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, 2004
---------------------------------------------
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 5, 2004:
2,503,000 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
2004 2003
------------ ------------
Cash and due from banks $ 15,997 $ 22,764
Federal funds sold 21,170 7,880
------------ ------------
Cash and cash equivalents
37,167 30,644
Securities available-for-sale 52,482 63,692
Loans, net 315,839 312,929
Bank premises, equipment, and leasehold improvements 11,276 10,904
Other real estate owned 5,827 --
Accrued interest receivable and other assets 12,667 11,279
------------ ------------
$ 435,258 $ 429,448
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand, noninterest bearing $ 101,752 $ 96,567
Demand, interest bearing 56,893 62,974
Savings and money market 129,158 122,705
Time 90,521 91,968
------------ ------------
Total deposits 378,324 374,214
Accrued expenses and other liabilities 4,901 3,247
------------ ------------
Total liabilities 383,225 377,461
------------ ------------
Stockholders' equity
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 2,514,000 shares at March 31, 2004
and 2,519,000 shares at December 31, 2003 28,587 28,903
Additional paid-in capital 3 3
Retained earnings 22,339 22,041
Accumulated other comprehensive income 1,104 1,040
------------ ------------
Total stockholders' equity 52,033 51,987
------------ ------------
Total liabilities and stockholders' equity $ 435,258 $ 429,448
============ ============
See accompanying notes to consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three months ended
March 31,
-----------------------
2004 2003
---------- ----------
Interest income:
Interest and fees on loans $ 5,191 $ 5,045
Interest on securities 223 425
Interest on tax-exempt securities 291 320
Federal funds sold 32 22
---------- ----------
Total interest income 5,737 5,812
---------- ----------
Interest expense:
Interest on deposits 563 750
---------- ----------
Total interest expense 563 750
---------- ----------
Net interest income 5,174 5,062
Provision for loan losses 120 620
---------- ----------
Net interest income after provision for loan losses 5,054 4,442
---------- ----------
Noninterest income:
Service charges 661 680
Credit card fees 207 203
Other income 55 96
---------- ----------
Total noninterest income 923 979
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,690 2,831
Occupancy expense 358 323
Equipment expense 422 379
Professional fees 250 197
Telephone, postage and supplies 313 234
Bankcard expenses 178 186
Other expense 534 446
---------- ----------
Total noninterest expense 4,745 4,596
---------- ----------
Earnings before income tax expense 1,232 825
Income tax expense 329 207
---------- ----------
NET EARNINGS $ 903 $ 618
========== ==========
Earnings per share data:
Basic $ 0.36 $ 0.24
Diluted $ 0.35 $ 0.24
Weighted average shares outstanding:
Basic 2,520,000 2,557,000
Diluted 2,566,000 2,560,000
See accompanying notes to consolidated financial statements
3
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in thousands)
Three months ended
March 31,
-----------------------
2004 2003
---------- ----------
Net earnings $ 903 $ 618
Unrealized gain/(loss) on AFS securities 64 (411)
---------- ----------
Total comprehensive income $ 967 $ 207
========== ==========
See accompanying notes to consolidated financial statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three months ended
March 31
------------------------
2004 2003
---------- ----------
Cash flow from operating activities
Net earnings $ 903 $ 618
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization 442 407
Provision for loan losses 120 620
Changes in assets and liabilities:
Accrued interest receivable and other assets (1,388) 622
Accrued expenses and other liabilities 1,610 (552)
---------- ----------
Net cash provided by operating activities 1,687 1,715
---------- ----------
Cash flows from investing activities
Purchase of securities available-for-sale -- (3,975)
Proceeds from matured/called/securities available-for-sale 11,183 12,710
Net increase in loans (3,030) (2,696)
Net increase in other real estate owned (5,827) --
Proceeds from sale of bank premises, equipment and leasehold improvements 21 --
Purchases of bank premises, equipment, leasehold improvements (700) (157)
---------- ----------
Net cash provided by investing activities 1,647 5,882
---------- ----------
Cash flows from financing activities
Net increase in demand and savings deposits 5,557 3,251
Net increase (decrease) in time deposits (1,447) 523
Dividends paid (605) (293)
Repurchase of common stock (420) --
Issuance of common stock 104 --
Payments on capital note payable -- (78)
---------- ----------
Net cash provided by financing activities 3,189 3,403
---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 6,523 11,000
Cash and cash equivalents at beginning of period 30,644 20,199
---------- ----------
Cash and cash equivalents at end of period $ 37,167 $ 31,199
========== ==========
Additional cash flow information
Interest paid $ 553 $ 813
Income taxes paid $ 250 $ --
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(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"), 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's common
stock. The change in capital structure has been included for all periods
presented.
