SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 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 November 3,
2004: 2,482,594 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (Dollars in
thousands)
ASSETS
September 30 December 31
2004 2003
------------ ------------
Cash and due from banks $ 17,752 $ 22,764
Federal funds sold 11,100 7,880
------------ ------------
Cash and cash equivalents 28,852 30,644
Securities available-for-sale 110,073 63,692
Loans, net 318,101 312,929
Bank premises, equipment, and leasehold improvements 11,722 10,904
Accrued interest receivable and other assets 16,639 11,279
------------ ------------
Total assets $ 485,387 $ 429,448
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand, noninterest bearing $ 121,403 $ 96,567
Demand, interest bearing 50,744 62,974
Savings and money market 170,247 122,705
Time 84,771 91,968
------------ ------------
Total deposits 427,165 374,214
Accrued expenses and other liabilities 5,567 3,247
------------ ------------
Total liabilities 432,732 377,461
------------ ------------
Stockholders' equity
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 2,486,000 shares at September 30, 2004
and 2,519,000 shares at December 31, 2003 27,687 28,903
Additional paid-in capital 7 3
Retained earnings 24,047 22,041
Accumulated other comprehensive income 914 1,040
------------ ------------
Total stockholders' equity 52,655 51,987
------------ ------------
Total liabilities and stockholders' equity $ 485,387 $ 429,448
============ ============
See accompanying notes to unaudited consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 5,320 $ 4,978 $ 15,602 $ 14,984
Interest on securities 511 347 977 1,124
Interest on tax-exempt securities 326 358 909 1,022
Federal funds sold 49 12 140 62
------------ ------------ ------------ ------------
Total interest income 6,206 5,695 17,628 17,192
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 639 626 1,778 2,088
Other -- 1 -- 1
------------ ------------ ------------ ------------
Total interest expense 639 627 1,778 2,089
------------ ------------ ------------ ------------
Net interest income 5,567 5,068 15,850 15,103
------------ ------------ ------------ ------------
Provision for loan losses 120 40 360 780
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 5,447 5,028 15,490 14,323
------------ ------------ ------------ ------------
Noninterest income:
Service charges 591 668 1,901 1,997
Credit card fees 241 275 681 733
Other income 124 61 255 212
------------ ------------ ------------ ------------
Total noninterest income 956 1,004 2,837 2,942
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 2,623 2,540 7,977 8,167
Occupancy expense 301 296 992 939
Equipment expense 425 398 1,265 1,171
Professional fees 267 183 847 592
Telephone, postage and supplies 271 227 849 675
Bankcard expenses 219 235 606 629
Other expense 518 489 1,576 1,430
------------ ------------ ------------ ------------
Total noninterest expense 4,624 4,368 14,112 13,603
------------ ------------ ------------ ------------
Earnings before income tax expense 1,779 1,664 4,215 3,662
Income tax expense 437 404 1,007 905
------------ ------------ ------------ ------------
NET EARNINGS $ 1,342 $ 1,260 $ 3,208 $ 2,757
============ ============ ============ ============
Earnings per share data:
Basic $ 0.54 $ 0.49 $ 1.28 $ 1.08
Diluted $ 0.53 $ 0.49 $ 1.26 $ 1.08
Weighted average shares outstanding:
Basic 2,490,000 2,546,000 2,503,000 2,553,000
Diluted 2,531,000 2,560,000 2,544,000 2,561,000
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
3
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net earnings $ 1,342 $ 1,260 $ 3,208 $ 2,757
------------ ------------ ------------ ------------
Change in unrealized gain (loss)
on available-for-sale securities 460 (276) (126) (490)
------------ ------------ ------------ ------------
Total comprehensive income $ 1,802 $ 984 $ 3,082 $ 2,267
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (Dollars
in thousands)
Nine months ended
September 30
------------------------
2004 2003
---------- ----------
Cash flow from operating activities
Net earnings $ 3,208 $ 2,757
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization 1,365 1,428
Provision for loan losses 360 780
Stock based compensation expense 4 --
Changes in assets and liabilities:
Accrued interest receivable and other assets (5,360) 552
Accrued expenses and other liabilities 2,408 (69)
---------- ----------
Net cash provided by operating activities 1,985 5,448
---------- ----------
Cash flows from investing activities
