained earnings 23,232 22,907
Accumulated other comprehensive income 1,393 1,804
--------- -----------
Total stockholders' equity 51,117 51,203
--------- -----------
Total liabilities and stockholders' equity $405,257 $401,834
========= ===========
See accompanying notes to consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
EARNINGS
(UNAUDITED)
(In thousands, except per share amounts)
Three months ended
March 31,
--------------------------------
2003 2002
--------- ---------
Interest income:
Interest and fees on loans $ 5,045 $ 5,690
Interest on taxable securities 425 445
Interest on tax-exempt securities 320 341
Federal funds sold 22 52
--------- ---------
Total interest income 5,812 6,528
Interest expense:
Interest on deposits 750 1,158
Other -- 9
--------- ---------
Total interest expense 750 1,167
Net interest income 5,062 5,361
Provision for loan losses 620 75
--------- ---------
Net interest income after provision for loan losses 4,442 5,286
Noninterest income:
Service charges 680 407
Credit card fees 203 217
Other income 96 62
--------- ---------
Total noninterest income 979 686
Noninterest expense:
Salaries and employee benefits 2,831 2,643
Occupancy expense 323 326
Equipment expense 379 758
Professional fees 197 247
Telephone, postage and supplies 234 254
Bankcard expenses 186 185
Other expense 446 457
--------- ---------
Total noninterest expense 4,596 4,870
--------- ---------
Earnings before income tax expense 825 1,102
Income tax expense 207 336
--------- ---------
NET EARNINGS $ 618 $ 766
========= =========
Earnings per share data:
Basic $ 0.25 $ 0.31
========= =========
Diluted $ 0.25 $ 0.31
========= =========
Weighted average shares outstanding:
Basic 2,437,000 2,435,000
========= =========
Diluted 2,440,000 2,444,000
========= =========
See accompanying notes to consolidated financial statements
3
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three months ended
March 31
--------------------------------
2003 2002
-------- --------
Cash flow from operating activities
Net earnings $ 618 $ 766
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization 407 577
Provision for loan losses 620 75
Changes in assets and liabilities
Accrued interest receivable and other assets 622 111
Accrued expenses and other liabilities (552) (163)
-------- --------
Net cash provided by operating activities 1,715 1,366
Cash flows from investing activities
Purchase of securities available-for-sale (3,975) (13,357)
Proceeds from matured/called/securities available-for-sale 12,710 14,753
Net increase in loans (2,696) (2,455)
Purchases of bank premises, equipment, leaseholdimprovements (157) (453)
-------- --------
Net cash (provided) in investing activities 5,882 (1,512)
Cash flows from financing activities
Net increase in demand and savings deposits 3,251 19,395
Net increase (decrease) in time deposits 523 (1,508)
Net decrease in federal funds purchased -- (2,100)
Dividends paid (293) (1,484)
Payments on capital note payable (78)
-------- --------
Net cash provided by financing activities 3,403 14,228
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 11,000 14,082
Cash and cash equivalents at beginning of period 20,199 22,493
-------- --------
Cash and cash equivalents at end of period $ 31,199 $ 36,575
======== ========
Additional cash flow information
Interest paid $ 813 $ 1,463
Income taxes paid $ -- $ --
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
FNB Bancorp (the "Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California on February 28, 2001. The consolidated
financial statements include the accounts of FNB Bancorp and its wholly owned
subsidiary, First National Bank of Northern California (the "Bank"). The Bank
provides traditional banking services in San Mateo and San Francisco counties.
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 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. The change in capital structure has been included for all periods
presented.
Significant intercompany transactions and balances have been eliminated in
consolidation. The financial statements include all adjustments of a normal and
recurring nature, which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2002.
Results of operations for interim periods are not necessarily indicative
of results for the full year.