All intercompany transactions and balances have been eliminated in
consolidation. The financial statements include all adjustments of a normal and
recurring nature, which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2003.
Results of operations for interim periods are not necessarily
indicative of results for the full year.
NOTE B - STOCK OPTION PLAN
At March 31, 2004, the Company has two stock-based employee
compensation plans. Prior to 2003, the Company accounted for the plan under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Effective January 1,
2003, the Company adopted the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, prospectively to all
employee awards granted, modified, or settled after January 1, 2003. Therefore,
the cost related to stock-based employee compensation included in the
determination of net income for 2003 and 2004 is less than that which would have
been recognized if the fair value based method had been applied to all awards
since the original effective date of Statement No. 123. Awards under the
Company's plan vest over periods ranging from three to five years. The following
table illustrates the effect on net income and earnings per share if the fair
value based method had been applied to all outstanding and unvested awards in
each period.
5
(In thousands, except per share) Three months ended
March 31
------------------------
2004 2003
---------- ----------
Net income as reported $ 903 $ 618
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects 1 --
Deduct: total stock-based employee
compensation expense determined
under fair value method for all awards, net
of related tax effect (1) (2)
Pro forma net income $ 903 $ 616
Earnings per share:
Basic - as reported $ 0.36 $ 0.24
Basic - pro forma $ 0.36 $ 0.24
Diluted - as reported $ 0.35 $ 0.24
Diluted - pro forma $ 0.35 $ 0.24
NOTE C - LOANS
The loan portfolio consisted of the following at the dates indicated:
March 31, December 31,
(In thousands) 2004 2003
---------- ----------
Real Estate $ 226,906 $ 214,588
Construction 37,758 48,610
Commercial 53,936 52,248
Consumer 2,000 2,551
---------- ----------
Gross loans 320,600 317,997
Net deferred loan fees (1,742) (1,784)
Allowance for loan losses (3,019) (3,284)
---------- ----------
Net loans $ 315,839 $ 312,929
========== ==========
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.
Earnings per share have been computed based on the following (dollars
in thousands):
6
Three months ended
(In thousands, except number of shares) March 31
------------------------
2004 2003
---------- ----------
Net earnings $ 903 $ 618
Average number of shares outstanding 2,520,000 2,557,000
Effect of dilutive options 46,000 3,000
Average number of shares outstanding used
To calculate diluted earnings per share 2,566,000 2,560,000
All outstanding options were included in the 2004 and 2003
computations.
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, 2004 was $967,000 compared to $207,000 for the three
months ended March 31, 2003.
NOTE F - OTHER REAL ESTATE OWNED
Loans that have become delinquent through non payment of scheduled
principal and/or interest for 90 days are placed in nonaccrual and interest is
no longer accrued. If a favorable restructuring can not be made for the loan
(provided the market value of the collateral is sufficient), or, if
insufficient, or the borrower is unable to make further payments, foreclosure
procedures are initiated. If there are no bidders, or if bids are made and are
insufficient to cover the debt, the Bank will acquire the property at sale under
judgments, decrees, or mortgages where the property was originally security for
debts previously contracted. During the quarter ended March 31, 2004 the Company
foreclosed on a loan secured by a residential care facility, and placed it in
Other Real Estate Owned. It was booked at its cost of $5,828,000, and an
appraisal was ordered. The appraisal was received in April, showing a market
value of $7,000,000.