Purchase of securities available-for-sale (73,098) (27,100)
Proceeds from matured/called/securities available-for-sale 26,101 24,619
Net increase in loans (5,532) (16,171)
Proceeds from sale of bank premises, equipment and leasehold improvements 121 --
Purchases of bank premises, equipment, leasehold improvements (1,902) (368)
---------- ----------
Net cash used in investing activities (54,310) (19,020)
---------- ----------
Cash flows from financing activities
Net increase in demand and savings deposits 60,148 17,693
Net (decrease) increase in time deposits (7,197) 440
Dividends paid (1,202) (1,165)
Repurchase of common stock (1,489) (989)
Issuance of common stock for exercise of stock options 273 2
Payments on capital note payable -- (78)
---------- ----------
Net cash provided by financing activities 50,533 15,903
---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,792) 2,331
Cash and cash equivalents at beginning of period 30,644 20,199
---------- ----------
Cash and cash equivalents at end of period $ 28,852 $ 22,530
========== ==========
Additional cash flow information
Interest paid $ 1,778 $ 2,202
Income taxes paid $ 1,226 $ 657
See accompanying notes to unaudited consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 PLANS
At September 30, 2004, the Company has two stock-based employee
compensation plans. Prior to 2003, the Company accounted for the plans 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
5
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 plans 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.
(Dollars in thousands, except per share) Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income as reported $ 1,342 $ 1,260 $ 3,208 $ 2,757
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects 2 1 4 2
Deduct: total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effect (3) (3) (4) (9)
------------ ------------ ------------ ------------
Pro forma net income $ 1,341 $ 1,258 $ 3,208 $ 2,750
Earnings per share:
Basic - as reported $ 0.54 $ 0.49 $ 1.28 $ 1.08
Basic - pro forma $ 0.54 $ 0.49 $ 1.28 $ 1.07
Diluted - as reported $ 0.53 $ 0.49 $ 1.26 $ 1.08
Diluted - pro forma $ 0.53 $ 0.49 $ 1.26 $ 1.07
NOTE C - EARNINGS PER SHARE CALCULATION
Earnings per common share (EPS) are computed based on the weighted
average number of common shares outstanding during the period. Basic EPS
excludes dilution and is computed by dividing net earnings by the weighted
average of common shares outstanding. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Earnings per share have been computed based on the following (dollars
in thousands):
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net earnings $ 1,342 $ 1,260 $ 3,208 $ 2,757
Average number of shares outstanding 2,490,000 2,546,000 2,503,000 2,553,000
Effect of dilutive options 41,000 14,000 41,000 8,000
Average number of shares outstanding used
to calculate diluted earnings per share 2,531,000 2,560,000 2,544,000 2,561,000
All outstanding options were included in the 2004 and 2003 computations.
6
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income consists of net unrealized gains
and losses on investment securities available for sale. Comprehensive income for
the three months ended September 30, 2004 was $1,802,000 compared to $984,000
for the three months ended September 30, 2003. Comprehensive income for the nine
months ended September 30, 2004 was $3,082,000 compared to $2,267,000 for the
nine months ended September 30, 2003.
NOTE E - OTHER REAL ESTATE OWNED
Loans that have become delinquent through non payment of scheduled
principal and/or interest for 90 days are placed in nonaccrual and interest is
no longer accrued. If a favorable restructuring cannot be made for the loan
(provided the market value of the collateral is sufficient), or, if
insufficient, 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 sold in May and its cost was recovered.
NOTE F - 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 September 30, 2004, a total of 85,004 shares, or
approximately 3.32% 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.
NOTE G - OTHER-THAN-TEMPORARY IMPAIRMENTS OF CERTAIN INVESTMENTS
On March 31, 2004, the FASB ratified EITF Issue No. 03-01, which
provides guidance on recognizing other-than-temporary impairments on certain
investments. The issue is effective for other-than-temporary impairment
evaluations for investments accounted for under SFAS No. 115, as well as
non-marketable equity securities accounted for under the cost method and was
originally scheduled to become effective for reporting periods beginning July 1,
2004.
