FNB BANCORP/CA/ - FORM 10-Q - November 5, 2015

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - FNB BANCORP/CA/	ex31_2.htm
EX-32 - EXHIBIT 32 - FNB BANCORP/CA/	ex32.htm
EX-31.1 - EXHIBIT 31.1 - FNB BANCORP/CA/	ex31_1.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, 2015

FNB BANCORP

(Exact name of registrant as specified in its charter)

California

(State or other jurisdiction of incorporation)


000-49693		91-2115369
(Commission File Number)		(IRS Employer Identification No.)

975 El Camino Real, South San Francisco, California		94080
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (650) 588-6800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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). x Yes o 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 o	Accelerated filer x

	Non-accelerated filer o	Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock as of October 31, 2015: 4,316,283 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 Statements of Earnings	4

	Consolidated Statements of Comprehensive Earnings	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	53

PART II. OTHER INFORMATION		54

Item 1.	Legal Proceedings	54

Item 1 A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	55

Item 5.	Other Information	55

Item 6.	Exhibits	55

SIGNATURES		55

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

ASSETS


	September 30,		December 31,
	2015		2014
(Dollar amounts in thousands)
Cash and due from banks	$	40,282	$	14,978
Interest-bearing time deposits with financial institutions		1,246		2,784
Securities available-for-sale, at fair value		315,560		264,881
Loans, net of allowance for loan losses of $9,940 and $9,700 on September 30, 2015 and December 31, 2014		696,888		583,715
Bank premises, equipment, and leasehold improvements, net		10,326		10,951
Bank owned life insurance		15,742		12,510
Other equity securities		6,748		5,769
Accrued interest receivable		4,326		3,725
Other real estate owned, net		838		763
Goodwill		4,580		1,841
Prepaid expenses		877		1,045
Other assets		14,044		14,202
Total assets	$	1,111,457	$	917,164

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Demand, noninterest bearing	$	262,206	$	202,811
Demand, interest bearing		84,682		89,548
Savings and money market		512,534		394,676
Time		129,943		105,159
Total deposits		989,365		792,194

Federal Home Loan Bank advances		—		9,000
Note payable		5,100		5,550
Accrued expenses and other liabilities		13,302		13,332
Total liabilities		1,007,767		820,076

Stockholders’ equity
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 4,316,180 shares at September 30, 2015 and 4,259,306 shares at December 31, 2014		67,852		66,791
Retained earnings		33,046		28,729
Accumulated other comprehensive income, net of tax		2,792		1,568
Total stockholders’ equity		103,690		97,088
Total liabilities and stockholders’ equity	$	1,111,457	$	917,164

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS 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,
	2015		2014		2015			2014
Interest income:
Interest and fees on loans	$	8,309	$	7,899	$	23,874		$	23,423
Interest on taxable securities		924		883		2,597			2,577
Interest on tax-exempt securities		651		498		1,754			1,478
Interest time deposits with other financial institutions		9		20		36			66
Total interest income		9,893		9,300		28,261			27,544
Interest expense:
Interest on deposits		635		472		1,625			1,417
Interest on Federal Home Loan Bank advances		1		3		2			14
Interest on note payable		57		63		173			131
Total interest expense		693		538		1,800			1,562
Net interest income		9,200		8,762		26,461			25,982
Provision for loan losses		75		—		225			75
Net interest income after provision for loan losses		9,125		8,762		26,236			25,907
Noninterest income:
Service charges		618		644		1,854			1,928
Net gain on sale of available-for-sale securities		29		100		250			139
Bank-owned life insurance earnings		90		86		261			273
Other income		287		211		1,002			727
Total noninterest income		1,024		1,041		3,367			3,067
Noninterest expense:
Salaries and employee benefits		4,100		4,241		12,513			12,636
Occupancy expense		592		704		1,906			2,078
Equipment expense		718		405		1,533			1,202
Professional fees		334		395		1,075			1,427
FDIC assessment		150		165		450			525
Telephone, postage and supplies		237		284		782			883
Advertising		112		118		381			339
Data processing expense		659		151		940			430
Low income housing expense		70		109		212			329
Surety insurance		122		68		298			202
Directors expense		72		63		216			189
Gain on sale of other real estate owned, net		—		—		—			(220	)
Other real estate owned expense, net		—		—		(6	)		87
Other expense		313		352		911			1,000
Total noninterest expense		7,479		7,055		21,211			21,107
Earnings before provision for income taxes		2,670		2,748		8,392			7,867
Provision for income tax expense		431		925		2,283			2,581
Net earnings		2,239		1,823		6,109			5,286
Dividends and discount accretion on preferred stock		—		—		—			170
Net earnings available to common stockholders	$	2,239	$	1,823	$	6,109		$	5,116