NOTE G - STOCK REPURCHASE PROGRAM
On July 25, 2003, the Board of Directors authorized a stock repurchase
program, which calls for the repurchase of up to 5% of the Company's shares,
which at that time represented 121,852 shares, based on approximately 2,437,043
shares outstanding at that date.
On January 23, 2004 the Board of Directors of the registrant authorized
an extension of the FNB Bancorp stock repurchase program previously adopted on
July 25, 2003. Through March 31, 2004, a total of 52,160 shares, or
approximately 2.04% of the shares outstanding on that date (adjusted for the
stock dividend paid by the registrant on December 15, 2003, to shareholders of
record on November 28, 2003) had been repurchased pursuant to the program.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies And Estimates
------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following policies require significant judgments and estimates.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is periodically evaluated for adequacy by
management. Factors considered include the Company's loan loss experience, known
and inherent risks in the portfolio, current economic conditions, known adverse
situations that may affect the borrower's ability to repay, regulatory policies,
and the estimated value of underlying collateral. The evaluation of the adequacy
of the allowance is based on the above factors along with prevailing and
anticipated economic conditions that may impact borrowers' ability to repay
loans. Determination of the allowance is in part objective and in part a
subjective judgment by management based on the information it currently has in
its possession. Adverse changes in any of these factors or the discovery of new
adverse information could result in higher than expected charge-offs and loan
loss provisions.
Earnings Analysis
-----------------
Net earnings for the quarter ended March 31, 2004 were $903,000,
compared to net earnings of $618,000 for the quarter ended March 31, 2003.
Earnings before income tax expense for the quarter ended March 31, 2004 were
$1,232,000, compared to $825,000 for the quarter ended March 31, 2003. This
improvement of $407,000 was largely attributable to a decline in the provision
for loan losses, which was $500,000 lower in the 2004 quarter than in the 2003
quarter.
Net interest income for the quarter ended March 31, 2004 was
$5,174,000, compared to $5,062,000 for the quarter ended March 31, 2003. The
prime lending rate was 4.00% in the first quarter of 2004 compared to 4.25% in
the first quarter of 2003. The Federal Home Loan Bank of San Francisco's
Weighted Monthly Cost of Funds Index announced for the three months ended March
2004, averaged 1.85%, compared to 2.31% for the three months ended March 2003.
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets.
Basic earnings per share were $0.36 for the first quarter of 2004
compared to $0.24 for the first quarter of 2003. Diluted earnings per share were
$0.35 for the first quarter of 2004 compared to $0.24 for the first quarter of
2003.
8
The following table presents an analysis of net interest income and
average earning assets and liabilities for the three-month period ended March
31, 2004 compared to the three-month period ended March 31, 2003.
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
- ------- FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Three months ended March 31,
-------------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
Annualized Annualized
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
---------- ---------- ---------- ---------- ---------- ----------
Loans, gross $ 314,565 $ 5,191 6.64% $ 288,024 $ 5,045 7.10%
Taxable securities 26,933 223 3.58 42,229 425 4.08
Nontaxable securities 32,531 291 3.31 30,882 320 4.20
Federal funds sold 13,376 32 0.96 7,609 22 1.17
---------- ---------- ---------- ----------
Total interest earning assets $ 387,405 $ 5,737 5.96 $ 368,744 $ 5,812 6.39
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,158 $ 18,250
Premises and equipment 11,048 11,141
Other assets 12,762 6,100
---------- ----------
Total noninterest earning assets $ 41,968 $ 35,491
---------- ----------
TOTAL ASSETS $ 429,373 $ 404,235
========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 57,486 ($ 31) (0.22) $ 49,949 ($ 28) (0.23)
Money market 67,080 (127) (0.76) 64,271 (165) (1.04)
Savings 58,313 (38) (0.26) 53,861 (53) (0.40)
Time deposits 92,229 (367) (1.60) 89,670 (504) (2.28)
Federal funds purchased and other
Borrowings -- -- -- 43 -- --
---------- ---------- ---------- ----------
Total interest bearing liabilities $ 275,108 ($ 563) (0.82) $ 257,794 ($ 750) (1.18)
---------- ---------- ---------- ----------
NONINTEREST BEARING LIABILITIES
Demand deposits 96,252 89,643
Other liabilities 5,663 4,940
---------- ----------
Total noninterest bearing liabilities $ 101,915 $ 94,583
---------- ----------
TOTAL LIABILITIES $ 377,023 $ 352,377
Stockholders' equity $ 52,350 $ 51,858
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 429,373 $ 404,235
========== ==========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 5,174 5.37% $ 5,062 5.57%
Interest income is reflected on an actual basis, not on a fully taxable basis
due to immaterial effect. Yield on gross loans was not adjusted for nonaccrual
loans, which were not considered material for this calculation.