On September 30, 2004, the FASB delayed certain provisions of EITF
03-01. Its deliberation of EITF 03-01 is expected to resume sometime in November
2004.
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 September 30, 2004 were $1,342,000,
compared to net earnings of $1,260,000 for the quarter ended September 30, 2003.
Net earnings for the nine months ended September 30, 2004 were $3,208,000
compared to $2,757,000 for the nine months ended September 30, 2003. Earnings
before income tax expense for the quarter ended September 30, 2004 were
$1,779,000, compared to $1,664,000 for the quarter ended September 30, 2003.
Earnings before income tax were $4,215,000 for the nine months ended September
30, 2004 compared to $3,662,000 for the nine months ended September 30, 2003.
8
Net interest income for the quarter ended September 30, 2004 was
$5,567,000, compared to $5,068,000 for the quarter ended September 30, 2003. Net
interest income for the nine months ended September 30, 2004 was $15,850,000
compared to $15,103,000 for the nine months ended September 30, 2003.The prime
lending rate was 4.25% on July 1, 2004, 4.50% on August 11, 2004, and 4.75% on
September 21, 2004, compared to 4.00% in the third quarter of 2003. The Federal
Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds Index announced
for the three months ended September 2004 (based on the three Index Months ended
August 31), averaged 1.82%, compared to 2.03% for the three months ended
September 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 $0.54 for the third quarter of 2004
compared to $0.49 for the third quarter of 2003. Diluted earnings per share were
$0.53 for the third quarter of 2004 compared to $0.49 for the third quarter of
2003. Basic earnings per share were $1.28 for the nine months ended September
30, 2004 compared to $1.08 for the nine months ended September 30, 2003. Diluted
earnings per share were $1.26 for the nine months ended September 30, 2004
compared to $1.08 for the nine months ended September 30, 2003.
The following table presents an analysis of net interest income and
average earning assets and liabilities for the three-and nine-month periods
ended September 30, 2004 compared to the three- and nine-month periods ended
September 30, 2003.
9
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
- ------- FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Three months ended September 30,
-------------------------------------------------------------------------------------------
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 $ 315,430 $ 5,320 6.69% $ 297,898 $ 4,978 6.63%
Taxable securities 67,938 511 2.98 40,533 347 3.40
Nontaxable securities 38,872 326 3.33 39,158 358 3.63
Federal funds sold 14,671 49 1.33 5,137 12 0.93
------------ ------------ ------------ ------------
Total interest earning assets $ 436,911 $ 6,206 5.64 $ 382,726 $ 5,695 5.90
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,432 $ 17,925
Premises and equipment 11,634 10,749
Other assets 11,365 6,001
------------ ------------
Total noninterest earning
assets $ 42,431 $ 34,675
------------ ------------
TOTAL ASSETS $ 479,342 $ 417,401
============ ============
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 57,712 ($ 28) (0.19) $ 52,877 ($ 24) (0.18)
Money market 104,579 (237) (0.90) 65,616 (124) (0.75)
Savings 61,092 (41) (0.27) 57,275 (40) (0.28)
Time deposits 84,619 (333) (1.56) 91,512 (438) (1.90)
Federal funds purchased and other
borrowings -- -- -- 345 (1) (1.15)
------------ ------------ ------------ ------------
Total interest bearing
liabilities $ 308,002 ($ 639) (0.82) $ 267,625 ($ 627) (0.93)
------------ ------------ ------------ ------------
NONINTEREST BEARING LIABILITIES
Demand deposits 113,259 93,034
Other liabilities 5,765 5,095
------------ ------------
Total noninterest bearing
liabilities $ 119,024 $ 98,129
------------ ------------
TOTAL LIABILITIES $ 427,026 $ 365,754
Stockholders' equity $ 52,316 $ 51,647
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 479,342 $ 417,401
============ ============
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 5,567 5.06% $ 5,068 5.25%
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.