NOTE B - 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 Company 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:
5
(In thousands, except per share) Three months ended
March 31,
-----------------------------------
2003 2002
---------------- ----------------
Net income as reported $618 $766
Deduct: total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effect (2) (2)
---------------- ----------------
Pro forma net income $616 $764
---------------- ----------------
Earnings per share:
Basic - as reported $0.25 $0.31
Basic - pro forma $0.25 $0.31
Diluted - as reported $0.25 $0.31
Diluted - pro forma $0.25 $0.31
NOTE C - LOANS
The loan portfolio consisted of the following at the dates indicated:
March 31, December 31,
(In thousands) 2003 2002
--------- ------------
Real Estate $ 210,656 $ 211,473
Construction 35,713 32,947
Commercial 43,742 42,549
Consumer 2,379 2,956
--------- ------------
Gross loans 292,490 289,925
Net deferred loan fees (1,578) (1,640)
Allowance for loan losses (3,947) (3,396)
--------- ------------
Net loans $ 286,965 $ 284,889
========= ============
NOTE D - EARNINGS PER SHARE CALCULATION
Earnings per common share (EPS) are computed based on the weighted average
number of common shares outstanding during the period. Basic EPS excludes
dilution and is computed by dividing net earnings by the weighted average of
common shares outstanding. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
6
Earnings per share have been computed based on the following (dollars in
thousands):
Three months ended
(In thousands, except number of shares) March 31,
-------------------------
2003 2002
---------- ----------
Net earnings $ 618 $ 766
Average number of shares outstanding 2,437,000 2,435,000
Effect of dilutive options 3,000 9,000
---------- ----------
Average number of shares outstanding used
to calculate diluted earnings per share 2,440,000 2,444,000
========= =========
Options to purchase 48,019 shares of common stock were not included in the
computation of diluted EPS for three months ended March 31, 2003, because the
options' exercise price was greater than the average market price of the common
shares. Options to purchase 17,940 shares of common stock were not included in
the computation of diluted EPS for three months ended March 31, 2002 for the
same reason. These options, that expire on May 31, 2008, were still outstanding
as of March 31, 2003.
NOTE E - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income consists of net unrealized gains
on investment securities available for sale. Comprehensive income for the three
months ended March 31, 2003 was $207,000 compared to $622,000 for the three
months ended March 31, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies And Estimates
------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following 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.
Earnings Analysis
-----------------
Net earnings for the quarter ended March 31, 2003 was $618,000, compared
to net earnings of $766,000 for the quarter ended March 31, 2002.
Net interest income for the quarter ended March 31, 2003 was $5,062,000,
compared to $5,361,000 for the quarter ended March 31, 2002, a decrease of
$299,000 or 5.58%. The prime lending rate was 4.25% during the first quarter of
2003, compared to 4.75% during the first quarter of 2002, a decrease of 50 basis
points or 10.53%. The 11th District Cost of Funds Index (COFI) was 2.210% in
March 2003, compared to 2.653% in March 2002, a decrease of 44.3 basis points.
7
Net interest income is the difference between interest yield generated by
earning assets and the interest expense associated with the funding of those
assets.
The following tables present an analysis of net interest income and
average earning assets and liabilities for the three-month period ended March
31, 2003 compared to the three-month period ended March 31, 2002.
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
- ------- FNB BANCORP AND SUBSIDIARY
Three months ended March 31
-----------------------------------------------------------------------
(In thousands) 2003 2002
--------------------------------- ----------------------------------
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
--------- --------- ----- --------- --------- -----
Loans, gross $ 288,024 $ 5,045 7.10% $ 293,784 $ 5,690 7.85%
Taxable securities 42,229 425 4.08 34,805 445 5.19
Nontaxable securities 30,882 320 4.20 28,231 341 4.90
Federal funds sold 7,609 22 1.17 12,506 52 1.69
--------- --------- --------- ---------
Total interest earning assets $ 368,744 $ 5,812 6.39 $ 369,326 $ 6,528 7.17
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,250 $ 19,395
Premises and equipment 11,141 11,724
Other assets 6,100 3,887
--------- ---------
Total noninterest earning assets $ 35,491 $ 35,006
========= =========
TOTAL ASSETS $ 404,235 $ 404,332
========= =========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 49,949 ($28) (0.23) 58,671 ($64) (0.44)
Money market 64,271 (165) (1.04) 57,326 (237) (1.68)
Savings 53,861 (53) (0.40) 50,364 (73) (0.59)
Time deposits 89,670 (504) (2.28) 100,585 (784) (3.16)
Federal funds purchased and other
borrowings 43 (0) (0.00) 445 (9) (8.20)
--------- --------- --------- ---------
Total interest bearing liabilities $ 257,794 ($750) (1.18) $ 267,391 ($ 1,167) (1.77)
--------- --------- --------- ---------
NONINTEREST BEARING LIABILITIES
Demand deposits 89,643 85,155
Other liabilities 4,940 4,349
--------- ---------
Total noninterest bearing liabilities $ 94,583 $ 89,504
--------- ---------
TOTAL LIABILITIES $ 352,377 $ 356,895
Stockholders' equity $ 51,858 47,437
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 404,235 $ 404,332
========= =========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 5,062 5.57% $ 5,361 5.89%
Interest income is reflected on an actual basis, not on a fully taxable basis.