9
Table 1, above, shows the various components that contributed to
changes in net interest income for the two quarterly periods of 2004 and 2003.
The principal interest earning assets are loans, from a volume perspective as
well as from an earnings rate. For the quarter ended March 31, 2004, average
loans outstanding represented 81.2% of average earning assets. For the quarter
ended March 31, 2003, they represented 78.1% of average earning assets.
While the yield on total interest earning assets decreased from 6.39%
to 5.96%, or 43 basis points, this was offset by the larger volume invested in
loans, which resulted in a small decrease of total interest income from
$5,812,000 to $5,737,000, or $75,000, or 1.3%
The cost on total interest bearing liabilities decreased from 1.18% to
0.82%, a decrease of 36 basis points. The most expensive as well as principal
source of interest bearing liabilities comes from time deposits. Their average
cost decreased from 2.28% to 1.60%, and the expense on these deposits decreased
$137,000 for the three months ended March 31, 2004 compared to 2003. This
accounted for most of the expense of interest bearing liabilities, which
decreased $187,000.
For the three months ended March 31, 2004 the following table 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) 2004 Compared To 2003
Variance
Interest Attributable To
Income/Expense ------------------------
Variance Rate Volume
---------- ---------- ----------
INTEREST EARNING ASSETS
Loans $ 146 ($ 319) $ 465
Taxable securities (202) (75) (127)
Nontaxable securities (29) (44) 15
Federal funds sold 10 (7) 17
---------- ---------- ----------
Total ($ 75) ($ 445) $ 370
---------- ---------- ----------
INTEREST BEARING LIABILITIES
Demand deposits $ 3 ($ 1) $ 4
Money market (38) (43) 5
Savings deposits (15) (18) 3
Time deposits (137) (151) 14
---------- ---------- ----------
Total ($ 187) ($ 213) $ 26
---------- ---------- ----------
NET INTEREST INCOME $ 112 ($ 238) $ 350
========== ========== ==========
10
Noninterest income
- ------------------
The following table shows the principal components of noninterest
income for the periods indicated.
Table 3 NONINTEREST INCOME
(In thousands) Three months ended March 31,
---------------------------
2004 2003
------------ ------------
Service charges $ 661 $ 680
Credit card fees 207 203
Other income 55 96
------------ ------------
Total noninterest income $ 923 $ 979
============ ============
Noninterest income consists mainly of service charges on deposits,
credit card fees, and other miscellaneous types of income. Service charges
decreased $19,000 in the quarter ended March 31, 2004 from the same quarter in
2003. Most of this was from a $30,000 decrease in service charges on deposits,
while charges for miscellaneous fees, such as deluxe check fees, wire transfer
fees, etc. increased by a net $11,000 in the same periods. Other income
decreased by $41,000 for the quarter ended March 31, 2004 compared to the same
quarter of 2003. This was because, in the quarter ended March 31, 2003, the
Marketing Department was discontinued, and $45,000 that had been provided for
future projects was unused and taken to other income at the time.