10
Table 2 NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Nine months ended September 30,
-------------------------------------------------------------------------------------------
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 $ 315,293 $ 15,602 6.62% $ 291,566 $ 14,984 6.87%
Taxable securities 41,488 977 3.15 41,202 1,124 3.65
Nontaxable securities 34,750 909 3.50 35,562 1,022 3.84
Federal funds sold 17,856 140 1.05 7,369 62 1.12
------------ ------------ ------------ ------------
Total interest earning assets $ 409,387 $ 17,628 5.76 $ 375,699 $ 17,192
6.12
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,969 $ 17,975
Premises and equipment 13,863 10,960
Other assets 10,093 5,877
------------ ------------
Total noninterest earning
assets $ 42,925 $ 34,812
------------ ------------
TOTAL ASSETS $ 452,312 $ 410,511
============ ============
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 57,347 ($ 88) (0.21) $ 51,485 ($ 85) (0.22)
Money market 84,103 (533) (0.85) 65,088 (442) (0.91)
Savings 59,822 (119) (0.27) 55,285 (147) (0.36)
Time deposits 88,515 (1,038) (1.57) 90,642 (1,414) (2.09)
Federal funds purchased and other
borrowings -- -- -- 151 (1) (0.89)
------------ ------------ ------------ ------------
Total interest bearing
liabilities $ 289,787 ($ 1,778) (0.82) $ 262,651 ($ 2,089) (1.06)
------------ ------------ ------------ ------------
NONINTEREST BEARING LIABILITIES
Demand deposits 104,618 91,152
Other liabilities 5,666 5,010
------------ ------------
Total noninterest bearing
liabilities $ 110,284 $ 96,162
------------ ------------
TOTAL LIABILITIES $ 400.071 $ 358,813
Stockholders' equity $ 52,241 $ 51,698
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 452,312 $ 410,511
============ ============
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 15,850 5.18% $ 15,103 5.37%
Tables 1 and 2, above, shows the various components that contributed to
changes in net interest income for the three and nine months ended September 30,
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 September
30, 2004, average loans outstanding represented 72.2% of average earning assets.
For the quarter ended September 30, 2003, they represented 77.8% of average
earning assets. For the nine months ended September 30, 2004 and 2003, average
loans outstanding represented 77.0% and 77.5%, respectively, of average earning
assets.
11
While the yield on total interest earning assets for the quarter ended
September 30, 2004 compared to the quarter ended September 30, 2003 decreased
from 5.90% to 5.64%, or 26 basis points, this was offset by the larger volume
invested in loans, which resulted in a $511,000 increase in total interest
income. Comparing the nine months ended September 30, 2004 to the nine months
ended September 30, 2003, the yield on total interest earning assets decreased
by 36 basis points. Again, this was offset by a larger volume invested in loans,
producing an increase in total interest income of $436,000, or 2.54%
For the three months ended September 30, 2004 compared to the three
months ended September 30, 2003, the cost on total interest bearing liabilities
decreased from 0.93% to 0.82%, a decrease of 11 basis points. The most expensive
source of interest bearing liabilities are the time certificates of deposit.
Their average cost decreased from 1.90% to 1.56%, and the expense on these
deposits decreased $105,000 for the three months ended September 30, 2004
compared to 2003. Money market deposits increased $38,963,000 or 59.38%, causing
total interest expense on interest bearing liabilities to increase by $12,000.
For the nine months ended September 30, 2004 compared to the nine
months ended September 30, 2003, the cost on total interest bearing liabilities
decreased from 1.06% to 0.82%.
For the three and nine month periods ended September 30, 2004 and
September 2003, respectively, the following tables show the dollar amount of
change in interest income and expense and the dollar amounts attributable to:
(a) changes in volume (changes in volume at the current year rate), 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.
For three months ended September 30, 2004 compared to three months
ended September 30, 2003, the major contributors to change in interest income
were average real estate and construction loans, which increased by $7,475,000,
and average commercial loans, up by $9,743,000. For the nine months ended
September 30, 2004 and September 30, 2003, average real estate and construction
loans increased by $12,780,000 and average commercial loans increased by
$10,939,000. For the two three month periods, interest rates on loans did not
change significantly, but for the nine months, there was more of a decline in
interest attributable to interest on loans. On the interest expense side,
because of maturing time certificates, more of the interest decrease for the
current quarter was attributable to changes in rate, and more so for the nine
months of this year compared to last year.