Earnings per share data:
Basic	$	0.52	$	0.43	$	1.42		$	1.21
Diluted	$	0.51	$	0.42	$	1.38		$	1.17

Weighted average shares outstanding:
Basic		4,309		4,250		4,293			4,222
Diluted		4,422		4,384		4,414			4,364

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,
	2015			2014			2015			2014
Net earnings	$	2,239		$	1,823		$	6,109		$	5,286
Unrealized holding gain (loss) on available-for-sale securities, net of tax (expense) benefit of ($988) and ($953) for three and nine months ended September 30, 2015, and net of tax benefit (expense) of $185 and ($1,567) for three and nine months ended September 30, 2014		1,422			(266	)		1,372			2,256
Reclassification adjustment for gain on available-for-sale securities sold, net of tax of $12 and $103 for three and nine months ended September 30, 2015, and $41 and $57 for three and nine months ended September 30, 2014, respectively		(17	)		(59	)		(147	)		(82	)
Other Comprehensive Earnings (loss)		1,405			(325	)		1,225			2,174

Total comprehensive earnings	$	3,644		$	1,498		$	7,334		$	7,460

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
	2015			2014
Cash flow from operating activities:
Net earnings	$	6,109		$	5,286
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net gain on sale of securities available-for-sale		(250	)		(139	)
Depreciation, amortization and accretion		2,553			2,599
Gain on sale of other real estate owned		—			(220	)
Stock-based compensation expense		183			208
Earnings on bank owned life insurance		(261	)		(273	)
Increase in net deferred loan fees		51			(54	)
Provision for loan losses		225			75
(Increase) decrease in accrued interest receivable		(288	)		138
Decrease in prepaid expense		1,976			257
Increase in other assets		2,888			(117	)
(Decrease) increase in accrued expenses and other liabilities		(5,027	)		409
Net cash provided by operating activities		8,159			8,169

Cash flows from investing activities
Purchase of securities available-for-sale		(90,590	)		(32,703	)
Proceeds from matured/called/sold securities available-for-sale		40,514			30,893
Net (investment) in other equity securities		(300	)		(469	)
Acquisition, net of cash paid		(18,481	)
Maturities of time deposits of other banks		9,374			1,475
Proceeds from sale of other real estate owned		—			1,461
Net investment in other real estate owned		(75	)		(78	)
Net increase in loans		(20,480	)		(12,811	)
Purchases of bank premises, equipment, leasehold improvements		(144	)		(629	)
Net cash used in investing activities		(80,182	)		(12,861	)

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


(Dollar amounts in thousands)	Nine months ended
	September 30
	2015			2014
Cash flows from financing activities
Net increase in demand and savings deposits		109,085			28,662
Net decrease in time deposits		(2,040	)		(20,121	)
Increase (decrease) of FHLB advances		(9,000	)		1,000
Proceeds from note payable		—			6,000
Principal repayment on note payable		(450	)		(300	)
Dividends paid on common stock		(1,146	)		(848	)
Exercise of stock options		878			1,132
Redemption of preferred stock series C		—			(9,450	)
Dividends paid on preferred stock series C		—			(170	)
Net cash provided by financing activities		97,327			5,905
NET INCREASE IN CASH AND CASH EQUIVALENTS		25,304			1,213
Cash and cash equivalents at beginning of period		14,978			14,007
Cash and cash equivalents at end of period	$	40,282		$	15,220