Noninterest expense
- -------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
NONINTEREST EXPENSE
(In thousands) Three months ended March 31,
---------------------------
2004 2003
------------ ------------
Salaries and employee benefits $ 2,690 $ 2,831
Occupancy expense 358 323
Equipment expense 422 379
Professional fees 250 197
Telephone, postage and supplies 313 234
Bankcard expenses 178 186
Other expense 534 446
------------ ------------
Total noninterest expense $ 4,745 $ 4,596
============ ============
Noninterest expense consists of salaries and employee benefits
representing more than half of the total, and various smaller categories.
Salaries and employee benefits decreased by $141,000 or 5.0% in the quarter
ended March 31, 2004 compared to the same quarter of 2003. During August of
2003, the in-bank courier service was outsourced. Their salaries and benefits
for the quarter ended March 31, 2003 were $41,000. There was a general reduction
in staff by attrition, with full-time equivalent employees at 194 on March 31,
2003 compared to 164 on March 31, 2004, accounting for the total reduction of
11
$141,000. For the quarter ended March 31, 2004, occupancy expense increased by
$35,000 over the same quarter in 2003. Most of this was from the relocation of
the San Mateo Branch, with an increased expense of $29,000 for the quarter. The
increase of equipment expense in the quarter ended March 31, 2004 compared to
the same quarter in 2003 was $43,000. Most of the increase was from software
maintenance contracts, which increased by $46,000. Professional fees increased
by $53,000 in the quarter ended March 31, 2004 compared to the quarter ended
March 31, 2003. This reflects the increasing costs associated with compliance
issues such as the Patriot Act, Sarbanes-Oxley, and the Gramm-Leach-Bliley Act.
Other expense represents a number of small items, and increased $88,000 in the
quarter ended March 31, 2004 compared to the quarter ended March 31, 2003.
Within this group, contributions and donations increased by $31,000, and
marketing and promotion (excluding contributions and donations), increased
$59,000. Remaining expenses in the group decreased $2,000.
Income Taxes
- ------------
The effective tax rate for the quarter ended March 31, 2004 was 26.7%
compared to 26.1% for the quarter ended March 31, 2003. Income on tax-free
investments declined in the quarter ended March 31, 2004 compared to March 31,
2003, and contributed 0.8% to the increase in this rate.
Asset and Liability Management
- ------------------------------
Ongoing management of the Company's interest rate sensitivity, limits
interest rate risk through monitoring the mix and maturity of loans, investments
and deposits. Management regularly reviews the Company's position and evaluates
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth
and deposit withdrawals, as well as to provide for general needs, the Company
must maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
comes from Company's customer base, which provides core deposit growth. The
overall liquidity position of the Company is closely monitored and evaluated
regularly. Management believes the Company's liquidity sources at March 31, 2004
are adequate to meet its operating needs in 2004 and going forward into the
foreseeable future.
The following table sets forth information concerning interest rate
sensitive assets and liabilities as of March 31, 2004. 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.
