FNB BANCORP/CA/ - FORM 10-Q - November 14, 2012

Attached files

file	filename
EX-32 - EXHIBIT 32 - FNB BANCORP/CA/	ex_32.htm
EX-31.1 - EXHIBIT 31.1 - FNB BANCORP/CA/	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - FNB BANCORP/CA/	ex31_2.htm

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, 2012

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 S No £

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large accelerated filer £	Accelerated filer £

	Non-accelerated filer S	Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S

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, 2012: 3,517,880 shares.

FNB BANCORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page No

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited):

	Consolidated Balance Sheets	3

	Consolidated Statement of Earnings	4

	Consolidated Statement of Comprehensive Earnings	5

	Consolidated Statement of Cash Flows	6

	Notes to Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3. Quantitative and Qualitative Disclosures About Market Risk		45

Item 4T. Controls and Procedures		45

PART II OTHER INFORMATION		45

Item 1. Legal Proceedings		45

Item 1A. Risk Factors		46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46

Item 4. Mining Safety Disclosures		46

Item 6. Exhibits		46

SIGNATURES		47

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30,		December 31,
(Dollar amounts in thousands)	2012		2011

ASSETS

Cash and due from banks	$	70,803	$	38,474
Securities available-for-sale at fair value		228,805		187,664
Loans, net of allowance for loan losses of $8,582 and $9,897 on September 30, 2012 and December 31, 2011		547,549		443,721
Bank premises, equipment, and leasehold improvements, net		12,761		13,227
Bank owned life insurance		11,691		9,521
Other equity securities		5,888		4,608
Accrued interest receivable		3,639		3,614
Other real estate owned, net		1,923		2,747
Goodwill		1,841		1,841
Prepaid expenses		1,513		2,107
Other assets		11,311		8,117
Total assets	$	897,724	$	715,641

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Demand, noninterest bearing		176,597		139,382
Demand, interest bearing		78,014		63,308
Savings and money market		351,078		310,237
Time		186,275		108,851
Total deposits		791,964		621,778

Federal Home Loan Bank advances		2,728		—
Accrued expenses and other liabilities		8,316		6,667
Total liabilities		803,008		628,445

Stockholders’ equity
Preferred stock - series C - no par value, authorized and outstanding 12,600 shares (liquidation preference of $1,000 per share plus accrued dividends)		12,600		12,600
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 3,517,880 shares at September 30, 2012 and 3,506,405 shares at December 31, 2011		49,171		48,895
Retained earnings		28,715		22,427
Accumulated other comprehensive income		4,230		3,274
Total stockholders’ equity		94,716		87,196
Total liabilities and stockholders’ equity	$	897,724	$	715,641

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

(Dollar amounts and average shares are in thousands, except earnings per share amounts)

	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012			2011
Interest income:
Interest and fees on loans	$	7,208	$	7,314	$	20,721		$	22,159
Interest on taxable securities		644		513		1,874			1,379
Interest on tax-exempt securities		503		414		1,520			1,192
Total interest income		8,355		8,241		24,115			24,730
Interest expense:
Interest Federal Home Loan Bank advances		4		—		4			—
Deposits		659		842		1,996			2,583
Total interest expense		663		842		2,000			2,583
Net interest income		7,692		7,399		22,115			22,147
Provision for loan losses		400		450		1,200			1,300
Net interest income after provision for loan losses		7,292		6,949		20,915			20,847
Noninterest income:
Service charges		722		817		2,218			2,325
Credit card fees		114		197		422			525
Net gain on sale of available-for-sale securities		89		168		898			318
Bank-owned life insurance earnings		97		83		675			248
Bargain purchase gain		3,666		—		3,666			—
Other income		82		102		226			353
Total noninterest income		4,770		1,367		8,105			3,769
Noninterest expense:
Salaries and employee benefits		3,732		3,413		11,151			10,322
Occupancy expense		606		593		1,804			1,734
Equipment expense		423		433		1,301			1,258
Professional fees		325		449		1,296			1,206
FDIC assessment		160		240		496			915
Acquisition related expense		250		—		425			—
Telephone, postage and supplies		295		253		844			864
Operating losses		14		310		66			547
Bankcard expenses		114		181		427			482
Data processing expense		110		150		386			436
Low income housing expense		69		69		208			208
Gain on sale of other real estate owned		—		—		(4	)		(66	)
Loss on impairment of other real estate owned		—		69		—			299
Other real estate owned expense		5		55		56			316
Other expense		528		568		1,726			1,782
Total noninterest expense		6,631		6,783		20,182			20,303
Earnings before provision for income tax expense		5,431		1,533		8,838			4,313
Provision for income tax expense		490		344		1,381			1,141
Net earnings		4,941		1,189		7,457			3,172
Dividends and discount accretion on preferred stock		158		372		501			800
Net earnings available to common stockholders	$	4,783	$	817	$	6,956		$	2,372

Earnings per share data:
Basic	$	1.36	$	0.23	$	1.98		$	0.68
Diluted	$	1.33	$	0.23	$	1.95		$	0.67

Weighted average shares outstanding:
Basic		3,516		3,509		3,513			3,509
Diluted		3,583		3,528		3,569			3,528

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(UNAUDITED)

(Dollar amounts in thousands)	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012			2011
Net earnings	$	4,941		$	1,189		$	7,457		$	3,172
Unrealized holding gain on available-for-sale securities net of tax		837			1,216			956			2,660
Reclassification adjustment for gains recognized on available-for-sale securities sold, net of tax		(53	)		(99	)		(530	)		(188	)
Total comprehensive earnings	$	5,725		$	2,306		$	7,883		$	5,644

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollar amounts in thousands)	Nine months ended
	September 30
	2012			2011
Cash flow from operating activities:
Net earnings	$	7,457		$	3,172
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net gain on sale of securities available-for-sale		(898	)		(318	)
Depreciation, amortization and accretion		2,585			2,041
Gain on sale of other real estate owned		(4	)		(66	)
Stock-based compensation expense		166			230
Earnings on bank owned life insurance		(46	)		(249	)
Provision for loan losses		1,200			1,300
Bargain purchase gain		(3,666	)		—
(Increase) decrease in accrued interest receivable		372			645
Decrease in prepaid expense		594			1,090
(Increase) decrease in other assets		(977	)		1,691
Increase in valuation allowance on other real estate owned		—			299
Increase (decrease) in accrued expenses and other liabilities		242			(1,321	)
Net cash provided by operating activities		7,025			8,514

Cash flows from investing activities
Cash paid for acquisition, net of cash acquired		(18,374	)		—
Purchase of securities available-for-sale		(64,866	)		(51,557	)
Proceeds from matured/called/sold securities available-for-sale		38,136			28,950
Investment, net of redemption, in other equity securities		(1,280	)		478
Investment in time deposits of other banks		17,096			—
Proceeds from sale of other real estate owned		832			4,078
Net investment in other real estate owned		(13	)		—
Net (increase) decrease in loans		(1,835	)		16,803
Increase in bank-owned life insurance		(2,124	)		—
Purchases of bank premises, equipment, leasehold improvements		(582	)		(979	)
Proceeds from sale of equipment		—			2
Net cash used in investing activities		(33,010	)		(2,225	)

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended
	September 30
	2012			2011
Cash flows from financing activities
Net increase in demand and savings deposits		68,687			23,104
Net decrease in time deposits		(6,170	)		(19,890	)
Decrease in FHLB advances		(3,369	)		—
Dividends paid on common stock		(421	)		(568	)
Exercise of stock options		88			9
Dividends paid on preferred stock series A and B		—			(545	)
Repayment of series A and B stock		—			(12,600	)
Issuance of referred stock series C		—			12,600
Dividends paid on preferred stock series C		(501	)		—
Net cash provided by financing activities		58,314			2,110
NET INCREASE IN CASH AND CASH EQUIVALENTS		32,329			8,399
Cash and cash equivalents at beginning of period		38,474			60,874
Cash and cash equivalents at end of period	$	70,803		$	69,273

Additional cash flow information:
Interest paid		1,868			2,581
Income taxes paid		1,685			1,640
Tax benefit on exercise of stock options		22			—

Non-cash investing and financing activities:
Accrued dividends		246			200
Change in unrealized gain in available for-sale securities, net of tax		956			2,472
Loans transferred to other real estate owned		—			619
Deemed dividends on preferred stock		—			255

Acquisition:
Assets acquired		136,303			—
Liabilities assumed		114,263			—

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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 and Guam.

On September 21, 2012, the Company acquired 100% of the common stock of Oceanic Holding, Inc., the sole owner of Oceanic Bank. See detailed discussion in Note H.

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 position and results of operations for the interim periods presented, as required by Regulation S-X, Rule 10-01.

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, 2011.

Results of operations for interim periods are not necessarily indicative of results for the full year.

NOTE B – STOCK OPTION PLANS

Stock option expense is recorded based on the fair value of option contracts issued. The fair value is determined by the expected contract term, the risk free interest rate, the volatility of the Company’s stock price and the level of dividends the Company is expected to pay.

The expected term of options granted is derived from historical plan behavior and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S. Treasury yield curve in effect at the time of the grant.

The amount of compensation expense for options recorded in the quarters ended September 30, 2012 and September 30, 2011 was $44,000 and $76,000, respectively. There was no income tax benefit recognized in the statements of earnings for these amounts for the quarters ended September 30, 2012, and September 30, 2011, respectively. The amount of compensation expense for options recorded in the nine months ended September 30, 2012 and September 30, 2011 was $166,000 and $230,000, respectively. There was an income tax benefit of $22,000 recognized in the statements of earnings for these amounts for the nine months ended September 30, 2012, but no tax benefit recognized for the nine months ended September 30, 2011.