Yield on gross loans was not adjusted for nonaccrual loans, which were not
considered material for this calculation.
Table 1, above, shows the various components that contributed to changes
in net interest income for the two quarterly periods. The principal earning
assets are loans, from a volume perspective as well as from an earnings rate.
For the quarter ended March 31, 2003, compared to the quarter ended March 31,
2002, interest on loans decreased $645,000 or 11.34%, while the yield decreased
75 basis points, and average loans outstanding decreased $5,760,000. Average
8
taxable securities increased $7,424,000 in the same periods, as fewer callable
issues remained, and reinvestment took place. Yields on these securities
decreased 111 basis points, and their income decreased $20,000. Average
nontaxable securities increased $2,651,000, and their interest decreased
$21,000, while the yield decreased 70 basis points. Average federal funds sold
decreased $4,897,000, and interest decreased $30,000, while yield decreased 52
basis points. Average total interest earning assets decreased by $582,000, their
income decreased $716,000 and the yield decreased 78 basis points.
For the quarter ended March 31, 2003, compared to the quarter ended March
31, 2002, interest on interest bearing demand deposits decreased $36,000 or
56.25%, as the volume decreased $8,722,000 or 14.87%, and the yield decreased 21
basis points. The decrease in yield was 47.73%. For the same periods, interest
on money market deposits decreased by $72,000 or 30.38%, their volume increased
by $6,945,000, but the yield decreased from 1.68% to 1.04%. Interest on savings
for the same periods decreased $20,000, while savings volume increased
$3,497,000 or 6.94%, and the yield decreased 19 basis points. Interest on time
deposits decreased $280,000 or 35.71%, and volume decreased $10,915,000 or
10.85%, while yields decreased 88 basis points. Finally, total interest on
interest bearing liabilities decreased $417,000 quarter-to-quarter, volume
decreased $9,597,000 or 3.59%, and the yield decreased from 1.77% for the
quarter ended March 31, 2002 to 1.18% for the quarter ended March 31, 2003. The
net interest income and margin as a percent of total earning assets decreased by
32 basis points for the first quarter of 2002 compared to the first quarter of
2003.
For the three months ended March 31, 2003 compared to the three months
ended March 31, 2002, the following Table 2 shows the dollar amount of change in
interest income and expense and the dollar amounts attributable to: (a) changes
in volume (changes in volume at the current year rate), b) changes in rate
(changes in rate times the prior year's volume) and (c) changes in rate/volume
(changes in rate times change in volume). In this table, the dollar change in
rate/volume is prorated to volume and rate proportionately.
Table 2 FNB BANCORP AND SUBSIDIARY
- ------- RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended March 31,
(In thousands) 2003 Compared To 2002
----------------------------------
Increase (decrease)
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
-------------- ---- ------
INTEREST EARNING ASSETS
Loans ($645) ($533) ($112)
Taxable securities (20) (95) 75
Nontaxable securities (21) (48) 27
Federal funds sold (30) (10) (20)
----- ----- -----
Total ($716) ($686) ($30)
----- ----- -----
INTEREST BEARING LIABILITIES
Demand deposits ($36) ($26) ($10)
Money market (72) (90) 18
Savings deposits (20) (23) 3
Time deposits (280) (195) (85)
Federal funds purchased and other borrowings (9) (1) (8)
----- ----- -----
Total ($417) ($335) ($82)
----- -----
NET INTEREST INCOME ($299) ($351) $ 52
===== ===== =====
9
Noninterest income
- ------------------
The following table shows the principal components of noninterest income
for the periods indicated.