12
Table 5 RATE SENSITIVE ASSETS/LIABILITIES
------- As of March 31, 2004
(In thousands)
Over
Three Three To Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
---------- ---------- ---------- ---------- ---------- ----------
Interest earning assets:
Federal funds sold $ 21,170 $ -- $ -- $ -- $ -- $ 21,170
Securities available for sale 1,724 3,223 29,256 18,279 -- 52,482
Loans 276,682 8,394 7,332 23,700 2,750 318,858
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 299,576 11,617 36,588 41,979 2,750 392,510
Cash and due from banks -- -- -- -- 15,997 15,997
Allowance for loan losses -- -- -- -- (3,019) (3,019)
Other assets -- -- -- -- 29,770 29,770
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 299,576 $ 11,617 $ 36,588 $ 41,979 $ 45,498 $ 435,258
========== ========== ========== ========== ========== ==========
Interest bearing liabilities:
Demand, interest bearing $ 56,893 $ -- $ -- $ -- $ -- $ 56,893
Savings and money market 129,158 -- -- -- -- 129,158
Time deposits 42,169 35,207 13,145 -- -- 90,521
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities 228,220 35,207 13,145 -- -- 276,572
---------- ---------- ---------- ---------- ---------- ----------
Noninterest demand deposits -- -- -- -- 101,752 101,752
Other liabilities -- -- -- -- 4,901 4,901
Stockholders' equity -- -- -- -- 52,033 52,033
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity $ 228,220 $ 35,207 $ 13,145 $ -- $ 158,686 $ 435,258
========== ========== ========== ========== ========== ==========
Interest rate sensitivity gap $ 71,356 ($ 23,590) $ 23,443 $ 41,979 ($ 113,188) $ --
========== ========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap $ 71,356 $ 47,766 $ 71,209 $ 113,188 $ -- $ --
Cumulative interest rate
sensitivity gap ratio 23.82% 15.35% 20.48% 29.04% -- --
Financial Condition
- -------------------
Assets. Total assets increased to $435,258,000 at March 31, 2004 from
$429,448,000 at December 31, 2003, an increase of $5,810,000. Most of this
increase was in cash and cash equivalents, which increased $6,523,000, other
real estate owned, which increased by $5,827,000, net loans, which increased
$2,910,000, accrued interest receivable and other assets, which increased
$1,388,000, offset by a decrease in securities available-for-sale of
$11,210,000. The increase in total assets was funded mainly by an increase in
deposits of $4,110,000.
Loans. Net loans at March 31, 2004 were $315,839,000, an increase of
$2,910,000 or 0.93% over December 31, 2003. Commercial loans increased
$1,688,000, representing most of the increase, while real estate and
construction loans increased by $1,466,000, and consumer loans decreased
$551,000. The portfolio breakdown was as follows.
Table 6 LOAN PORTFOLIO
-------
March 31, December 31,
(In thousands) 2004 Percent 2003 Percent
------------ ------------ ------------ ------------
Real Estate $ 226,906 70.8% $ 214,588 67.5%
Construction 37,758 11.8 48,610 15.3
Commercial 53,936 16.8 52,248 16.4
Consumer 2,000 0.6 2,551 0.8
------------ ------------ ------------ ------------
Gross loans 320,600 100.0% 317,997 100.0%
============ ============
Net deferred loan fees (1,742) (1,784)
Allowance for loan losses (3,019) (3,284)
------------ ------------
Net loans $ 315,839 $ 312,929
============ ============
13
Allowance for loan losses. The Company has the responsibility of
assessing the overall risks in its portfolio, assessing the specific loss
expectancy, and determining the adequacy of the allowance for loan losses. The
level of the allowance is determined by internally generating credit quality
ratings, reviewing economic conditions in the Company's market area, and
considering the Company's historical loan loss experience. The Company is
committed to maintaining an adequate allowance, identifying credit weaknesses by
consistent review of loans, and maintaining the ratings and changing those
ratings in a timely manner as circumstances change.
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2004 and the year ended December 31, 2003 is as
follows:
Table 7 ALLOWANCE FOR LOAN LOSSES
-------
Three months ended Three months ended
(In thousands) March 31, 2004 December 31, 2003
----------------- -----------------
Balance, beginning of period $ 3,284 $ 3,300
Provision for loan losses 120 --
Recoveries -- --
Amounts charged off (385) (16)
----------------- -----------------
Balance, end of period $ 3,019 $ 3,284
================= =================
In management's judgment, the allowance was adequate to absorb losses
currently inherent in the loan portfolio at March 31, 2004. 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, 2004, there was $2,750,000 in non-accrual loans,
compared to $9,085,000 at December 31, 2003. One loan secured by office
building, and another to a residential care facility were the main portion of
the December 31, 2003 nonaccrual loans. The first loan was secured by an office
building in the Silicon Valley community of Mountain View, which was placed in
nonaccrual status due to a significant decline in the underlying value of the
collateral. At December 31, 2003, its balance was $3,128,000.The loan had been
written down to its current market value. The guarantors continue to perform
according to the contractual obligations of the documents. The other loan was to
a residential care facility with a balance of $5,828,000, taken into Other Real
Estate Owned in the first quarter ended March 31, 2004. There were no foreclosed
assets or loans past due 90 days and still accruing on either date.