The intrinsic value for options exercisable as of September 30, 2012 was $814,000. The intrinsic value for options exercised during the three month period ended September 30, 2012 was $23,000. The intrinsic value for options exercised during the nine month period ended September 30, 2012 was $84,000.

The amount of total unrecognized compensation expense related to non-vested options at September 30, 2012 was $427,000, and the weighted average period over which it will be amortized is 2.9 years.

NOTE C – EARNINGS PER SHARE CALCULATION

Earnings per common share (EPS) is computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings available to common stockholders (after deducting dividends and related accretion on preferred stock) 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. All common stock equivalents are anti-dilutive when a net loss occurs.

Earnings per share have been computed based on the following :

(All amounts in thousands)	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Net earnings	$	4,941	$	1,189	$	7,457	$	3,172
Dividends and discount accretion on preferred stock		158		372		501		800
Net earnings available to common shareholders	$	4,783	$	817	$	6,956	$	2,372

Average number of shares outstanding		3,516		3,509		3,513		3,509
Effect of dilutive options		67		19		56		19
Average number of shares outstanding used to calculate diluted earnings per share		3,583		3,528		3,569		3,528

Anti-dilutive options not included		245		168		282		300

NOTE D – SECURITIES AVAILABLE FOR SALE

The amortized cost and carrying values of securities available-for-sale are as follows:

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized		Carrying
	cost		gains		losses		value
September 30, 2012
U. S. Treasury securities	$	7,164	$	151	$	—	$	7,315
Obligations of U.S. Government agencies		66,139		1,308		—		67,447
Mortgage backed securities		47,256		1,622		15		48,863
Obligations of states and political subdivisions		78,163		3,683		45		81,801
Corporate debt		18,150		505		40		18,615
Commercial paper		4,764		—		—		4,764
	$	221,636	$	7,269	$	100	$	228,805

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized		Carrying
	cost		gains		losses		value
December 31, 2011:
U.S. Treasury securities	$	12,371	$	263	$	—	$	12,634
Obligations of U.S. government agencies		53,150		964		12		54,102
Mortgage-backed securities		32,606		838		9		33,435
Obligations of states and political subdivisions		73,674		3,592		15		77,251
Corporate debt		10,314		102		174		10,242
	$	182,115	$	5,759	$	210	$	187,664

An analysis of gross unrealized losses within the available-for-sale investment securities portfolio as of September 30, 2012 and December 31, 2011 follows.

September 30, 2012: (Dollar amounts in thousands)	# of securities		Total Fair Value		Under 12 Months Unrealized Losses		Total Fair Value		12 Months or More Unrealized Losses		Total Fair Value		Total Unrealized Losses
Mortgage-backed securities	2	$	5,261	$	15	$	—	$	—	$	5,261	$	15
Obligations of states and political subdivisions	7		5,780		45		—		—		5,780		45
Corporate debt	4		2,168		14		1,437		26		3,605		40
Total	13	$	13,209	$	74	$	1,437	$	26	$	14,646	$	100

December 31, 2011: (Dollar amounts in thousands)	# of securities		Total Fair Value		Under 12 Months Unrealized Losses		Total Fair Value		12 Months or more Unrealized Losses		Total Fair Value		Total Unrealized Losses
Obligations of U.S. government agencies	6	$	6,293	$	12	$	—	$	—	$	6,293	$	12
Mortgage-backed securities	3		6,466		9		—		—		6,466		9
Obligations of states and political subdivisions	5		2,744		15		—		—		2,744		15
Corporate debt	7		5,554		173		500		1		6,054		174
Total	21	$	21,057	$	209	$	500	$	1	$	21,557	$	210

At September 30, 2012 and December 31, 2011, there were two securities in an unrealized loss position for greater than 12 consecutive months. Management periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. The unrealized losses are due solely to interest rate changes and the Company does not intend to sell nor expects it will be required to sell investment securities identified with impairments prior to the earliest of forecasted recovery or the maturity of the underlying investment security. Management has determined that no investment security is other-than-temporarily impaired at September 30, 2012.

The amortized cost and carrying value of debt securities as of September 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

At September 30, 2012:

(Dollar amounts in thousands)	Amortized		Carrying
	Cost		Value
Available-for-sale:
Due in one year or less	$	16,641	$	16,785
Due after one through five years		82,865		85,105
Due after five years through ten years		78,812		81,707
Due after ten years		43,318		45,208
	$	221,636	$	228,805

For the nine months ended September 30, 2012, gross realized gains amounted to $906,000 on the sale of $25,743,000 in securities. For the nine months ended September 30, 2011, gross realized gains amounted to $320,000 on the sale of $21,275,000 in securities. For the nine months ended September 30, 2012 and September 30, 2011, gross realized losses were $8,000 and $2,000, respectively.

At September 30, 2012, securities with an amortized cost of $77,980,000 and fair value of $80,729,000 were pledged as collateral for public deposits and for other purposes required by law.

At September 30, 2012 and December 31, 2011, the Bank had investments in Federal Reserve Bank stock classified as other equity securities in the accompanying balance sheet of $1,062,000. These investments in Federal Reserve Bank stock are carried at cost. At September 30, 2012 and December 31, 2011, the Bank had investments in Federal Home Loan Bank stock classified as other equity securities in the accompanying balance sheet of $4,578,000 and $3,300,000, respectively. These investments in Federal Home Loan Bank stock are carried at cost, and evaluated periodically for impairment.

Both the Bank’s investment in Federal Reserve Bank and Federal Home Loan Bank stock are periodically evaluated for impairment. As of September 30, 2012, management concluded no evidence of impairment exists.

NOTE E - LOANS

Loans are summarized as follows at September 30, 2012 and December 31,2011:

(Dollar amounts in thousands)	FNB Bancorp Originated			PNCI		PCI		Total Balance September 30 2012			Balance December 31 2011
Commercial real estate	$	247,171		$	49,874	$	1,426	$	298,471		$	257,413
Real estate construction		13,754			3,479		674		17,907			28,229
Real estate multi-family		42,604			18,948		—		61,552			36,369
Real estate 1 to 4 family		101,289			15,809		100		117,198			86,322
Commercial & industrial		45,852			13,460		—		59,312			43,074
Consumer loans		1,950			—		—		1,950			2,335
Gross loans		452,620			101,570		2,200		556,390			453,742
Net deferred loan fees		(259	)		—		—		(259	)		(124	)
Allowance for loan losses		(8,582	)		—		—		(8,582	)		(9,897	)
Net loans	$	443,779		$	101,570	$	2,200	$	547,549		$	443,721

PNCI = purchased, non-credit impaired

PCI = purchased, credit impaired

A summary of impaired loans, the related allowance for loan losses, average investment and income recognized on impaired loans follows.

	Impaired Loans
	At September 30, 2012

			Unpaid
(Dollar amounts in thousands)	Recorded		Principal		Related
Originated	Investment		Balance		Allowance

With no related allowance recorded
Commercial & industrial	$	2,257	$	2,257	$	—
Commercial real estate construction		6,164		6,164		—
Commercial real estate		1,097		1,663		—
Residential - 1 to 4 family		1,059		1,059		—
Total		10,577		11,143		—

With an allowance recorded
Commercial & industrial	$	2,052	$	2,407	$	330
Commercial real estate construction		1,046		1,046		74
Real estate multi-family		3,242		3,242		22
Commercial real estate		8,788		9,964		470
Residential- 1 to 4 family		5,307		5,307		292
Total		20,435		21,966		1,188

Total
Commercial & industrial	$	4,309	$	4,664	$	330
Commercial real estate construction		7,210		7,210		74
Real estate multi-family		3,242		3,242		22
Commercial real estate		9,885		11,627		470
Residential - 1 to 4 family		6,366		6,366		292
Grand total	$	31,012	$	33,109	$	1,188

	Impaired Loans
	3 months ended				9 months ended
	September 30, 2012				September 30, 2012
		Average				Average
(Dollar amounts in thousands)		Recorded		Income		Recorded		Income
		Investment		Recognized		Investment		Recognized

With no related allowance recorded
Commercial & industrial	$	1,586	$	22	$	1,621	$	67
Commercial real estate		1,097		3		1,097		9
Commercial real estate - construction		6,175		139		6,198		248
Residential - 1 to 4 family		1,062		17		1,068		33
Total		9,920		181		9,984		357

With an allowance recorded
Commercial & industrial	$	5,102	$	17	$	6,184	$	93
Commercial real estate		6,574		59		6,861		169
Commercial real estate - construction		1,049		4		1,053		12
Real estate multi-family		3,242		—		3,263		—
Residential - 1 to 4 family		5,319		34		5,324		84
Total		21,286		114		22,685		358

Total
Commercial & industrial	$	6,688	$	39	$	7,805	$	160
Commercial real estate		7,671		62		7,958		178
Commercial real estate - construction		7,224		143		7,251		260
Real estate multi-family		3,242		—		3,263		—
Residential - 1 to 4 family		6,381		51		6,392		117
Grand total	$	31,206	$	295	$	32,669	$	715

	Impaired Loans
	For the Year Ended December 31, 2011
			Unpaid				Average
(Dollar amounts in thousands)	Recorded		Principal		Related		Recorded		Income
		Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded
Commercial & industrial	$	2,926	$	3,560	$	—	$	4,074	$	108
Commercial real estate construction		6,232		6,232		—		6,266		314
Commercial real estate		3,269		3,835		—		3,546		130
Residential- 1 to 4 family		1,059		1,145		—		1,097		4
Total		13,486		14,772		—		14,983		556