Table 3 NONINTEREST INCOME
-------
Three months ended March 31,
(In thousands) 2003 2002
---------- ----------
Service charges $680 $407
Credit card fees 203 217
Other income 96 62
---------- ----------
Total noninterest income $979 $686
========== ==========
Noninterest income consists mainly of service charges on deposits and
credit card fees, and other miscellaneous types of income. Service charges
increased $273,000 or 67.1% in the quarter ended March 31, 2003 over the same
quarter in 2002. Most of this was from an increase of $171,000 in charges for
checks returned for insufficient funds. The remaining categories, Credit card
fees and Other income, increased by $20,000 or 7.2% for the quarter ended March
31, 2003 compared to the quarter in 2002.
Noninterest expense
- -------------------
The following table shows the principal components of noninterest expense
for the periods indicated.
Table 4 NONINTEREST EXPENSE
- -------
Three months ended March 31,
(In thousands) 2003 2002
---------- ----------
Salaries and employee benefits $2,831 $2,643
Occupancy expense 323 326
Equipment expense 379 758
Professional fees 197 247
Telephone, postage & supplies 234 254
Bankcard expenses 186 185
Other expense 446 457
---------- ----------
Total noninterest expense $4,596 $4,870
========== ==========
The only significant variance was in equipment expense, which decreased by
$379,000 or 50.0% for the quarter ended March 31, 2003 compared to the quarter
ended March 31, 2002. The quarter ended March 31, 2002 included a $283,000
equipment write-down related to the final phase of the Bank's accounting and
related application systems, and a net decrease of $96,000 in other related
nonrecurring equipment expenses.
Income Taxes
- ------------
The effective tax rate was 30% for the first three months of 2002.
Investment in tax-free securities and tax-favored Enterprise Zone loans
generated a higher proportion of tax-free interest income to total interest
income for the three months ended March 31, 2003 compared to the three months
ended March 31, 2002. Consequently, the effective tax rate for the three months
of 2003 decreased to 25%.
Asset and Liability Management
- ------------------------------
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
10
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth and
deposit withdrawals, as well as to provide for general needs, the Company must
maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
is the Company's customer base, which provides core deposit growth. The overall
liquidity position of the Company is closely monitored and evaluated regularly.
Management believes the Company's liquidity sources at March 31, 2003 are
adequate to meet its operating needs in 2003 and going forward into the
foreseeable future.
The following table sets forth information concerning rate sensitive
assets and rate sensitive liabilities as of March 31, 2003. The assets and
liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms. Since all interest rates and yields do
not adjust at the same speed or magnitude, and since volatility is subject to
change, the gap is only a general indicator of interest rate sensitivity.
The Company's asset/liability gap is the difference between the cash flow
amounts of interest-sensitive assets and liabilities that will be refinanced (or
repriced) during a given period. For example, if the asset amount to be repriced
exceeds the corresponding liability amount for a certain day, month, year or
longer period, the institution is in an asset-sensitive gap position. In this
situation, net interest income would increase if market interest rates rose or
decrease if market interest rates fell. Alternatively, if more liabilities than
assets will reprice, the institution is in a liability-sensitive position.
Accordingly, net interest income would decline when rates rose and increase when
rates fell.