Additional cash flow information:
Interest paid	$	1,745		$	1,568
Income taxes paid		1,938			2,387
Tax benefit on exercise of stock options		154			457

Non-cash investing and financing activities:
Accrued dividends		646			446
Change in unrealized gain in available for-sale securities, net of tax		1,224			2,174
OREO sales funded by loan origination		—			3,400

Acquisitions:
Fair value of assets acquired		115,127			—
Fair value of liabilities assumed		93,627			—

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(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 Francisco, San Mateo, and Santa Clara counties.

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 periods presented.

The accompanying unaudited consolidated 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 annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto for the year ended December 31, 2014. Results of operations for interim periods are not necessarily indicative of results for the full year. Certain prior year information has been reclassified to conform to current year presentation. The reclassifications had no impact on consolidated net earnings or stockholders’ equity.

NOTE B – STOCK OPTION PLANS

Stock option expense is recorded based on the fair value of option contracts issued. The fair value is determined using an option pricing model that considers 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 quarter ended September 30, 2015 was $61,000 and $69,000 for the quarter ended September 30, 2014. There was no income tax benefit for the quarter ended September 30, 2015, and an income tax benefit of $24,000 for the quarter ended September 30, 2014. The amount of compensation expense for options recorded in the nine months ended September 30, 2015 and September 30, 2014 was $183,000 and $208,000, respectively. There was an income tax benefit of $154,000 and $294,000 for the nine months ended September 30, 2015 and September 30, 2014, respectively.

The intrinsic value for options exercised during the nine months ended September 30, 2015 was $671,000. The intrinsic value for options exercised during the nine months ended September 30, 2014 was $848,000. The intrinsic value for options exercisable at September 30, 2015 was $3,042,000.

The amount of total unrecognized compensation expense related to non-vested options at September 30, 2015 was $569,000, and the weighted average period over which it will be amortized is 3.1 years.

NOTE C – EARNINGS PER SHARE CALCULATION

Earnings per common share (EPS) are computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings 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. The number of potential common shares included in the quarterly diluted EPS is computed using the average market price during the three months included in the reporting period under the treasury stock method. The number of potential common shares included in year-to-date diluted EPS is a year-to-date weighted average of potential shares included in each quarterly diluted EPS computation. All common stock equivalents are anti-dilutive when a net loss occurs. A 5% stock dividend was declared in the fourth quarter of 2014, paid in 2015, and prior per share amounts have been adjusted to reflect the 5% stock dividend.

Earnings per share have been computed based on the following:

(All amounts in thousands)	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Net earnings	$	2,239	$	1,823	$	6,109	$	5,286
Dividends and discount accretion on preferred stock		—		—		—		170
Net earnings available to common shareholders	$	2,239	$	1,823	$	6,109	$	5,116

Average number of shares outstanding		4,309		4,250		4,293		4,222
Effect of dilutive options		113		134		121		142
Average number of shares outstanding used to calculate diluted earnings per share		4,422		4,384		4,414		4,364

Anti-dilutive options not included		93		65		94		65

NOTE D – SECURITIES AVAILABLE FOR SALE

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

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
September 30, 2015
U.S. Treasury securities	$	5,996	$	83	$	—		$	6,079
Obligations of U.S. government agencies		79,446		719		(12	)		80,153
Mortgage-backed securities		62,221		1,355		(80	)		63,496
Obligations of states and political subdivisions		122,607		2,652		(231	)		125,028
Corporate debt		40,557		292		(45	)		40,804
	$	310,827	$	5,101	$	(368	)	$	315,560
December 31, 2014
U.S. Treasury securities	$	3,975	$	12	$	(29	)	$	3,958
Obligations of U.S. government agencies		63,090		270		(298	)		63,062
Mortgage-backed securities		78,076		1,002		(661	)		78,417
Obligations of states and political subdivisions		82,151		2,534		(143	)		84,542
Corporate debt		34,931		176		(205	)		34,902
	$	262,223	$	3,994	$	(1,336	)	$	264,881