With an allowance recorded
Commercial & industrial	$	5,881		5,896	$	428	$	3,905	$	40
Commercial real estate construction		1,586		1,686		214		2,109		58
Commercial real estate		11,767		11,767		727		11,521		400
Residential- 1 to 4 family		2,254		2,262		200		2,009		89
Total		21,488		21,611		1,569		19,544		587

Total
Commercial & industrial	$	8,807	$	9,456	$	428	$	7,979	$	148
Commercial real estate construction		7,818		7,918		214		8,375		372
Commercial real estate		15,036		15,602		727		15,067		530
Residential - 1 to 4 family		3,313		3,407		200		3,106		93
Grand total	$	34,974	$	36,383	$	1,569	$	34,527	$	1,143

	Impaired Loans
	3 months ended				9 months ended
	September 30, 2011				September 30, 2011
		Average				Average
(Dollar amounts in thousands)		Recorded		Income		Recorded		Income
		Investment		Recognized		Investment		Recognized

With no related allowance recorded
Commercial & industrial	$	3,623	$	48	$	4,666	$	148
Commercial real estate		1,840		22		1,840		51
Commercial real estate construction		6,267		22		6,278		179
Residential - 1 to 4 family		1,031		12		1,076		50
Total		12,761		104		13,860		428

With an allowance recorded
Commercial	$	4,455	$	9	$	4,547	$	35
Commercial real estate construction		1,592		14		2,111		43
Commercial real estate		6,572		30		5,787		138
Residential- 1 to 4 family		2,254		22		2,255		69
Total		14,873		75		14,700		285

Total
Commercial & industrial	$	8,078	$	57	$	9,213	$	183
Commercial real estate construction		7,859		36		8,389		222
Commercial real estate		8,412		52		7,627		189
Residential - 1 to 4 family		3,285		34		3,331		119
Grand total	$	27,634	$	179	$	28,560	$	713

Nonaccrual loans totaled $23,632,000 and $19,098,000 as of September 30, 2012 and December 31, 2011. The difference between impaired loans and nonaccrual loans represents loans that are restructured, are performing under modified agreements, and accruing interest.

The following aggregate information is provided at September 30, 2012 and December 31, 2011, about the contractual balances of nonaccrual loans:

	September 30			December 31
(Dollar amounts in thousands)	2012			2011
Outstanding balance	$	23,632		$	19,098
Weighted average rate		5.62	%		6.19	%
Weighted average term to maturity		58 months			73 months

	Loans on Nonaccrual Status as of
(Dollar amounts in thousands)	September 30,		December 31,
	2012		2011
Commercial & industrial	$	5,519	$	7,019
Real estate - construction		2,415		642
Commercial real estate		6,198		6,826
Real estate multi family		3,780		3,283
Real estate 1 to 4 family		4,444		1,328
Total	$	22,356	$	19,098

Interest income on impaired loans of $295,000 and $715,000 was recognized for cash payments received during the three months and nine months ended September 30, 2012, and $1,143,000 was recognized for cash payments received during the year ended December 31, 2011. The amount of interest on impaired loans not collected for the three and nine months ended September 30, 2012 was $198,000, and $711,000, and for the year ended December 31, 2011 was $1,137,000. The cumulative amount of unpaid interest on impaired loans was $2,678,000 for the nine months ended September 30, 2012, and $1,967,000 for the year ended December 31, 2011.

Troubled Debt Restructurings

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories.

Rate Modification – A modification in which the interest rate is changed.

Term modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

As of September 30, 2012 and 2011, respectively, there were no available commitments for troubled debt restructurings.

A summary of the number, principal amounts outstanding for troubled debt restructurings were as follows as of September 30, 2012 and December 31, 2011.

	Modifications
	As of September 30, 2012
				Pre-		Post-
				Modification		Modification
				Outstanding		Outstanding
		Number of		Recorded		Recorded
		Contracts		Investment		Investment
(Dollar amounts in thousands)
Commercial & industrial		6	$	3,483	$	3,483
Real estate 1 to 4 family		3		1,454		1,454
Commercial real estate		4		6,852		6,852
Real estate multi family		1		3,242		3,242
Total		14	$	15,031	$	15,031

No significant modification occurred during three and nine month periods ending September 30, 2012. No defaults have occurred. All restructurings were a modification of interest rate and/or payment. There were no principal reductions granted.

	Modifications
	As of December 31, 2011
				Pre-		Post-
				Modification		Modification
				Outstanding		Outstanding
		Number of		Recorded		Recorded
		Contracts		Investment		Investment
(Amounts in thousands)
Commercial & industrial		5	$	2,987	$	2,987
Real estate 1 to 4 family		2		1,004		1,004
Commercial real estate		6		9,173		9,173
Real estate multi family		1		3,283		3,283
Total		14	$	16,447	$	16,447

Risk rating system

Loans to borrowers graded as pass or pooled loans represent loans to borrowers of acceptable or better credit quality. They demonstrate sound financial positions, repayment capacity and credit history. They have an identifiable and stable source of repayment.

Special mention loans have potential weaknesses that deserve management’s attention. If left uncorrected these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. These assets are “not adversely classified” and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard loans are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans are normally classified as Substandard when there are unsatisfactory characteristics causing more than acceptable levels of risk. A substandard loan normally has one or more well-defined weakness that could jeopardize the repayment of the debt. For example, a) cash flow deficiency, which may jeopardize future payments; b) sale of non-collateral assets has become primary source of repayment; c) the borrower is bankrupt; or d) for any other reason, future repayment is dependent on court action.

Doubtful loans represent credits with weakness inherent in the Substandard classification and where collection or liquidation in full is highly questionable. To be classified Doubtful, there must be specific pending factors which prevent the Loan Review Officer from determining the amount of loss contained in the credit. When the amount of loss can be reasonably estimated, that amount is classified as “loss” and the remainder is classified as Substandard.

Commercial Real Estate Loans

Our commercial real estate loans are made primarily to investors or small businesses where our primary source of repayment is from cash flows generated by the properties, either through rent collection or business profits. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have multiple sources of income, so if cash flow generated from the property declines, at least in the short term, the borrowers can normally cover these short term cash flow deficiencies from their available cash reserves. Risk of loss to the Bank is increased when there are cash flow decreases sufficiently large and for such a prolonged period of time that loan payments can no longer be made by the borrowers.

Real Estate Construction Loans

Our real estate construction loans are generally made to borrowers who are rehabilitating a building, converting a building use from one type of use to another, or developing land and building residential or commercial structures for sale or lease. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have sufficient resources to make the required construction loan payments during the construction and absorption or lease-up period. After construction is complete, the loans are normally paid off from proceeds from the sale of the building or through a refinance to a commercial real estate loan. Risk of loss to the Bank is increased when there are material construction cost overruns, significant delays in the time to complete the project and/or there has been a material drop in the value of the projects in the marketplace since the inception of the loan.

Commercial and Industrial Loans

Our commercial and industrial loans are generally made to small businesses to provide them with at least some of the working capital necessary to fund their daily business operations. These loans are generally either unsecured or secured by fixed assets, accounts receivable and/or inventory. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when our small business customers experience a significant business downturn, incur significant financial losses, or file for relief from creditors through bankruptcy proceedings.

Residential Real Estate Loans

Our residential real estate loans are generally made to borrowers who are buying or refinancing their primary personal residence or a rental property of 1-4 single family residential units. The Bank uses

conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers lose their primary source of income and/or property values decline significantly.

Consumer and Installment Loans

Our consumer and installment loans generally consist of personal loans, credit card loans, automobile loans or other loans secured by personal property. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers lose their primary source of income, or file for relief from creditors through bankruptcy proceedings.

	As of September 30, 2012
(Dollar amounts in thousands)
Originated		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial & industrial	$	623	$	—	$	4,967	$	5,590	$	40,262	$	45,852	$	—
Commercial real estate		125		1,043		3,195		4,363		242,808		247,171		—
Commercial real estate -construction		—		—		—		—		13,754		13,754		—
Real estate multi-family		—		—		3,242		3,242		39,362		42,604		—
Real estate 1 to 4 family		217		501		3,126		3,844		97,445		101,289		—
Consumer		—		—		—		—		1,950		1,950		—
Total	$	965	$	1,544	$	14,530	$	17,039	$	435,581	$	452,620	$	—

Purchased
Not credit impaired
Commercial & industrial	$	—	$	—	$	—	$	—	$	13,460	$	13,460
Real estate construction		—		—		1,371		1,371		2,108		3,479
Commercial real estate		986		—		1,582		2,568		47,306		49,874
Real estate multi-family		—		—		538		538		18,410		18,948
Real estate 1 to 4 family		—		392		—		392		15,417		15,809
Total	$	986	$	392	$	3,491	$	4,869	$	96,701	$	101,570

Credit impaired
Real estate construction	$	—	$	—	$	674	$	674	$	—	$	674
Commercial real estate		—		—		—		—		1,426		1,426
Real estate 1 to 4 family		—		—		100		100		—		100
Total	$	—	$	—	$	774	$	774	$	1426	$	2,200

The purchased loans not credit impaired that are over 90 days delinquent represent loans where borrowers and management are in negotiations that are expected to be successful and allow for modifications that will bring the loans current or extend the maturity dates without value impairment.