12
Table 3 FNB BANCORP AND SUBSIDIARY
- ------- RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended September 30,
(Dollars in thousands) 2004 Compared to 2003
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 342 $ 46 $ 296
Taxable securities 164 (42) 206
Nontaxable securities (32) (29) (3)
Federal funds sold 37 5 32
------------ ------------ ------------
Total $ 511 ($ 20) $ 531
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 4 $ 2 $ 2
Money market 113 25 88
Savings deposits 1 (2) 3
Time deposits (105) (72) (33)
Fed funds purchased & other borrowings (1) -- (1)
------------ ------------ ------------
Total $ 12 ($ 47) $ 59
------------ ------------ ------------
NET INTEREST INCOME $ 499 $ 27 $ 472
============ ============ ============
Table 4 FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS
Nine Months Ended September 30,
(Dollars in thousands) 2004 Compared To 2003
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 618 ($ 601) $ 1,219
Taxable securities (147) (154) 7
Nontaxable securities (113) (92) (21)
Federal funds sold 78 (10) 88
------------ ------------ ------------
Total $ 436 ($ 857) $ 1,293
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 3 ($ 7) $ 10
Money market 91 (30) 121
Savings deposits (28) (37) 9
Time deposits (376) (343) (33)
Fed funds purchased & other borrowings (1) -- (1)
------------ ------------ ------------
Total ($ 311) ($ 417) $ 106
------------ ------------ ------------
NET INTEREST INCOME $ 747 ($ 440) $ 1,187
============ ============ ============
13
Provision for loan losses
- -------------------------
The level of the provision for loan losses during each of the periods
presented reflects the Company's continued efforts to reduce credit costs by
enforcing underwriting and administration procedures, as well as aggressively
pursuing collection efforts with troubled debtors. The Company provided $120,000
and $40,000 for loan losses in the third quarter of 2004 and 2003, respectively.
For the nine months ended September 30, 2004 and 2003, it provided $360,000 and
$780,000. The provision reflects management's assessment of credit risk in the
loan portfolio for each of the periods presented. Additional comments on the
subject are mentioned on page 17, in the "Allowance for loan losses" section of
this report.
Noninterest income
- ------------------
The following table shows the principal components of noninterest
income for the periods indicated.
Table 5 NONINTEREST INCOME
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(Dollars in thousands) 2004 2003 2004 2003
---------- ---------- ---------- ----------
Service charges $ 591 $ 668 $ 1,901 $ 1,997
Credit card fees 241 275 681 733
Other income 124 61 255 212
---------- ---------- ---------- ----------
Total noninterest income $ 956 $ 1,004 $ 2,836 $ 2,942
========== ========== ========== ==========
Noninterest income consists mainly of service charges on deposits,
credit card fees, and other miscellaneous types of income. For the quarter ended
September 30, 2004 compared to September 30, 2003, total noninterest income
decreased $48,000 or 4.78%. The major component, service charges, decreased
$77,000 while other income increased $63,000. The main component of other
income, tax free income on officer's life insurance, increased $67,000. For the
nine months ended September 30, 2004 and September 30, 2003, total noninterest
income declined by $106,000, or 3.60%. The major component, service charges,
declined $96,000, or 4.81%.
Noninterest expense
- -------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
14
Table 6 NONINTEREST EXPENSE
(Dollars in thousands) Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Salaries and employee benefits $ 2,623 $ 2,540 $ 7,977 $ 8,167
Occupancy expense 301 296 992 939
Equipment expense 425 398 1,265 1,171
Professional fees 267 183 847 592
Telephone, postage and supplies 271 227 849 675
Bankcard expense 219 235 606 629
Other expense 518 489 1,576 1,430
---------- ---------- ---------- ----------
Total noninterest expense $ 4,624 $ 4,368 $ 14,112 $ 13,603
========== ========== ========== ==========
Noninterest expense consists mainly of salaries and employee benefits.