Table 5
- -------
RATE SENSITIVE ASSETS/LIABILITIES
(In thousands) As of March 31, 2003
Over
Three Three Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
--------- --------- ---------- --------- --------- ---------
Interest earning assets:
Federal funds sold $ 13,115 $ -- $ -- $ -- $ -- $ 13,115
Securities available for sale 3,710 12,329 31,449 19,605 -- 67,093
Loans 246,924 17,987 5,222 12,918 7,861 290,912
Total interest earning assets 263,749 30,316 36,671 32,523 7,861 371,120
Cash and due from banks -- -- -- -- 18,084 18,084
Allowance for loan losses -- -- -- -- (3,947) (3,947)
Other assets -- -- -- -- 20,000 20,000
--------- --------- --------- --------- --------- ---------
Total assets $ 263,749 $ 30,316 $ 36,671 $ 32,523 $ 41,998 $ 405,257
Interest bearing liabilities:
Demand, interest bearing $ 49,208 $ -- $ -- $ -- $ -- $ 49,208
Savings and money market 119,858 -- -- -- -- 119,858
Time deposits 37,116 37,582 15,377 -- -- 90,075
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities 206,182 37,582 15,377 -- -- 259,141
--------- --------- --------- --------- --------- ---------
Noninterest demand deposits -- -- -- -- 92,039 92,039
Other liabilities -- -- -- -- 2,960 2,960
Stockholders' equity -- -- -- -- 51,117 51,117
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 206,182 $ 37,582 $ 15,377 $ -- $ 146,116 $ 405,257
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $ 57,567 ($ 7,266) $ 21,294 $ 32,523 ($104,118) $ --
========= ========= ========= ========= ========= =========
Cumulative interest rate sensitivity gap $ 57,567 $ 50,301 $ 71,595 $ 104,118 $ -- $ --
Cumulative interest rate sensitivity gap ratio 21.83% 17.11% 21.65% 28.66%
11
Financial Condition
- -------------------
Assets. Total assets increased to $405,257,000 at March 31, 2003 from
$401,834,000 at December 31, 2002, an increase of $3,423,000. Most of this
increase was in cash and cash equivalents, which increased $11,000,000 and was
offset mainly by a $8,870,000 decrease in securities available for sale. Most of
the increase in total assets came from total deposits, which increased by
$3,774,000.
Loans. Net loans at March 31, 2003 were $286,965,000, an increase of
$2,076,000 or 0.73% over December 31, 2002, which showed $284,889,000.
Construction loans increased $2,766,000, representing most of the change. The
portfolio breakdown was as follows.
Table 6 LOAN PORTFOLIO
- -------
March 31, December 31,
(In thousands) 2003 Percent 2002 Percent
--------- ------- ------------ -------
Real Estate $ 210,656 72.0% $ 211,473 72.9%
Construction 35,713 12.2 32,947 11.4
Commercial 43,742 15.0 42,549 14.7
Consumer 2,379 0.8 2,956 1.0
--------- ------- ------------ -------
Gross loans 292,490 100.0% 289,925 100.0%
Net deferred loan fees (1,578) (1,640)
Allowance for loan losses (3,947) (3,396)
--------- ------------
Net loans $ 286,965 $ 284,889
========= ============
Allowance for Loan Losses. The Company has the responsibility of assessing
the overall risks in its portfolio, assessing the specific loss expectancy, and
determining the adequacy of the allowance for loan losses. The allowance for
loan losses is determined by internally generating credit quality ratings,
reviewing economic conditions in the Company's market area, and considering the
Company's historical loan loss experience. The Company 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. Two commercial office buildings on which
the Bank has a term loan and a construction loan and are not yet leased have
lost value at an accelerated rate during the first quarter of 2003. These
borrowers have been impacted by downturns in their other holdings which impacts
their ability to service these loans. These buildings are located in the South
of Market area of San Francisco and in the Silicon Valley community of Mountain
View. Both of these communities have been continuously impacted at an increasing
rate from the Dot.Com meltdown. Additional reserves for the unsecured portions
of these loans have been made. The loans are current and the borrowers have a
variety of alternatives to cure the current situation. $500,000 in additional
allowance for loan losses was provided related to these two loans during the
quarter.
A summary of transactions in the allowance for loan losses for the three
months ended March 31, 2003 and the year ended December 31, 2002 is as follows:
Table 7 ALLOWANCE FOR LOAN LOSSES
- -------
Three months ended Year ended
(In thousands) March 31, 2003 December 31, 2002
------------------ -----------------
Balance, beginning of period $ 3,396 $ 3,543
Provision for loan losses 620 150
Recoveries 1 8
Amounts charged off (70) (305)
------------------ -----------------
Balance, end of period $ 3,947 $ 3,396
================== =================
12
In management's judgment, the allowance was adequate to absorb potential
losses inherent in the loan portfolio at March 31, 2003. However, changes in
prevailing economic conditions in the Company's markets or in the financial
condition of its customers could result in changes in the level of nonperforming
assets and charge-offs in the future and, accordingly, changes in the allowance.