	Age Analysis of Past Due Loans
	As of December 31, 2011
(Dollar amounts in thousands)
		30-59 Days Past Due		60-89 Days Past Due		Over 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial & industrial	$	247	$	712	$	232	$	1,191	$	41,883	$	43,074	$	—
Commercial real estate		1,618		—		6,826		8,444		248,969		257,413		—
Commercial real estate -construction		549		—		527		1,076		27,153		28,229		—
Real estate multi-family		—		—		3,283		3,283		33,086		36,369		—
Real estate 1 to 4 family		71		2,629		257		2,957		83,365		86,322		—
Consumer		—		—		—		—		2,335		2,335		—
Total	$	2,485	$	3,341	$	11,125	$	16,951	$	436,791	$	453,742	$	—

There are nonaccrual loans of $23,632,000 and $19,098,000 which included past due loans of $18,795,000 and $16,951,000 at September 30, 2012 and December 31, 2011.

	Credit Quality Indicators
	As of September 30, 2012

(Dollar amounts in thousands)
				Special		Sub-				Total
Originated		Pass		mention		standard		Doubtful		loans
Commercial & industrial	$	40,577		$—	$	4,915	$	360	$	45,852
Commercial Real estate construction		12,154		—		1,600		—		13,754
Commercial real estate		240,357		3,370		3,444		—		247,171
Real estate multi-family		39,362		—		3,242		—		42,604
Real estate 1 to 4 family		96,901		—		4,102		286		101,289
Consumer loans		1,950		—		—		—		1,950
Totals	$	431,301	$	3,370	$	17,303	$	646	$	452,620

Purchased
Not credit impaired
Commercial & industrial	$	13,460	$	—	$	—	$	—	$	13,460
Real estate construction		—		—		3,479		—		3,479
Commercial real estate		27,488		10,821		11,565		—		49,874
Real estate multi-family		18,948		—		—		—		18,948
Real estate 1 to 4 family		15,386		—		423		—		15,809
Total	$	75,282	$	10,821	$	15,467	$	—	$	101,570

Credit impaired
Real estate construction	$	—	$	—	$	674		—	$	674
Commercial real estate		—		—		1,426		—		1,426
Real estate 1 to 4 family		—		—		100		—		100
Total	$	—	$	—	$	2,200	$	—	$	2,200

	Credit Quality Indicators
	As of December 31, 2011

(Dollar amounts in thousands)
				Special		Sub-				Total
		Pass		mention		standard		Doubtful		loans
Commercial & industrial	$	35,089	$	—	$	7,720	$	265	$	43,074
Commercial real estate construction		25,987		—		2,242		—		28,229
Commercial real estate		247,253		—		10,160		—		257,413
Real estate multi-family		33,085		—		3,284		—		36,369
Real estate 1 to 4 family		82,014		—		3,862		446		86,322
Consumer loans		2,335		—		—		—		2,335
Totals	$	425,763	$	—	$	27,268	$	711	$	453,742

	Allowance for Credit Losses For the Three Months Ended September 30, 2012
(Dollar amounts in thousands)
									Real Estate
	Commercial & industrial			Commercial Real Estate		Real Estate Construction			Multi family			1 to 4 family			Consumer		Total
Allowance for credit losses

Beginning balance	$	1,734		$	3,752	$	834		$	49		$	2,026		$	63	$	8,458
Charge-offs		(219	)		—		—			—			(73	)		(1)		(293	)
Recoveries		—			15		—			—			2			—		17
Provision		84			118		(257	)		(22	)		475			2		400
Ending balance	$	1,599		$	3,885	$	577		$	27		$	2,430		$	64	$	8,582
Ending balance: individually evaluated for impairment	$	330		$	470	$	74		$	22		$	292		$	—	$	1,188
Ending balance: collectively evaluated for impairment	$	1,269		$	3,415	$	503		$	5		$	2,138		$	64	$	7,394

	Allowance for Credit Losses For the Nine Months Ended September 30, 2012
(Dollar amounts in thousands)
										Real Estate
	Commercial			Commercial			Real Estate			Multi			1 to
	& industrial			Real Estate			Construction			family			4 family			Consumer			Total
Allowance for credit losses

Beginning balance	$	1,618		$	4,745		$	1,171		$	671		$	1,592		$	100		$	9,897
Charge-offs		(1,706	)		(738	)		(54	)		—			(182	)		(5	)		(2,685	)
Recoveries		1			154			—			—			11			4			170
Provision		1,686			(276	)		(540	)		(644	)		1,009			(35	)		1,200
Ending balance	$	1,599		$	3,885		$	577		$	27		$	2,430		$	64		$	8,582

Ending balance: individually evaluated for impairment	$	330		$	470		$	74		$	22		$	292		$	—		$	1,188
Ending balance: collectively evaluated for impairment	$	1,269		$	3,415		$	503		$	5		$	2,138		$	64		$	7,394

	Recorded Investment in Loans at September 30, 2012
(Dollar amounts in thousands)			Real Estate
	Commercial						Multi		1 to
	& industrial		Commercial		Construction		family		4 family		Consumer		Total

Loans:
Ending balance	$	59,312	$	298,471	$	17,907	$	61,552	$	117,198	$	1,950	$	556,390
Ending balance: individually evaluated for impairment	$	4,309	$	9,885	$	7,210	$	3,242	$	6,366	$	—	$	31,012
Ending balance: collectively evaluated for impairment	$	55,003	$	288,586	$	10,697	$	58,310	$	110,832	$	1,950	$	525,378

	Allowance for Credit Losses
	For the Three Months Ended September 30, 2011
(Dollar amounts in thousands)
	Commercial & industrial			Commercial Real Estate			Real estate Construction			Real estate 1 to 4 family		Consumer			Total
Allowance for credit losses

Beginning balance	$	2,289		$	4,365		$	1,536		$	1,460	$	69		$	9,719
Charge-offs		(448	)		4			(100	)		—		(2	)		(546	)
Recoveries		10			3			9			—		1			23
Provision		808			(635	)		197			105		(25	)		450
Ending balance	$	2,659		$	3,737		$	1,642		$	1,565	$	43		$	9,646
Ending balance: individually evaluated for impairment	$	1,506		$	413		$	142		$	212	$	—		$	2,273
Ending balance: collectively evaluated for impairment	$	1,153		$	3,324		$	1,500		$	1,353	$	43		$	7,373

	Allowance for Credit Losses
	For The Nine Months Ended September 30, 2011
(Dollar amounts in thousands)
	Commercial & industrial			Commercial Real Estate			Real estate Construction			Real estate 1 to 4 family		Consumer			Total
Allowance for credit losses

Beginning balance	$	2,102		$	4,103		$	1,999		$	1,233	$	87		$	9,524
Charge-offs		(548	)		(521	)		(100	)		—		(55	)		(1,224	)
Recoveries		15			3			27			—		1			46
Provision		1,090			152			(284	)		332		10			1,300
Ending balance	$	2,659		$	3,737		$	1,642		$	1,565	$	43		$	9,646
Ending balance: individually evaluated for impairment	$	1,506		$	413		$	142		$	212	$	—		$	2,273
Ending balance: collectively evaluated for impairment	$	1,153		$	3,324		$	1,500		$	1,353	$	43		$	7,373

	Recorded Investment in Loans at September 30, 2011
(Dollar amounts in thousands)
	Commercial & industrial		Commercial Real Estate		Real estate Construction		Real estate 1 to 4 family		Consumer		Total

Loans:
Ending balance	$	44,612	$	305,720	$	31,791	$	81,461	$	2,349	$	465,933
Ending balance: individually evaluated for impairment	$	8,055	$	8,663	$	7,845	$	3,326	$	—	$	27,889
Ending balance: collectively evaluated for impairment	$	36,557	$	297,057	$	23,946	$	78,135	$	2,349	$	438,044

NOTE F – FAIR VALUE MEASUREMENT

The following tables present information about the Company’s assets and liabilities measured at fair value as of September 30, 2012 and December 31, 2011, and indicate the fair value techniques used by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table presents the recorded amounts of assets measured at fair value on a recurring basis:

(Dollar amounts in thousands)				Fair Value Measurements at September 30, 2012, Using
				Quoted Prices
				in Active
				Markets	Other		Significant
				for Identical	Observable		Unobservable
	Fair Value			Assets	Inputs		Inputs
Description	9/30/2012			(Level 1)	(Level 2)		(Level 3)
U. S. Treasury securities	$	7,315	$	7,315	$	—	$	—
Obligations of U.S. Government agencies		67,447		—		67,447		—
Mortgage-backed securities		48,863		—		48,863		—
Obligations of states and political subdivisions		81,801		—		81,801		—
Corporate debt		18,615		—		18,615		—
Commercial paper		4,764		4,764
Total assets measured at fair value	$	228,805	$	7,315	$	221,490	$	—

(Dollar amounts in thousands)				Fair Value Measurements at December 31, 2011, Using
				Quoted Prices
				in Active
				Markets	Other		Significant
				for Identical	Observable		Unobservable
	Fair Value			Assets	Inputs		Inputs
Description	12/31/2011			(Level 1)	(Level 2)		(Level 3)
U. S. Treasury securities	$	12,634	$	12,634	$	—	$	—
Obligations of U.S. Government agencies		54,102		—		54,102		—
Mortgage-backed securities		33,435		—		33,435		—
Obligations of states and political subdivisions		77,251		—		77,251		—
Corporate debt		10,242		—		10,242		—
Total assets measured at fair value	$	187,664	$	12,634	$	175,030	$	—

The following tables present the recorded amount of assets measured at fair value on a non-recurring basis:

(Dollar amounts in thousands)				Fair Value Measurements at September 30, 2012, Using
				Quoted Prices
				in Active
				Markets	Other		Significant
				for Identical	Observable		Unobservable
	Fair Value			Assets	Inputs		Inputs
Description	9/30/2012			(Level 1)	(Level 2)		(Level 3)
Impaired loans	$	5,545	$	—	$	—	$	5,545
Total impaired assets measured at fair value	$	5,545	$	—	$	—	$	5,545

(Dollar amounts in thousands)				Fair Value Measurements at December 31, 2011, Using
				Quoted Prices in
				Active Markets	Other		Significant
				for Identical	Observable		Unobservable
	Fair Value			Assets	Inputs		Inputs
Description	12/31/11			(Level 1)	(Level 2)		(Level 3)
Impaired loans	$	8,383	$	—	$	—	$	8,383
Other real estate owned		2,746		—		—		2,746
Total impaired assets measured at fair value	$	11,129	$	—	$	—	$	11,129

The Bank does not record loans at fair value. However, from time to time, if a loan is considered impaired, a specific allocation within the allowance for loan losses may be required. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and cash flows. Those impaired loans not requiring an allowance represent loans for which the value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral or when the impaired loan has been written down to fair value require classification in the fair value hierarchy. If the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loans as nonrecurring Level 3. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank also records the impaired loans as nonrecurring Level 3.