For the three months ended September 30, 2004 compared to three months ended
September 30, 2003, it represented 56.7% and 58.2% of total noninterest
expenses. For the nine months ended September 30, 2004 and 2003, it was 56.5%
and 60.0% of total noninterest expense. These decreases are attributable to
outsourcing the bank's in-house courier service, and attrition, which saw
full-time equivalent employees decline from 168 employees at September 30, 2003
to 161 employees at September 30, 2004. The remaining categories are less
significant. However, professional fees increased by 45.9% in the quarter ended
September 30, 2004 compared to the quarter ended September 30, 2003, and
increased by 43.1% for the nine months ended September 30, 2004 compared to
2003. This reflects the increasing costs associated with compliance issues such
as the Patriot Act, Sarbanes-Oxley, and the Gramm-Leach-Bliley Act. Telephone,
postage and supplies increased 19.4% for the quarter ended September 30, 2004
compared to the same quarter in 2003, and increased 25.8% for the nine months
ended September 30, 2004 compared to the nine months ended September 30, 2003.
During 2004, an overhaul of the telephone and general telecommunications systems
has been implemented, with some parallel billing accounting for the increase.
Income Taxes
- ------------
The effective tax rate for the quarter ended September 30, 2004 was
24.6% compared to 24.3% for the quarter ended September 30, 2003. The effective
tax rate for the nine months ended September 30, 2004 and September 30, 2003,
respectively was 23.9% and 24.7%. The primary difference between the statutory
tax rate of 34% and the effective tax rate is due to a reduction due to tax-free
municipal bond interest, a reduction due to Low Income Housing tax credits, and
an increase in state taxes. The variance for each period reflects a greater or
lesser proportion of income from investments in tax-free municipal securities,
variable amounts of Low Income Housing tax credits, and variable increases in
state taxes.
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
15
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth
and deposit withdrawals, as well as to provide for general needs, the Company
must maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
comes from Company's customer base, which provides core deposit growth. The
overall liquidity position of the Company is closely monitored and evaluated
regularly. Management believes the Company's liquidity sources at September 30,
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 September 30, 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.
Table 7 RATE SENSITIVE ASSETS/LIABILITIES
- ------- As of September 30, 2004
(Dollars in thousands) Three Over Three Over One Over Not
Months To Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
---------- ---------- ---------- ---------- ---------- ----------
Interest earning assets:
Federal funds sold $ 11,100 $ -- $ -- $ -- $ -- $ 11,100
Securities available for sale 1,004 18,183 79,338 11,548 -- 110,073
Loans 275,258 11,233 9,138 22,968 2,732 321,329
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 287,362 29,416 88,476 34,516 2,732 442,502
Cash and due from banks -- -- -- -- 17,752 17,752
Allowance for loan losses -- -- -- -- (3,228) (3,228)
Other assets -- -- -- -- 28,361 28,361
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 287,362 $ 29,416 $ 88,476 $ 34,516 $ 45,617 $ 485,387
========== ========== ========== ========== ========== ==========
Interest bearing liabilities:
Demand, interest bearing $ 50,744 $ -- $ -- $ -- $ -- $ 50,744
Savings and money market 170,247 -- -- -- -- 170,247
Time deposits 84,771 -- -- -- -- 84,771
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 305,762 -- -- -- -- 305,762
---------- ---------- ---------- ---------- ---------- ----------
Noninterest demand deposits -- -- -- -- 121,403 121,403
Other liabilities -- -- -- -- 5,444 5,444
Stockholders' equity -- -- -- -- 52,655 52,655
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 305,762 $ -- $ -- $ -- $ 179,625 $ 485,387
========== ========== ========== ========== ========== ==========
Interest rate sensitivity gap ($ 18,400) $ 29,416 $ 88,476 $ 34,516 ($ 134,008) $ --
========== ========== ========== ========== ========== ==========
Cumulative interest rate sensitivity gap ($ 18,400) $ 11,016 $ 99,492 $ 134,008 $ -- $ --
Cumulative interest rate sensitivity gap ratio (6.40%) 3.48% 24.55% 30.47% -- --
16
Financial Condition
- -------------------
Assets. Total assets increased to $485,387,000 at September 30, 2004
from $429,448,000 at December 31, 2003, an increase of $55,939,000. Most of this
increase was in securities available for sale, which increased $46,381,000, with
loans, premises and other assets increasing by $11,287,000, offset by a decline
of $1,792,000 in cash and due from banks. The increase in total assets was
funded mainly by an increase in deposits of $52,950,000.