In the first quarter of 2004, the Company foreclosed and took
into Other Real Estate Owned, the loan secured by a residential care facility
with a net loan balance of $5,828,000. This loan was previously in nonaccrual
status due to a payment default, and ultimately a bankruptcy filed by the
borrower. An independent appraiser determined that the "as is" market value of
the property as of May 20, 2003 was $7,300,000.
The loan secured by an office building in Mountain View in December 31,
2003 was written down to $2,700,000 in the quarter ended March 31, 2004, its
current market value.
14
Deposits. Total deposits at March 31, 2004 were $378,324,000 compared
to $374,214,000 on December 31, 2003. Of these totals, noninterest-bearing
demand deposits were $101,742,000 or 26.9% of the total on March 31, 2004 and
$96,567,000 or 25.8% on December 31, 2003. Time deposits were $90,521,000 on
March 31, 2004 and $91,968,000 on December 31, 2003.
The following table sets forth the maturity schedule of the time certificates of
deposit on March 31, 2004:
Table 8
-------
(In thousands) Under $100,000
Maturities: $100,000 or more Total
---------- ---------- ----------
Three months or less $ 19,507 $ 22,662 $ 42,169
Over three to six months 11,126 8,365 19,491
Over six through twelve months 9,945 5,771 15,716
Over twelve months 9,660 3,485 13,145
---------- ---------- ----------
Total $ 50,238 $ 40,283 $ 90,521
========== ========== ==========
The following table shows the risk-based capital ratios and leverage
ratios at March 31, 2004 and December 31, 2003:
Table 9
------- Minimum "Well
March 31, December 31, Capitalized"
Risk-Based Capital Ratios 2004 2003 Requirements
Tier 1 Capital 13.60% 13.29% > 6.00%
-
Total Capital 14.40% 14.15% > 10.00%
-
Leverage Ratios 11.92% 12.06% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimum loss. As of March 31, 2004, Liquid Assets were
$89,649,000, or 20.6% of total assets. As of December 31, 2003, Liquid Assets
were $94,336,000, or 22.0% 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.
A higher loan to deposit ratio means that assets will be less liquid.
This has to be balanced against the fact that loans represent the highest
interest earning assets A lower loan to deposit ratio means lower potential
income. On March 31, 2004 net loans were at 83.5% of deposits. On December 31,
2003 net loans were at 83.6%.
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
15
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,
2004 and December 31, 2003, 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 $65,168,000 and $56,888,000 at March 31, 2004 and December 31, 2003,
respectively. As a percentage of net loans, these off-balance sheet items
represent 20.6% and 18.2% respectively.
Corporate Reform Legislation
President George W. Bush signed the "Sarbanes-Oxley Act of 2002" (the
"Act") on July 30, 2002, which responds to the recent corporate accounting
scandals. Among other matters, the Act increases the penalties for securities
fraud, establishes new rules for financial analysts to prevent conflicts of
interest, creates a new independent oversight board for the accounting
profession, imposes restrictions on the consulting activities of accounting
firms that audit company records and requires certification of financial reports
by corporate executives. The SEC has adopted a number of rule changes to
implement the provisions of the Act.. The SEC has also approved new rules
proposed and adopted by the New York Stock Exchange and the Nasdaq Stock Market
to strengthen corporate governance standards for listed companies. The Company
does not currently anticipate that compliance with the Act (including the rules
adopted pursuant to the Act) will have a material effect upon its financial
position or results of its operations or its cash flows.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may change
as a result of changes in interest rates and other market conditions. Market
risk is attributed to all market risk sensitive financial instruments, including
loans, investment securities, deposits and borrowings. The Company does not
engage in trading activities or participate in foreign currency transactions for
its own account. Accordingly, exposure to market risk is primarily a function of
asset and liability management activities and of changes in market rates of
interest. Changes in rates can cause or require increases in the rates paid on
deposits that may take effect more rapidly or may be greater than the increases
in the interest rates that the Company is able to charge on loans and the yields
that it can realize on its investments. The extent of that market risk depends
on a number of variables including the sensitivity to changes in market interest
rates and the maturities of the Company's interest earning assets and deposits.