Other real estate owned is carried at the lower of historical cost or fair market value. An appraisal (a Level 3 valuation) is obtained at the time the Company acquires property through the foreclosure process. Any loan balance outstanding that exceeds the appraised value of the property is charged off against the allowance for loan loss at the time the property is acquired. Subsequent to acquisition, the Bank updates the property’s appraised value on at least an annual basis. If the value of the property has declined during the year, a loss due to valuation impairment charge is recorded along with a corresponding reduction in the book carrying value of the property.

Fair Values of Financial Instruments.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments:

Cash and Cash Equivalents.

The carrying amounts reported in the balance sheet for cash and short-term instruments are a reasonable estimate of fair value, which will approximate their historical cost.

Securities Available-for-Sale.

Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans Receivable.

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values and credit risk factors. For fixed rate loans, fair values are based on discounted cash flows, credit risk factors, and liquidity factors.

Deposit liabilities.

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are based on discounted cash flows.

Federal Home Loan Bank Advances.

The fair values of Federal Home Loan Bank Advances are based on discounted cash flows. The discount rate is equal to the market rate currently offered by similar products.

Interest Receivable and Payable

The interest receivable and payable balances approximate their fair value due to the short-term nature of their settlement dates.

Undisbursed loan commitments, lines of credit, Mastercard line and standby letters of credit.

The fair value of these off-balance sheet items are based on discounted cash flows of expected fundings.

The Bank has excluded non-financial assets and non-financial liabilities, such as bank premises and equipment, deferred taxes and other liabilities.

The following table provides summary information on the estimated fair value of financial instruments at September 30, 2012:

(Dollar amounts in thousands)	Carrying		Fair		Fair value measurements
	amount		value		Level 1		Level 2			Level 3
Financial assets:
Cash and cash equivalents	$	70,803	$	70,803	$	70,803
Securities available for sale		228,805		228,805		7,315	$	221,490
Other equity securities		5,888		5,888				5,888
Loans,net		547,549		555,470				549,925	$	5,545
Accrued interest receivable		3,639		3,639				3,639

Financial liabilities:
Accrued interest payable		431		431				431
Deposits		791,964		792,612		605,738		186,874
Federal Home Loan Bank advances		2,728		2,728				2,728

Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit		—		1,084						1,084

The carrying amount of loans include $23,632,000 of nonaccrual loans (loans that are not accruing interest) as of September 30, 2012. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

The following table provides summary information on the estimated fair value of financial instruments at December 31, 2011:

(Dollar amounts in thousands)	Carrying		Fair		Fair value measurements
	amount		value		Level 1		Level 2			Level 3
Financial assets:
Cash and cash equivalents	$	38,474	$	38,474	$	38,474
Securities available for sale		187,664		187,664		12,634	$	175,030
Loans, net		443,721		454,342				445,959	$	8,383
Accrued interest receivable		3,614		3,614				3,614

Financial liabilities:
Accrued interest payable		299		299				299
Deposits		621,778		622,291		512,927		109,364

Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit		—		945						945

NOTE G – PREFERRED STOCK

On September 15, 2011, Preferred Stock was issued to the U. S. Treasury as part of the Treasury’s Small Business Lending Fund (“SBLF”), as Preferred Stock – Series C – Non-Cumulative. The initial dividend rate is 5%. Depending on the volume of our small business lending, the dividend rate can be reduced to as low as one percent. If lending does not increase in the first two years, the dividend rate will increase to seven percent. After 4.5 years, the dividend rate will increase to nine percent if the Company has not repaid the SBLF funding.

NOTE H – ACQUISITION OF OCEANIC HOLDING, INC.

On September 21, 2012, the Company announced that it had completed the acquisition of 100% of the common stock of Oceanic Holding, Inc., the sole owner of Oceanic Bank. As part of this acquisition, Oceanic Bank was merged into First National Bank of Northern California. Oceanic Bank operated three branch offices, which consisted of two offices in San Francisco and an office on the island of Guam. The purchase price of Oceanic Holding, Inc. was for $27,750,000.

The Oceanic Holding, Inc. acquisition was accounted for under the acquisition method of accounting in accordance with generally accepted accounting principles in the Unites States of America. The statement of net assets acquired as of September 21, 2012 and the resulting bargain purchase gain are presented in the following table. The purchase of assets and assumed liabilities were also recorded at their respective acquisition date fair value, and identifiable intangible assets were recorded at fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of a merger as information relative to closing date fair values not known at the time of acquisition becomes available. A “bargain purchase” gain totaling $3.7 million resulted from the acquisition and is included as a component of noninterest income on the statement of earnings. The amount of the gain is equal to the amount by which the fair value of net assets acquired exceeded the fair value of consideration transferred. The acquisition resulted in a gain due to the value of the assets and liabilities acquired being greater than the cash consideration paid to the sellers at the time of the acquisition. Oceanic Holding, Inc.’s results of operations prior to the acquisition are not included in the Company’s consolidated statement of earnings.

Schedule of Net Assets Acquired (at fair value)

	At
	September 21,
	2012
	(In thousands)
Assets
Cash and due from banks, net of purchase consideration		(18,374	)
Time deposits		17,096
MBS and CMO securities		5,083
Commercial paper investments		8,304
Loans		103,194
Other assets		2,516
Core deposit intangible		110
Total Assets		117,929

Liabilities
Deposits		107,669
Federal Home Loan Bank advances		6,097
Accrued expenses and other liabilities		497
Total Liabilities		114,263

Net assets acquired		3,666

Oceanic Holdings, Inc. tangible stockholder’s equity		32,985
Less cash consideration paid to seller		(27,672	)
Adjusted Oceanic Holding, Inc. Stockholder’s Equity		5,313
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Investment securities		(210	)
Loans		(2,388	)
Deferred tax asset		972
Core deposit intangible		110
Deposits		(49	)
Federal Home Loan Bank advances		(82	)
Bargain purchase gain		3,666

The pro forma consolidated condensed statement of earnings for FNB Bancorp and Oceanic Holding, Inc. for the nine months ended September 30, 2012 and 2011, and the year ended December 31, 2011 are presented below. The unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of fiscal year 2011, nor does it indicate the results of operations in future periods.

The pro forma adjustments related to loans, deposits, Federal Home Loan Bank advances are being accreted or amortized into income using methods that approximate a level yield over their respective expected lives. Adjustments related to identifiable intangibles are being amortized and recorded as noninterest expense over their respective estimated lives using accelerated methods. The pro forma consolidated condensed statements of earnings do not reflect any adjustments to Oceanic’s historical provision for credit losses and goodwill impairment charges.

	9/30/2012				9/30/2011
	As Reported		As Adjusted		As Reported		As Adjusted
Net interest income after provision for loan losses	$	20,915	$	25,528	$	20,847	$	25,800
Noninterest Income	$	4,439	$	8,353	$	3,769	$	7,657
Noninterest expense	$	20,182	$	22,734	$	20,303	$	23,000
Earnings before provision for income tax expense	$	5,172	$	11,147	$	4,313	$	10,457
Provision for income tax expense		1,381		2,330		1,141		2,103
Net earnings	$	3,791	$	8,817	$	3,172	$	8,354

Pro Forma adjustments are composed of an estimated bargain purchase gain of $3,666,000 that resulted based on the consideration paid less the fair value of the assets and liabilities acquired, the accretion of purchase discounts assigned to the purchased loan portfolio and the amortization of core deposit intangibles and deposit premiums.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information and Uncertainties Regarding Future Financial Performance.

This report, including management’s discussion below, 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 and competitive market pricing, which 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. These factors could reduce our ability to attract new deposits and loans and leases.

Liquidity Risk. The stability of funding sources and continued availability of borrowings; our ability to raise capital or incur debt on reasonable terms.

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 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 Open Market Committee (“FOMC”) monetary policies that could reduce interest income or increase the cost of funds to the Company, either of which could result in reduced earnings. In addition, deterioration in economic conditions could result in increased loan and lease losses.

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, liquidity requirements, and the risks associated with concentration in real estate related loans 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.

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. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01. The Company believes the following critical accounting policy requires significant judgments and estimates used in the preparation of the consolidated financial statements.

Allowance for Loan Losses

The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company’s historical 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 our borrowers’ ability to repay their loans. Determination of the allowance is based upon objective and subjective judgments by management based on the information currently available. Adverse changes in information could result in higher than expected charge-offs and loan loss provisions.