Nonperforming assets. Nonperforming assets consist of nonaccrual loans,
foreclosed assets, and loans that are 90 days or more past due but are still
accruing interest. At March 31, 2003, there was $7,861,000 in non-accrual loans,
compared to $2,161,000 at December 31, 2002. In the first quarter of 2003, a
residential care facility loan with a balance of $5,827,000 was placed on
non-accrual status and a notice of default filed. The bank is well
collateralized at current values. There were no foreclosed assets or loans past
due 90 days and still accruing on either date.
Deposits. Total deposits at March 31, 2003 were $351,180,000 compared to
$347,406,000 on December 31, 2002. Of these totals, noninterest-bearing demand
deposits were $92,039,000 or 26.2% of the total on March 31, 2003 and
$88,495,000 or 25.5% on December 31, 2002. Time deposits were $90,075,000 on
March 31, 2003 and $89,552,000 on December 31, 2002.
The following table sets forth the maturity schedule of the time certificates of
deposit on March 31, 2003:
Table 8
- -------
(In thousands) Under $100,000
Maturities: $100,000 or More Total
-------- -------- --------
Three months or less $ 19,281 $ 17,835 $ 37,116
Over three to six months 12,811 8,103 20,914
Over six through twelve months 10,314 6,355 16,669
Over twelve months 10,456 4,920 15,376
-------- -------- --------
Total $ 52,862 $ 37,213 $ 90,075
======== ======== ========
The following table shows the risk-based capital ratios and leverage ratios at
March 31, 2003 and December 31, 2002:
Table 9 Minimum "Well
- ------- March 31, December 31, Capitalized"
Risk-Based Capital Ratios 2003 2002 Requirements
--------- ------------ -------------
Tier 1 Capital 14.16% 13.92% 6.00%
Total Capital 15.28% 14.87% 10.00%
Leverage Ratios 12.43% 12.16% 5.00%
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimum loss. As of March 31, 2003, liquid assets were
$98,292,000 or 24.3% of total assets. Liquidity consists of cash and due from
other banks accounts, federal funds sold, and securities available-for-sale. The
Company's primary uses of funds are loans, and the primary sources of funds are
deposits. The relationship between total net loans and total deposits is a
useful additional measure of liquidity. The Company's principal source of income
on a stand-alone basis is dividends from the Bank.
13
A higher loan to deposit ratio means that assets will be less liquid. This
has to be balanced against the fact that loans represent the highest earning
assets, so that a lower loan to deposit ratio means lower potential income. On
March 31, 2003 net loans were at 81.7% of deposits.
Forward-Looking Information and Uncertainties Regarding Future Financial
Performance.
------------------------------------------------------------------------
This report, including management's discussion above, concerning earnings
and financial condition, contains "forward-looking statements". Forward-looking
statements are estimates of or statements about expectations or beliefs
regarding the Company's future financial performance or anticipated future
financial condition that are based on current information and that are subject
to a number of risks and uncertainties that could cause actual operating results
in the future to differ significantly from those expected at the current time.
Those risks and uncertainties include, although they are not limited to, the
following:
Increased competition. Increased competition from other banks and
financial service businesses, mutual funds and securities brokerage and
investment banking firms that offer competitive loan and investment products
could require us to reduce interest rates and loan fees to attract new loans or
to increase interest rates that we offer on time deposits, either or both of
which could, in turn, reduce interest income and net interest margins.
Possible Adverse Changes in Economic Conditions. Adverse changes in
national or local economic conditions could (i) reduce loan demand which could,
in turn, reduce interest income and net interest margins; (ii) adversely affect
the financial capability of borrowers to meet their loan obligations, which, in
turn, could result in increases in loan losses and require increases in
provisions for possible loan losses, thereby adversely affecting operating
results; and (iii) lead to reductions in real property values that, due to the
Company's reliance on real property to secure many of its loans, could make it
more difficult to prevent losses from being incurred on non-performing loans
through the sale of such real properties.