For the quarter ended March 31, 2004, the prime lending rate held steady at
4.00% From January 1, 2003 through June 26, 2003, the prime lending rate was
4.25%, and dropped to 4.00% from June 27 to the end of December 2003. The
changes were not as significant as in prior years. The effect of these rate
changes was mitigated, because a significant amount of the Real Estate loan
portfolio is subject to interest rate caps and floors. Consequently, this did
not have a material effect on earnings.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
and other members of the Company's senior management as of the end of the
Company's fiscal quarter ended March 31, 2004. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
(b) Internal Control Over Financial Reporting: An evaluation of
any changes in the Company's internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the
Company's fiscal quarter ended March 31, 2004, was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management.
The Company's Chief Executive Officer and Chief Financial Officer concluded that
no change identified in connection with such evaluation has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
17
PART II--OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number Average Number of Shares Maximum Number (or
Of Shares (or Price Paid (or Units) Purchased Approximate Dollar Value)
Units) Per Share As Part of Publicly of Shares (or Units) that
Purchased (or Unit) Announced Plans or May Yet Be Purchased
Programs Under the Plans or
Programs
- ------------------------------------------------------------------------------------------------------------
Month #1
January 1 None N/a None 85,285
through
January 31, 2004
- ------------------------------------------------------------------------------------------------------------
Month #2
February 1 4,900 $33.75 4,900 80,385
through
February 29, 2004
- ------------------------------------------------------------------------------------------------------------
Month #3
March 1 4,600 $33.36 4,600 75,785
through
March 31, 2004
- ------------------------------------------------------------------------------------------------------------
Total 9,500 9,500
- ------------------------------------------------------------------------------------------------------------
Footnote: On July 25, 2003, the Board of Directors of the Company authorized a
stock repurchase program which calls for the repurchase of up to five percent
(5%) of the Company's then outstanding shares of common stock, or approximately
121,852 shares. The repurchases are to be made from time to time in the open
market as conditions allow and will be structured to comply with Commission Rule
10b-18. All repurchased shares reflected in the table above were made in open
market transactions and then retired. The Board of Directors has reserved the
right to suspend, terminate, modify or cancel this repurchase program at any
time for any reason. On January 23, 2004, the Board of Directors of the
registrant authorized an extension of the FNB Bancorp stock repurchase program
previously adopted on July 25, 2003. On March 31, 2004, a total of 52,160
shares, or approximately 2.04% of the shares outstanding on that date (adjusted
for the stock dividend paid by the registrant on December 15, 2003, to
shareholders of record on November 28, 2003) had been repurchased pursuant to
the program. The program (as extended) calls for the further purchase of an
additional 75,785 shares, subject to an aggregate limit of five percent of the
registrant's common stock. All such transactions, including any block purchases,
will be structured to comply with Commission Rule 10b-18 and all shares that are
purchased under this program will be retired. The Board of Directors has
reserved the right to suspend, terminate, modify or cancel the program at any
time for any reason.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31: Rule 13a-14(a)/15d-14(a) Certifications
32: Section 1350 Certifications
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed during the
quarter ended March 31, 2004:
Filed January 6, 2004, announcing the appointment of R. Albert
Roensch as Director of FNB Bancorp and First National Bank of
Northern California.
Filed January 22, 2004, announcing earnings for 2003 fiscal
year-end.
Filed January 27, 2004, announcing cash dividend payable
February 17, 2004.
Filed January 29, 2004, announcing extension of stock
repurchase program.
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 11, 2004. 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)
19