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of September 30, 2015 and December 31, 2014 follows:

(Dollar amounts in thousands)			Less than					12 Months
	Total		12 Months			Total		or Longer			Total		Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
September 30, 2015
U.S. Treasury securities	$	—	$	—		$	—	$	—		$	—	$	—
Obligations of U.S. Government agencies		3,987		(4	)		5,035		(8	)		9,022		(12	)
Mortgage-backed securities		—		—			14,416		(80	)		14,416		(80	)
Obligations of states and political subdivisions		27,308		(200	)		1,842		(31	)		29,150		(231	)
Corporate debt		10,475		(29	)		1,986		(16	)		12,461		(45	)
Total	$	41,770	$	(233	)	$	23,279	$	(135	)	$	65,049	$	(368	)

(Dollar amounts in thousands)			Less than					12 Months
	Total		12 Months			Total		or Longer			Total		Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
December 31, 2014:
U. S. Treasury securities	$	—	$	—		$	2,015	$	(29	)	$	2,015	$	(29	)
Obligations of U.S. Government agencies		13,178		(43	)		19,116		(255	)		32,294		(298	)
Mortgage-backed securities		5,056		(10	)		36,382		(651	)		41,438		(661	)
Obligations of states and political subdivisions		8,678		(49	)		5,696		(94	)		14,374		(143	)
Corporate debt		18,065		(125	)		4,919		(80	)		22,984		(205	)
Total	$	44,977	$	(227	)	$	68,128	$	(1,109	)	$	113,105	$	(1,336	)

At September 30, 2015, there were twenty securities in an unrealized loss position for twelve consecutive months or more. At the same time, there were forty-nine securities in an unrealized loss position for less than twelve consecutive months. Management periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. Management reviews market rates, the entity’s financial condition and any relevant news items or legal/tax/regulatory changes. 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 was other-than-temporarily impaired at September 30, 2015 and December 31, 2014.

The amortized cost and carrying value of available-for-sale debt securities as of September 30, 2015 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.

September 30, 2015:

(Dollar amounts in thousands)	Amortized		Fair
	Cost		Value
Available-for-sale:
Due in one year or less	$	12,762	$	12,853
Due after one through five years		139,399		141,174
Due after five years through ten years		130,249		132,506
Due after ten years		28,417		29,027
	$	310,827	$	315,560

For the nine months ended September 30, 2015, gross realized gains amounted to $250,000 on securities sold for $11,463,000. For the nine months ended September 30, 2014, gross realized gains amounted to $151,000 on securities sold for $10,505,000. For the nine months ended September 30, 2015, there were no gross realized losses on securities sold. For the nine months ended September 30, 2014, there were $12,000 gross realized losses on securities sold for $2,109,000. For the three months ended September 30, 2015, gross realized gains amounted to $29,000 on securities sold for $3,187,000. For the three months ended September 30, 2014, gross realized gains were $112,000 on securities sold for $5,219,000.

For the three months ended September 30, 2015, there were no gross realized losses on securities sold. For the three months ended September 30, 2014, gross realized losses were $12,000 on securities sold for $1,849,000.

At September 30, 2015, securities with an amortized cost of $102,182,000 and fair value of $103,776,000 were pledged as collateral for public deposits and for other purposes required by law.

NOTE E - LOANS

Loans are summarized as follows at September 30, 2015 and December 31, 2014:

(Dollar amounts in thousands)								Total
	FNB							Balance
	Bancorp							September 30,
September 30, 2015	Originated			PNCI		PCI		2015
Commercial real estate	$	304,276		$	88,493	$	1,321	$	394,090
Real estate construction		30,395			5,473		—		35,868
Real estate multi-family		47,264			16,664		—		63,928
Real estate 1 to 4 family		151,159			21,121		—		172,280
Commercial & industrial		27,817			12,026		—		39,843
Consumer		1,497			—		—		1,497
Gross loans		562,408			143,777		1,321		707,506
Net deferred loan fees		(678	)		—		—		(678	)
Allowance for loan losses		(9,940	)		—		—		(9,940	)
Net loans	$	551,790		$	143,777	$	1,321	$	696,888