Possible Adverse Changes in National Economic Conditions and Federal
Reserve Board Monetary Policies. Changes in national economic policies, such as
increases in inflation or declines in economic output often prompt changes in
Federal Reserve Board monetary policies that could reduce interest income or
increase the cost of funds to the Company, either of which could result in
reduced earnings.
Changes in Regulatory Policies. Changes in federal and national bank
regulatory policies, such as increases in capital requirements or in loan loss
reserve or asset/liability ratio requirements, could adversely affect earnings
by reducing yields on earning assets or increasing operating costs.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this report, which speak only as of the date of this report, or to
make predictions based solely on historical financial performance. The Company
also disclaims any obligation to update forward-looking statements contained in
this report.
Other Matters
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. As of March 31, 2003
and December 31, 2002, commitments to extend credit and letters of credit were
the only financial instruments with off-balance sheet risk. The Company has not
entered into any contracts for financial derivative instruments such as futures,
swaps, options or similar instruments. Loan commitments and letters of credit
were $63,009,000 and $61,470,000 at March 31, 2003 and December 31, 2002,
respectively. As a percentage of net loans, these off-balance sheet items
represent 22.0% and 22.0% respectively.
14
Corporate Reform Legislation
President George W. Bush signed the "Public Company Accounting Reform and
Investor Protection Act of 2002" (the "Act") on July 30, 2002, which responds to
the recent corporate accounting scandals. Among other matters, the Act increases
the penalties for securities fraud, establishes new rules for financial analysts
to prevent conflicts of interest, creates a new independent oversight board for
the accounting profession, imposes restrictions on the consulting activities of
accounting firms that audit company records and requires certification of
financial reports by corporate executives. The effect of the Act upon
corporations is uncertain; however, it is likely that compliance costs may
increase as corporations modify procedures if required to conform to the
provisions of the Act. The Company does not currently anticipate that compliance
with the Act will have a material effect upon the results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may change
as a result of changes in interest rates and other market conditions. Market
risk is attributed to all market risk sensitive financial instruments, including
loans, investment securities, deposits and borrowings. The Company does not
engage in trading activities or participate in foreign currency transactions for
its own account. Accordingly, exposure to market risk is primarily a function of
asset and liability management activities and of changes in market rates of
interest. Changes in rates can cause or require increases in the rates paid on
deposits that may take effect more rapidly or may be greater than the increases
in the interest rates that the Company is able to charge on loans and the yields
that it can realize on its investments. The extent of that market risk depends
on a number of variables including the sensitivity to changes in market interest
rates and the maturities of the Company's interest earning assets and deposits.
There has been no material change since March 31, 2003.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Section 13(a)-14(c))
of the Securities Exchange Act of 1934 (the "Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management
within the 90-day period preceding the filing date of this quarterly report. The
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive Officer
and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
(b) Changes in Internal Controls: In the quarter ended March 31, 2003, the
Company did not make any significant changes in, nor take any corrective actions
regarding, its internal controls or other factors that could significantly
affect these controls.
15
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.13: Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The following report on Form 8-K has been filed during the
quarter ended March 31, 2003:
Filed February 20, 2003: Announcement of earnings for the fourth
quarter of 2002 and for the year ended
December 31, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FNB BANCORP
(Registrant)
Dated: May 13, 2003. By: /s/ Thomas C. McGraw
-----------------------------------
Thomas C. McGraw
Chief Executive Officer
(Authorized Officer)
By: /s/ James B. Ramsey
-----------------------------------
James B. Ramsey
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
16
CERTIFICATIONS
I, Thomas C. McGraw, Chief Executive Officer, (Principal Executive
Officer) of the registrant, FNB Bancorp, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
17
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003.
/s/ Thomas C. McGraw
- -----------------------------
Thomas C. McGraw
Chief Executive Officer
(Principal Executive Officer)
18
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 quarterly report on Form 10-Q 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
19
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003.
/s/ James B. Ramsey
- -------------------------------------------------
James B. Ramsey
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
20