Loans. Net loans at September 30, 2004 were $318,101,000, an increase
of $5,172,000 or 1.65% over December 31, 2003. Construction loans decreased
$16,037,000, representing most of the decrease, while real estate loans
increased by $24,568,000. Construction loans outstanding can vary significantly,
because the loans are funded gradually, but once completed, the amount paid off
is large. The commercial and consumer loans decreased $3,557,000. The portfolio
breakdown was as follows.
Table 8 LOAN PORTFOLIO
-------
September 30, December 31,
(In thousands) 2004 Percent 2003 Percent
------------ ------------ ------------ ------------
Real Estate $ 239,156 74.1% $ 214,588 67.5%
Construction 32,573 10.1 48,610 15.3
Commercial 49,194 15.2 52,248 16.4
Consumer 2,048 0.6 2,551 0.8
------------ ------------ ------------ ------------
Gross loans 322,971 100.0% 317,997 100.0%
============ ============
Net deferred loan fees (1,642) (1,784)
Allowance for loan losses (3,228) (3,284)
------------ ------------
Net loans $ 318,101 $ 312,929
============ ============
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 nine
months ended September 30, 2004 and the nine months ended December 31, 2003 is
as follows:
Table 9 ALLOWANCE FOR LOAN LOSSES
-------
Nine months ended Nine months ended
(In thousands) September 30, 2004 September 30, 2003
------------------ ------------------
Balance, beginning of period $ 3,284 $ 3,396
Provision for loan losses 360 780
Recoveries 1 4
Amounts charged off (417) (880)
------------------ ------------------
Balance, end of period $ 3,228 $ 3,300
================== ==================
17
In management's judgment, the allowance was adequate to absorb probable
losses currently inherent in the loan portfolio at September 30, 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. At September 30, 2004, the allowance represented 1.00% of gross
loans net of unearned loan fees, compared to September 30, 2003, where it
represented 1.09% of gross loans net of unearned loan fees. At September 30,
2004, the allowance represented 118.6% of nonperforming loans, compared to
September 30, 2003, where it represented 35.82% of nonperforming loans.
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 September 30, 2004, there was $2,732,000 in non-accrual
loans, compared to $9,085,000 at December 31, 2003. One loan secured by an
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 and is at $2,670,000 on September
30, 2004. 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 $5,827,000, which was sold in May, 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 $5,827,000. This loan was previously in nonaccrual
status due to a payment default, and ultimately a bankruptcy filed by the
borrower. The loan was sold with no loss of principal in the second quarter of
2004.
Deposits. Total deposits at September 30, 2004 were $427,165,000
compared to $374,214,000 on December 31, 2003. Of these totals,
noninterest-bearing demand deposits were $121,403,000 or 28.4% of the total on
September 30, 2004 and $96,567,000 or 25.8% on December 31, 2003. Savings and
money market deposits were $170,247,000 on September 30, 2004, and $122,705,000
on December 31, 2003. Time deposits were $84,771,000 on September 30, 2004 and
$91,968,000 on December 31, 2003.