(Dollar amounts in thousands)								Total
	FNB							Balance
	Bancorp							December 31,
December 31, 2014	Originated			PNCI		PCI		2014
Commercial real estate	$	285,252		$	31,852	$	1,323	$	318,427
Real estate construction		37,827			1,944		—		39,771
Real estate multi-family		43,379			10,445		—		53,824
Real estate 1 to 4 family		123,522			5,210		—		128,732
Commercial & industrial		42,551			9,111		—		51,662
Consumer		1,448			—		—		1,448
Gross loans		533,979			58,562		1,323		593,864
Net deferred loan fees		(449	)		—		—		(449	)
Allowance for loan losses		(9,700	)		—		—		(9,700	)
Net loans	$	523,830		$	58,562	$	1,323	$	583,715

Note: PNCI means Purchased, Not Credit Impaired. PCI means Purchased, Credit Impaired.

	Allowance for Credit Losses
	For the Three Months Ended September 30, 2015

(Dollar amounts in thousands)
							Real			Real
							Estate			Estate
	Commercial			Real Estate			Multi			1 to		Commercial
	Real estate			Construction			family			4 family		& industrial			Consumer			Total
Allowance for credit losses

Beginning balance	$	6,027		$	697		$	198		$	2,014	$	848		$	52		$	9,836
Charge-offs		—			—			—			—		(23	)		—			(23	)
Recoveries		15			—			—			7		26			4			52
Provision		(67	)		(49	)		(10	)		289		(73	)		(15	)		75
Ending balance	$	5,975			648			188			2,310	$	778		$	41		$	9,940

Ending balance individually evaluated for impairment	$	126		$	—		$	—		$	522	$	224		$	—		$	872
Ending balance: collectively evaluated for impairment	$	5,849		$	648		$	188		$	1,788	$	554		$	41		$	9,068

	Allowance for Credit Losses
	For the Nine Months Ended September 30, 2015

(Dollar amounts in thousands)
						Real			Real
						Estate			Estate
	Commercial		Real Estate			Multi			1 to			Commercial
	Real estate		Construction			family			4 family			& industrial			Consumer			Total
Allowance for credit losses


Beginning balance	$	5,549	$	849		$	206		$	1,965		$	1,073		$	58		$	9,700
Charge-offs		—		—			—			(45	)		(23	)		(11	)		(79	)
Recoveries		37		—			—			8			45			4			94
Provision		389		(201	)		(18	)		382			(317	)		(10	)		225
Ending balance	$	5,975	$	648		$	188		$	2,310		$	778		$	41		$	9,940

Ending balance: individually evaluated for impairment	$	126	$	—		$	—		$	522		$	224		$	—		$	872
Ending balance: collectively evaluated for impairment	$	5,849	$	648		$	188		$	1,788		$	554		$	41		$	9,068

	Recorded Investment in Loans at September 30, 2015

(Dollar amounts in thousands)					Real		Real
					Estate		Estate
	Commercial		Real Estate		Multi		1 to		Commercial
	Real Estate		Construction		family		4 family		& industrial		Consumer		Total

Loans:
Ending balance	$	394,090	$	35,868	$	63,928	$	172,280	$	39,843	$	1,497	$	707,506

Ending balance: individually evaluated for impairment	$	9,501	$	2,162	$	—	$	4,857	$	1,813	$	—	$	18,333
Ending balance: collectively evaluated for impairment	$	384,589	$	33,706	$	63,928	$	167,423	$	38,030	$	1,497	$	689,173

	Allowance for Credit Losses
	As of and For the Year Ended December 31, 2014

(Dollar amounts in thousands)
							Real			Real
							Estate			Estate
	Commercial			Real Estate			Multi			1 to			Commercial
	Real estate			Construction			family			4 family			& industrial			Consumer			Total
Allowance for credit losses