Goodwill

Goodwill arises from the Company’s purchase price exceeding the fair value of the net assets of an acquired business. Goodwill represents the value attributable to intangible elements acquired. The value of goodwill is supported ultimately by profit from the acquired business. A decline in earnings could lead to impairment, which would be recorded as a write-down in the Company’s consolidated statements of income. Events that may indicate goodwill impairment include significant or adverse changes in results of operations of the acquired business or asset, economic or political climate; an adverse action or assessment by a regulator; unanticipated competition; and a more-likely-than-not expectation that a reporting unit will be sold or disposed of at a loss.

Other Than Temporary Impairment

Other than temporary impairment (“OTTI”) is triggered if the Company has the intent to sell the security, it is likely that it will be required to sell the security before recovery, or if the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security or it is likely it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that the Company will be required to sell the security but the Company does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI. The credit loss is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected of a security. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, would be recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are to be presented as a separate category within OCI.

For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is re-evaluated accordingly based on the procedures described above.

Provision for and Deferred Income Taxes

The Company is subject to income tax laws of the United States, its states, and the municipalities in which it operates. The Company considers its income tax provision methodology to be critical, as the determination of current and deferred taxes is based on complex analyses of many factors including interpretation of federal and state laws, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), estimates of amounts due or owed, the timing of reversals of temporary differences and current financial standards. Actual results could differ significantly from the estimates due to tax law interpretations used in determining the current and deferred income tax liabilities. Additionally, there can be no assurances that estimates and interpretations used in determining income tax liabilities may not be challenged by federal and state taxing authorities.

Recent Accounting Pronouncements

In May, 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.

Some of the amendments clarify the Board’s intent about the application of existing fair value measurements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. As this ASU is disclosure-related only, the adoption of this ASU did not impact the Bank’s financial condition or results of operations.

In December, 2011, the FASB issued ASU 2011-12, “Comprehensive Income” – (Topic 220). “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.

All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.

Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. This ASU had no material impact on the Bank when adopted.

In July, 2012, the FASB issued ASU 2012-02 “Intangibles-Goodwill and Other” – (Topic 350) “Testing Indefinite-Lived Intangible Assets for Impairment.” In accordance with the amendments in this Update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.

Earnings Analysis

Net earnings for the quarter ended September 30, 2012 were $4,941,000, compared to net earnings of $1,189,000 for the quarter ended September 30, 2011, an increase of $3,752,000, or 3.16%. Cash dividend payments on the preferred shares outstanding were made as scheduled during the nine months ended September 30, 2012 and 2011, respectively. Net earnings for the nine months ended September 30, 2012 were $7,457,000 compared to net earnings of $3,172,000 for the nine months ended September 30, 2011, an improvement of $4,285,000. Net earnings before income tax expense for the quarter ended September 30, 2012 were $5,431,000, compared to net earnings before income tax expense of $1,533,000 for the quarter ended September 30, 2011, an increase of $3,898,000. Net earnings available to common stockholders for the quarter ended September 30, 2012, were $4,783,000, compared to net earnings available to common stockholders of $817,000 for the quarter ended September 30, 2011. Earnings before income tax expense were $8,838,000 for the nine months ended September 30, 2012 compared to net earnings before income tax expense of $4,313,000 for the nine months ended September 30, 2011, an improvement of $4,525,000. Net earnings available to common stockholders were $6,956,000 for the nine months ended September 30, 2012, compared to net earnings available to common stockholders of $2,372,000 for the nine months ended September 30, 2011. During the third quarter of 2012, a bargain purchase gain of $3,666,000 was recorded in relation to the completion of the purchase of Oceanic Holding, Inc. by FNB Bancorp on September 21, 2012.

Net interest income for the quarter ended September 30, 2012 was $7,692,000, compared to $7,399,000 for the quarter ended September 30, 2011, an increase of $293,000, or 4%. The increase in our net interest income was possible due to the decrease in interest on interest bearing liabilities being larger than the decrease in interest earned on interest earning assets. Net interest income for the nine months ended September 30, 2012 was $22,115,000 compared to $22,147,000 for the nine months ended September 30, 2011, a decrease of $32,000, or 0.1%.

Basic earnings per share were $1.36 for the quarter ended September 30, 2012, compared to $0.23 for the same period last year. Diluted earnings per share were $1.33 for the quarter ended September 30, 2012, compared to compared to $0.23 for the same period last year. Basic earnings per share were $1.98 for the nine months ended September 30, 2012, compared to $0.68 for the same period last year. Diluted earnings per share were $1.95 for the nine months ended September 30, 2012, compared to $0.67 for the same period last year.

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, 2012 compared to the three-and nine-month periods ended September 30, 2011.

TABLE 1	NET INTEREST INCOME AND AVERAGE BALANCES
	FNB BANCORP AND SUBSIDIARY

	Three months ended September 30,
	2012							2011
(Dollar amounts in thousands)					Annualized							Annualized
	Average				Average			Average				Average
	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	463,752	$	7,208		6.17	%	$	470,303	$	7,314		6.17	%
Taxable securities (3)		143,704		644		1.78	%		99,714		513		2.04	%
Nontaxable securities (3)		72,552		670		3.66	%		49,724		555		4.43	%
Fed funds sold		108		—		—			94		—		—
Total interest earning assets		680,116		8,522		4.97	%		619,835		8,382		5.37	%

NONINTEREST EARNING ASSETS:
Cash and due		64,912							64,708
Premises		12,862							13,582
Other assets		29,374							25,958
Total noninterest earning assets		107,148							104,248
TOTAL ASSETS	$	787,264						$	724,083

Demand, int bearing	$	68,637		21		0.12	%	$	61,107		31		0.20	%
Money market		282,434		412		0.58	%		273,284		552		0.80	%
Savings		55,434		28		0.20	%		48,143		28		0.23	%
Time deposits		112,782		198		0.70	%		106,968		231		0.86	%
FHLB advances		409		4		3.88	%		—		—		—
Total interest bearing liabilities		519,696		663		0.51	%		489,502		842		0.68	%

NONINTEREST BEARING LIABILITIES:
Demand deposits		165,886							141,237
Other liabilities		11,547							8,770
Total noninterest bearing liabilities		177,433							150,007

TOTAL LIABILITIES		697,129							639,509
Stockholders’ equity		90,135							84,574

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	787,264						$	724,083

NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	7,859		4.58	%			$	7,540		4.83	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis.

(2) Amounts of interest earned include loan fees of $276,000 and $221,000 for the quarters ended September 30, 2012 and 2011, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $167,000 and $141,000 for the quarters ended September 30, 2012 and 2011, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

(4) The annualized net interest margin is computed by dividing net interest income by total average interest earning assets and multiplied by an annualization factor.


TABLE 2	NET INTEREST INCOME AND AVERAGE BALANCES
	FNB BANCORP AND SUBSIDIARY

	Nine months ended September 30,
	2012							2011
(Dollar amounts in thousands)					Annualized							Annualized
	Average				Average			Average				Average
	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	458,709	$	20,721		6.04	%	$	474,265	$	22,159		6.25	%
Taxable securities (3)		133,423		1,874		1.88	%		91,782		1,379		2.01	%
Nontaxable securities (3)		72,064		2,024		3.76	%		46,772		1,586		4.53	%
Fed funds sold		36		—		—			41		—		—
Total interest earning assets		664,232		24,619		4.96	%		612,860		25,124		5.48	%

NONINTEREST EARNING ASSETS:
Cash and due		52,004							61,016
Premises		12,979							13,558
Other assets		28,577							28,634
Total noninterest earning assets		93,560							103,208
TOTAL ASSETS	$	757,792						$	716,068

Demand, int bearing	$	64,700		71		0.15	%	$	61,334		101		0.22	%
Money market		276,499		1,240		0.60	%		265,057		1,633		0.82	%
Savings		52,079		78		0.20	%		46,716		85		0.24	%
Time deposits		109,156		607		0.74	%		112,878		764		0.90	%
FHLB advances		137		4		—			—		—		—
Tot interest bearing liabilities		502,571		2,000		0.53	%		485,985		2,583		0.71	%

NONINTEREST BEARING LIABILITIES:
Demand deposits		155,624							139,241
Other liabilities		10,763							7,970
Total noninterest bearing liabilities		166,387							147,211

TOTAL LIABILITIES		668,958							633,196
Stockholders’ equity		88,834							82,872

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	757,792						$	716,068

NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	22,619		4.55	%			$	22,541		4.92	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis.

(2) Amounts of interest earned included loan fees of $843,000 and $740,000 for the nine months ended September 30, 2012 and 2011, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $504,000 and $394,000 for the nine months ended September 30, 2012 and 2011, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

(4) The annualized net interest margin is computed by dividing net interest income by total average interest earning assets and multiplied by an annualization factor.

Tables 1 and 2, above, show the various components that contributed to changes in net interest income for the three and nine months ended September 30, 2012 and 2011. The principal interest earning assets are loans, from a volume as well as from a rate or yield perspective. For the quarter ended September 30, 2012, average loans outstanding represented 68.2% of average earning assets. For the quarter ended September 30, 2011, they represented 75.9% of average earning assets. For the nine months ended September 30, 2012 and 2011, average loans outstanding represented 69.1% and 77.4%, respectively, of average earning assets.

The taxable equivalent yield on average interest earning assets for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011 decreased from 5.37% to 4.97%, or 40 basis points. Average loans decreased by $6,551,000, quarter over quarter, while their yield remained unchanged at 6.17%. Interest income on total interest earning assets increased $140,000 or 1.7% on a fully-taxable equivalent basis.