The following table sets forth the maturity schedule of the time certificates of
deposit on September 30, 2004:
Table 10
--------
(Dollars in thousands) Under $100,000
Maturities: $100,000 or more Total
---------- ---------- ----------
Three months or less $ 16,728 $ 16,488 $ 33,216
Over three to six months 11,655 8,127 19,782
Over six through twelve months 9,537 6,246 15,783
Over twelve months 11,207 4,783 15,990
---------- ---------- ----------
Total $ 49,127 $ 35,644 $ 84,771
========== ========== ==========
The following table shows the risk-based capital ratios and leverage
ratios at September 30, 2004 and December 31, 2003:
18
Table 11
-------- Minimum "Well
September 30, December 31, Capitalized"
Risk-Based Capital Ratios 2004 2003 Requirements
Tier 1 Capital 13.23% 13.29% > 6.00%
-
Total Capital 14.04% 14.15% > 10.00%
-
Leverage Ratios 10.82% 12.06% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimum loss. As of September 30, 2004, Liquid Assets were
$138,925,000, or 28.6% 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 September 30, 2004 net loans were at 74.5% 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
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
19
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 September
30, 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 $91,332,000 and $56,888,000 at September 30, 2004 and
December 31, 2003, respectively. As a percentage of net loans, these off-balance
sheet items represent 28.7% 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.
Subsequent Event
On November 5, 2004, the Bank entered into an Acquisition Agreement
with Sequoia National Bank, based in San Francisco, California, and Hemisphere
National Bank, based in Miami, Florida. Whereby the Bank proposes to acquire all
of the assets and San Francisco-based banking operations of Sequoia National
Bank. The all-cash purchase price to be paid by the Bank is valued at
approximately $11.7 million or $2.45 per share. Under the terms of the
Acquisition Agreement, Hemisphere National Bank proposes to simultaneously
acquire the remaining national bank charter of Sequoia National Bank, including
Sequoia's regulatory authority to establish branch offices in Los Angeles (and
elsewhere in California), representing approximately $0.11 per share in
additional consideration (after estimated corporate taxes and other transaction
related expenses) to the Sequoia National Bank shareholders. The transaction
will be taxable to shareholders of Sequoia National Bank. The Acquisition
Agreement has been approved by the Boards of Directors of the Bank, Sequoia
National Bank and Hemisphere National Bank. The closing of the transactions
contemplated by the Acquisition Agreement is presently expected to occur during
the first quarter of 2005, subject to the satisfaction of various conditions set
forth in the Acquisition Agreement, including approval of the shareholders of
Sequoia National Bank, the receipt of all necessary bank regulatory approvals,
and other conditions customary for transactions of this type.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may change
as a result of changes in interest rates and other market conditions. Market
risk is attributed to all market risk sensitive financial instruments, including
loans, investment securities, deposits and borrowings. The Company does not
engage in trading activities or participate in foreign currency transactions for
its own account. Accordingly, exposure to market risk is primarily a function of
asset and liability management activities and of changes in market rates of
interest. Changes in rates can cause or require increases in the rates paid on
deposits that may take effect more rapidly or may be greater than the increases
in the interest rates that the Company is able to charge on loans and the yields
that it can realize on its investments. The extent of that market risk depends
on a number of variables including the sensitivity to changes in market interest
rates and the maturities of the Company's interest earning assets and deposits.
For the quarter ended September 30, 2004, the prime lending rate was raised to
4.25% on July 1, 2004, 4.50% on August 11, 2004, and to 4.75% on September 21,
2004. It had been 4.00% for the first half of the year. 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 September 30, 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 September 30, 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.
21
PART II--OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds
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
July 1 1,000 $32.50 1,000 60,891
through
July 31, 2004
- ------------------------------------------------------------------------------------------------------------
Month #2
August 1 15,950 $33.00 15,950 44,941
Through
August 31, 2004
- ------------------------------------------------------------------------------------------------------------
Month #3
September 1 2,000 $33.00 2,000 42,941
Through
September 30, 2004
- ------------------------------------------------------------------------------------------------------------
Total 18,950 18,950
- ------------------------------------------------------------------------------------------------------------
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 September 30, 2004, a total of 85,004
shares, or approximately 3.32% 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 42,941 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.
22
Item 6. Exhibits
Exhibits
31: Rule 13a-14(a)/15d-14(a) Certifications
32: Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FNB BANCORP
(Registrant)
Dated:
November 9, 2004. By: /s/ THOMAS C. MC GRAW
----------------------------
Thomas C. Mc Graw
Chief Executive Officer
(Authorized Officer)
By: /s/ JAMES B. RAMSEY
----------------------------
James B. Ramsey
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
23