Beginning balance	$	5,763		$	734		$	293		$	1,788		$	1,237		$	64		$	9,879
Charge-offs		(83	)		(183	)		—			(62	)		(28	)		(26	)		(382	)
Recoveries		1,062			—			—			3			154			4			1,223
Provision		(1,193	)		298			(87	)		236			(290	)		16			(1,020	)
Ending balance	$	5,549		$	849		$	206		$	1,965		$	1,073		$	58		$	9,700


Ending balance: individually evaluated for impairment	$	101		$	—		$	—		$	432		$	225		$	8		$	766
Ending balance: collectively evaluated for impairment	$	5,448		$	849		$	206		$	1,533		$	848		$	50		$	8,934

	Recorded Investment in Loans at December 31, 2014

(Dollar amounts in thousands)
					Real		Real
					Estate		Estate
	Commercial		Real Estate		Multi		1 to		Commercial
	Real Estate		Construction		family		4 family		& industrial		Consumer		Total

Loans:
Ending balance	$	318,427	$	39,771	$	53,824	$	128,732	$	51,662	$	1,448	$	593,864

Ending balance: individually evaluated for impairment	$	9,530	$	2,373	$	—	$	4,333	$	2,315	$	64	$	18,615

Ending balance: collectively evaluated for impairment	$	308,897	$	37,398	$	53,824	$	124,399	$	49,347	$	1,384	$	575,249

	Allowance for Credit Losses
	For the Three Months Ended September 30, 2014

(Dollar amounts in thousands)
							Real			Real
							Estate			Estate
	Commercial			Real Estate			Multi			1 to			Commercial
	Real estate			Construction			family			4 family			& industrial			Consumer			Total
Allowance for credit losses

Beginning balance	$	6,215		$	717		$	465		$	2,250		$	1,166		$	46		$	10,859
Provision		495			(150	)		(202	)		(193	)		27			23			—
Charge-offs		(83	)		—			—			—			(17	)		(6	)		(106	)
Recoveries		5			—			—			1			14			1			21
Ending balance	$	6,632		$	567		$	263		$	2,058		$	1,190		$	64		$	10,774

Ending balance: individually evaluated for impairment	$	111		$	—		$	—		$	429		$	177		$	—		$	717
Ending balance: collectively evaluated for impairment	$	6,521		$	567		$	263		$	1,629		$	1,013		$	64		$	10,057

	Allowance for Credit Losses
	For the Nine Months Ended September 30, 2014

(Dollar amounts in thousands)
							Real			Real
							Estate			Estate
	Commercial			Real Estate			Multi			1 to			Commercial
	Real estate			Construction			family			4 family			& industrial			Consumer			Total
Allowance for credit losses

Beginning balance	$	5,763		$	734		$	293		$	1,788		$	1,237		$	64		$	9,879
Provision		(105	)		16			(30	)		330			(158	)		22			75
Charge-offs		(83	)		(183	)		—			(62	)		(28	)		(26	)		(382	)
Recoveries		1,057			—			—			2			139			4			1,202
Ending balance	$	6,632		$	567		$	263		$	2,058		$	1,190		$	64		$	10,774

Ending balance: individually evaluated for impairment	$	111		$	—		$	—		$	429		$	177		$	—		$	717
Ending balance: collectively evaluated for impairment	$	6,521		$	567		$	263		$	1,629		$	1,013		$	64		$	10,057

	Recorded Investment in Loans at September 30, 2014

(Dollar amounts in thousands)					Real		Real
					Estate		Estate
	Commercial		Real Estate		Multi		1 to		Commercial
	Real Estate		Construction		family		4 family		& industrial		Consumer		Total

Loans:
Ending balance	$	320,695	$	34,701	$	53,721	$	120,233	$	48,916	$	1,483	$	579,749

Ending balance: individually evaluated for impairment	$	10,158	$	2,378	$	—	$	4,292	$	2,170	$	—	$	18,998

Ending balance: collectively evaluated for impairment	$	310,537	$	32,323	$	53,721	$	115,941	$	46,746	$	1,483	$	560,751