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011, the cost on total interest bearing liabilities decreased from 0.68% to 0.51%, a decrease of 17 basis points. Interest on advances from the Federal Home Loan Bank for the quarter ended September 30, 2012 was 3.88%. Time deposit interest cost decreased from 0.86% to 0.70%. The time deposit average balance outstanding increased by $5,814,000, or 5.44%, while their expense decreased $33,000. Money market deposits average volume increased $9,150,000 or 3.34%, while their cost decreased from 0.80% to 0.58%.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, interest income on interest earning assets decreased $505,000 or 2.01% on a fully-taxable equivalent basis, while average earning assets increased $51,372,000, or 8.38%. Average loans decreased by $15,556,000 or 3.28%. Interest on loans decreased $1,438,000 or 6.49%, while yield decreased 21 basis points, or 3.36%. The cost on total interest bearing liabilities decreased from 0.71% to 0.53%. Time deposit averages decreased $3,722,000 or 3.30%. Their yield decreased 16 basis points, or 17.78%. Money market deposit average balances increased $11,442,000, or 4.32%, but their cost decreased $393,000, or 24.07%. For the nine months ended September 30, 2012, Federal Home Loan Bank advances averaged $137,000, and their interest cost was $4,000. There were no Federal Home Loan Bank advances during the nine months ended September 30, 2011.

For the three and nine month periods ended September 30, 2012 and September 30, 2011, 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), and b) changes in rate (changes in rate times the prior year’s volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.

Table 3	FNB BANCORP AND SUBSIDIARY
	RATE/VOLUME VARIANCE ANALYSIS
	Three Months Ended September 30,
(Dollar amounts in thousands)	2012 Compared to 2011
				Variance
	Interest			Attributable to
	Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(106	)	$	(4	)	$	(102	)
Taxable securities		131			(66	)		197
Nontaxable securities (1)		115			(96	)		211
Total	$	140		$	(166	)	$	306


INTEREST BEARING LIABILITIES
Demand deposits	$	10		$	14		$	(4	)
Money market		140			153			(13	)
Savings deposits		0			4			(4	)
Time deposits		33			45			(12	)
FHLB advances		(4	)		(4	)		—
Total	$	179		$	212		$	(33	)
NET INTEREST INCOME	$	319		$	46		$	273

(1)

Includes tax equivalent adjustment of $167,000 and $141,000 in the three months ended September 30, 2012 and September 30, 2011, respectively.

Table 4	FNB BANCORP AND SUBSIDIARY
	RATE/VOLUME VARIANCE ANALYSIS
	Nine Months Ended September 30,
(Dollar amounts in thousands)	2012 Compared to 2011
				Variance
	Interest			Attributable to
	Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(1,438	)	$	(711	)	$	(727	)
Taxable securities		495			(131	)		626
Nontaxable securities (1)		438			(272	)		710
Total	$	(505	)	$	(1,114	)	$	609

INTEREST BEARING LIABILITIES
Demand deposits	$	30		$	35		$	(5	)
Money market		393			464			(71	)
Savings deposits		7			15			(8	)
Time deposits		157			132			25
FHLB advances		(4	)		(4	)		—
Total	$	583		$	642		$	(59	)
NET INTEREST INCOME	$	78		$	(472	)	$	550

(1)

Includes tax equivalent adjustment of $504,000 and $394,000 in the nine months ended September 30, 2012 and September 30, 2011, respectively.

Noninterest income

The following table shows the principal components of noninterest income for the periods indicated.

Table 5	NONINTEREST INCOME
	Three months
	ended September 30,				Variance
(Dollar amounts in thousands)	2012		2011		Amount			Percent
Service charges	$	722	$	817	$	(95	)		-11.6	%
Credit card fees		114		197		(83	)		-42.1	%
Gain on available-for-sale of securities		89		168		(79	)		-47.0	%
Bank-owned life insurance policy earnings		97		83		14			16.9	%
Bargain purchase gain		3,666		—		3,666			n/a
Other income		82		102		(20	)		-19.6	%
Total noninterest income	$	4,770	$	1,367	$	3,403			248.9	%

	Nine months
	ended September 30,				Variance
(Dollars in thousands)	2012		2011		Amount			Percent
Service charges	$	2,218	$	2,325	$	(107	)		-4.6	%
Credit card fees		422		525		(103	)		-19.6	%
Gain on sale of available-for-sale securities		898		318		580			182.4	%
Bank-owned life insurance policy earnings		675		248		427			172.2	%
Bargain purchase gain		3,666		—		3,666			n/a
Other income		226		353		(127	)		-36.0	%
Total noninterest income	$	8,105	$	3,769	$	4,336			115.0	%

Noninterest income consists mainly of service charges on deposits, credit card fees and several other types of miscellaneous income. The major change in noninterest income was the bargain purchase gain of $3,666,000 resulting from the purchase of Oceanic Bank which was completed during September, 2012. The increase in gain on sale of available-for-sale securities for the quarter and nine months was primarily the result of re-positioning the Bank’s investment portfolio in anticipation of the acquisition of Oceanic Bank. The other significant item was the increase in bank-owned life insurance policy earnings. During the first quarter of 2012, the bank recorded a one-time gain on life insurance due to the passing of Mr. Mike Wyman, the former Chairman of the Board and CEO of the Company. During the third quarter of 2012, credit card fee income was reduced due to the sale of the Bank’s merchant bankcard portfolio to Elavon during the third quarter of 2012.

Noninterest expense

The following table shows the principal components of noninterest expense for the periods indicated.

Table 6	NONINTEREST EXPENSE
	Three months
	ended September 30,				Variance
(Dollar amounts in thousands)	2012		2011		Amount			Percent
Salaries and employee benefits	$	3,732	$	3,413	$	319			9.3	%
Occupancy expense		606		593		13			2.2	%
Equipment expense		423		433		(10	)		-2.3	%
Professional fees		325		449		(124	)		-27.6	%
FDIC assessment		160		240		(80	)		-33.3	%
Acquisition related expense		250		—		250			n/a
Telephone, postage & supplies		295		253		42			16.6	%
Operating losses		14		310		(296	)		-95.5	%
Bankcard expenses		114		181		(67	)		-37.0	%
Other real estate owned expense		5		55		(50	)		-90.9	%
Data processing expense		110		150		(40	)		-26.7	%
Low income housing expenses		69		69		—			n/a
Loss on impairment of other real estate owned		—		69		(69	)		-100.0	%
Other expense		528		568		(40	)		-7.0	%
Total noninterest expense	$	6,631	$	6,783	$	(152	)		-2.2	%

	NONINTEREST EXPENSE
	Nine months
	ended September 30,						Variance
(Dollars in thousands)	2012			2011			Amount			Percent
Salaries and employee benefits	$	11,151		$	10,322		$	829			8.0	%
Occupancy expense		1,804			1,734			70			4.0	%
Equipment expense		1,301			1,258			43			3.4	%
Professional fees		1,296			1,206			90			7.5	%
FDIC assessment		496			915			(419	)		-45.8	%
Acquisition related expense		425			—			425			n/a
Telephone, postage & supplies		844			864			(20	)		-2.3	%
Operating losses		66			547			(481	)		-87.9	%
Bankcard expenses		427			482			(55	)		-11.4	%
Other real estate owned expense		56			316			(260	)		-82.3	%
Data processing expense		386			436			(50	)		-11.5	%
Low income housing expenses		208			208			—			n/a
Gain on sale of other real estate owned		(4	)		(66	)		62			-93.9	%
Loss on impairment of other real estate owned		—			299			(299	)		-100.0	%
Other expense		1,726			1,782			(56	)		-3.1	%
Total noninterest expense	$	20,182		$	20,303		$	(121	)		-0.6	%

Noninterest expense consists mainly of salaries and employee benefits. For the three months ended September 30, 2012 compared to three months ended September 30, 2011, it represented 56.3% and 50.3% of total noninterest expenses. For the nine months ended September 30, 2012 and 2011, it was 55.3% and 50.8%, respectively, of total noninterest expenses. During the third quarter of 2012, an additional regional loan officer was added to assist our efforts in our San Francisco area branch offices. Also, the addition of salaries for the acquisition of Oceanic Bank were incurred by the Bank on September 21, 2012. The FDIC assessment rate was reduced in 2012 compared to 2011, by $80,000 and $419,000 for the quarter and nine months ended September 30, 2012 compared to the same periods of 2011. During the first quarter of 2011, the Bank experienced an operational loss of approximately $200,000 related to an unauthorized foreign wire transfer. The operational loss was increased by another $300,000 during the third quarter of 2011 when our insurance company denied coverage of our insurance reimbursement claim that had been filed. The Company disagrees with our insurance carrier’s decision to not cover the claim and has filed suit against the insurance carrier asking the courts to force the insurance company to pay our claim. Any recoveries that may be recovered as a result of our legal remedy efforts would be recorded as other income if and when any recovery actually occurs. Declines in our other real estate owned expenses in both the quarter and year-to-date period ending September 30, 2012 compared to the same periods in 2011 are directly related to the reduced number of properties managed by the Bank.

Provision for Loan Losses.

There was a provision of $400,000 and $450,000 for the three months ended September 30, 2012 and 2011, respectively. There was a provision for loan losses of $1,200,000 and $1,300,000 for the nine months ended September 30, 2012 and 2011, respectively. The allowance for loan losses was $8,582,000 or 1.54% of total gross loans at September 30, 2012, compared to $9,897,000 or 2.18% of total gross loans at December 31, 2011. The allowance for loan losses is maintained at a level considered adequate for management to provide for probable loan losses inherent in the loan portfolio.

Income Taxes

The effective tax rate for the quarter ended September 30, 2012 was 9.0% which compares to a 22.4% effective tax rate for the quarter ended September 30, 2011. The effective tax rate for the nine months ended September 30, 2012 and September 30, 2011, respectively was an effective tax rate of 15.6% and 26.5%, respectively. Tax preference items which affect our effective tax rate include changing amounts invested in tax-advantaged securities, available Low Income Housing Credits, and amounts of interest income on qualifying loans in Enterprise Zones. During the first quarter of 2012, the Company recognized a tax free gain on proceeds of life insurance of approximately $370,000 due to the passing of the Company’s former Chairman and CEO, Mike Wyman. During the third quarter of 2012, the effective tax rate declined due primarily to the recording of a significant bargain purchase gain related to the acquisition of Oceanic Holding, Inc. and its wholly-owned subsidiary, Oceanic Bank.

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 September 30, 2012 are adequate to meet its operating needs in 2012 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

Financial Condition

Assets. Total assets increased to $897,724,000 at September 30, 2012 from $715,641,000 at December 31, 2011, an increase of $182,083,000. The principal sources of this increase were $103,828,000 in net loans, $41,141,000 in securities available-for-sale, and $32,329,000 in cash and due from banks.

Loans. Gross loans before deferred loan fees and cost at September 30, 2012 were $556,390,000, an increase of $102,648,000 or 22.62% from December 31, 2011. Loans acquired from Oceanic Holding, Inc. were $103,194,000. The portfolio breakdown was as follows:

TABLE 7	LOAN PORTFOLIO

	September 30						December 31
(Dollar amounts in thousands)	2012			Percent			2011			Percent
Commercial real estate	$	298,471			55	%	$	257,413			57	%
Real estate construction		17,907			3	%		28,229			6	%
Real estate multi family		61,552			11	%		36,369			8	%
Real estate 1 to 4 family		117,198			21	%		86,322			19	%
Commercial & industrial		59,312			11	%		43,074			10	%
Consumer loans		1,950			0	%		2,335			1	%
Gross loans		556,390			102	%		453,742			102	%
Net deferred loan fees		(259	)		0	%		(124	)		0	%
Allowance for loan losses		(8,582	)		-2	%		(9,897	)		-2	%
Total	$	547,549			100	%	$	443,721			100	%

Allowance for loan losses. Management of the Company is responsible for assessing the overall risks within the Bank’s loan 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, historical loss experience, a review of economic conditions in the Company’s market area, and a variety of general economic factors that could affect the amount of expected losses within the Bank’s portfolio. The Company’s management considers changes in national and local economic conditions, as well as the condition of various market segments. It also reviews any changes in the nature and volume of the portfolio. Management watches for the existence and effect of any concentrations of credit, and changes in the level of such concentrations. It also reviews the effect of external factors, such as competition and legal and regulatory requirements. Finally, 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 activity in the allowance for loan losses for the nine months ended September 30, 2012 and the nine months ended September 30, 2011 is as follows:

TABLE 8	ALLOWANCE FOR LOAN LOSSES
	Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011
Balance, beginning of period	$	9,897		$	9,524
Provision for loan losses		1,200			1,300
Recoveries		170			46
Amounts charged off		(2,685	)		(1,224	)
Balance, end of period	$	8,582		$	9,646

During the nine months ended September 30, 2012, there was a provision for loan losses of $1,200,000 compared to $1,300,000 for the same period in 2011. The decrease in the provision was considered necessary given the existing risk levels within the Bank’s loan portfolio. Loan charge-off levels have declined year over year, yet overall financial risk in the loan portfolio has declined.

In management’s judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at September 30, 2012. 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.

The allowance is affected by a number of factors, and does not necessarily move in tandem with the level of gross loans outstanding. Management continues to monitor the factors that affect the allowance, and is prepared to make adjustments as they become necessary. All loans purchased in the acquisition of Oceanic Holding, Inc. were valued at fair value, with no allowance for loan losses allocated to the loans purchased. The allowance for loan losses applies only to the originated loans of the Company.

Nonperforming assets. Nonperforming assets consist of nonaccrual loans, loans that are 90 days or more past due but are still accruing interest and other real estate owned. At September 30, 2012, there was $25,555,000 in nonperforming assets, compared to $21,845,000 at December 31, 2011. Nonaccrual loans were $23,632,000 at September 30, 2012, compared to $19,098,000 at December 31, 2011. There were no loans past due 90 days and still accruing at either date. The increase in nonperforming assets during 2012 was primarily due to the purchased nonperforming assets included in the Oceanic Bank acquisition.

There was $1,923,000 in Other Real Estate Owned at September 30, 2012 which consisted of two separate properties. During the first nine months of 2012, the Bank sold one property, and no property was obtained through foreclosure. There was $2,747,000 in Other Real Estate Owned at December 31, 2011. During the first nine months of 2011, the Bank sold three properties and obtained one new commercial property through foreclosure. Management intends to aggressively market these properties. While management believes these properties will sell in the short term, there can be no assurance that these properties will sell quickly given the current real estate market, nor can the expected sales price be accurately predicted.

Deposits. Deposits are gathered primarily from our customers in San Francisco and San Mateo counties and on the island of Guam. The growth in deposits during the third quarter of 2012 was primarily due to the acquisition of Oceanic Bank in the third quarter of 2012, which is further explained in Note H. Growth in deposits, excluding the acquired Oceanic Bank deposits totaled $62,517,000 for the nine months ended September 30, 2012.

The following table sets forth the maturity schedule of the time certificates of deposit on September 30, 2012:

TABLE 9

(Dollar amounts in thousands)	Under		$100,000
Maturities	$100,000		or more		Total
Three months or less	$	14,567	$	51,625	$	66,192
Over three through six months		11,373		19,638		31,011
Over six through twelve months		16,308		40,604		56,912
Over twelve months		9,117		23,043		32,160
Total	$	51,365	$	134,910	$	186,275

Regulatory Capital. The following table shows the regulatory capital ratios and leverage ratios at September 30, 2012 and December 31, 2011 for the Bank. The ratios for the Bank and the Company are essentially equivalent.

TABLE 10

Regulatory Capital Ratios	September 30, 2012			December 31, 2011				Minimum “Well Capitalized” Requirements
Total Regulatory Capital Ratio		14.11	%		16.44	%	≥		10.00	%
Tier 1 Capital		12.86	%		15.18	%	≥		6.00	%
Leverage Ratios		10.97	%		11.15	%	≥		5.00	%

Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of September 30, 2012, liquid assets were $299,608,000, or 33.3% of total assets. As of December 31, 2011, liquid assets were $226,138,000, or 31.6% of total assets. Liquidity consists of cash and due from banks, 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 Company also has federal funds borrowing facilities totaling $45,000,000, a Federal Home Loan Bank line up to 30% of total assets, and a Federal Reserve Bank borrowing facility.

The relationship between total net loans and total deposits is a useful additional measure of liquidity. A higher loan to deposit ratio may lead to a loss of liquid assets in the future. This must 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, 2012, net loans were at 69.1% of deposits. On December 31, 2011, net loans were at 71.4% of deposits.

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, 2012 and December 31, 2011, 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 $108,430,000 and $92,690,000 at September 30, 2012 and December 31, 2011, respectively. As a percentage of net loans, these off-balance sheet items represent 19.8% and 20.9% respectively.

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.

Item 4T. 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, 2012. 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, 2012, 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.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There are no material legal proceedings adverse to the Company or First National Bank to which any director, officer, affiliate of the Company, or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or First National Bank.

From time to time, the Company and/or First National Bank are a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any material pending legal proceedings to which either it or First National Bank may be a party or has recently been a party, which will have a material adverse effect on the financial condition or results of operations of the Company and First National Bank, taken as a whole.

Item 1A. Risk Factors

During the course of normal operations, the Bank and the Company manage a variety of risks including, but not limited to, credit risk, operational risk, interest rate risk and regulatory compliance risk. For a more complete discussion of the risk factors facing the Bank and the Company, please refer to the section entitled “Item 1A – Risk Factors” in the Company’s December 31, 2011 Form 10K.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was signed into law. The purpose of this legislation was to bring about regulatory changes and oversight that would help stop past abuses from recurring in the future. This legislation gives new powers to the FDIC and the Federal Reserve Bank that they may use in the execution of their duties as regulators and overseers of the banking industry. It also created a new federal consumer protection agency named the Consumer Financial Protection Bureau (“CFPB”). All existing consumer laws and regulations will be transferred to the CFPB. This Act is expected to enable regulators to issue numerous new banking regulations and requirements that have not yet been fully developed or promulgated. The ultimate effect the Act has on the Company’s operations will ultimately be determined by the significance of the new banking regulations that are issued as a result of the Act. Management’s ability to effectively integrate Oceanic Holding, Inc. could have a negative impact on earnings and the financial position of the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

c) ISSUER PURCHASES OF EQUITY SECURITIES

On August 24, 2007, 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 2,863,635 shares of Common Stock, or 143,182 shares. There were no repurchases during the quarter ended September 30, 2012. There were 10,457 shares remaining that may be purchased under this Plan as of September 30, 2012.

Item 4. Mining Safety Disclosures

Not applicable.

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 14, 2012	By:	/s/ Thomas C. McGraw
		Thomas C. McGraw
		Chief Executive Officer
		(Authorized Officer)

	By:	/s/ David A. Curtis
		David A. Curtis
		Senior Vice President
		Chief Financial Officer
		(Principal Financial Officer)

Attached files

FNB BANCORP/CA/ Reports

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