	Impaired Loans
	As of and for the nine months ended September 30, 2015

				Unpaid				Average
(Dollar amounts in thousands)		Recorded		Principal		Related		Recorded		Income
		Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded

Commercial real estate	$	4,392	$	5,271	$	—	$	4,867	$	217
Commercial real estate construction		2,162		2,345		—		2,359		100
Real estate - multi family		—		—		—		—		—
Residential - 1 to 4 family		1,475		1,476		—		1,482		49
Commercial and industrial		528		782		—		4,410		27
Total		8,557		9,874		—		13,118		393

With an allowance recorded

Commercial real estate	$	5,109	$	5,113	$	126	$	5,162	$	196
Commercial real estate construction		—		—		—		—		—
Residential - 1 to 4 family		3,382		2,972		522		3,202		96
Commercial and industrial		1,285		1,539		224		1,489		5
Consumer		—		—		—		—		—
Total		9,776		9,624		872		9,853		297

Total

Commercial real estate	$	9,501	$	10,384	$	126	$	10,029	$	413
Commercial real estate construction		2,162		2,345		—		2,359		100
Real estate - multi family		—		—		—		—		—
Residential - 1 to 4 family		4,857		4,448		522		4,684		145
Commercial and industrial		1,813		2,321		224		5,899		32
Consumer		—		—		—		—		—
Grand total	$	18,333	$	19,498	$	872	$	22,971	$	690

	Impaired Loans
	As of and for the year ended December 31, 2014

			Unpaid				Average
(Dollar amounts in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded
Commercial real estate	$	4,462	$	5,333	$	—	$	4,473	$	304
Commercial real estate construction		2,373		2,556		—		1,846		150
Residential- 1 to 4 family		1,594		1,737		—		1,379		67
Commercial and industrial		582		939		—		788		54
Total		9,011		10,565		—		8,486		575

With an allowance recorded
Commercial real estate	$	5,068	$	5,071	$	101	$	5,127	$	258
Residential- 1 to 4 family		2,739		2,754		432		2,759		111
Commercial and industrial		1,733		2,100		225		1,907		33
Consumer		64		64		8		67		5
Total		9,604		9,989		766		9,860		407

Total
Commercial real estate	$	9,530	$	10,404	$	101	$	9,600	$	562
Commercial real estate construction		2,373		2,556		—		1,846		150
Residential- 1 to 4 family		4,333		4,491		432		4,138		178
Commercial and industrial		2,315		3,039		225		2,695		87
Consumer		64		64		8		67		5
Grand total	$	18,615	$	20,554	$	766	$	18,346	$	982

Average recorded investment on impaired loans was $22,971,000 for nine months ended September 30, 2015. Average recorded investment on impaired loans was $20,998,000 for three months ended September 30, 2015; $18,641,000 for nine months ended September 30, 2014; and $18,926,000 for three months ended September 30, 2014.

Nonaccrual loans totaled $5,192,000 and $5,648,000 as of September 30, 2015 and December 31, 2014. The difference between impaired loans and nonaccrual loans represents loans that are restructured, are performing under modified loan agreements, and accruing interest.

	Loans on Nonaccrual Status as of
(Dollar amounts in thousands)	September 30,		December 31,
	2015		2014
Commercial real estate	$	2,094	$	2,111
Real estate - construction		—		—
Real estate 1 to 4 family		1,285		1,181
Commercial and industrial		1,813		2,292
Consumer		—		64
Total	$	5,192	$	5,648

Interest income on impaired loans of $690,000 was recognized for cash payments received during the nine months ended September 30, 2015, and $982,000 was recognized for cash payments received during the year ended December 31, 2014. Interest income recognized for cash payments received for the three months ended September 30, 2015 was $222,000 and for the three months ended September 30, 2014 was $291,000. Interest income recognized for cash payments received for the nine months ended September 30, 2014 was $746,000. The amount of interest on impaired loans not collected for the nine months ended September 30, 2015 was $284,000 and for the year ended December 31, 2014 was $91,000. The cumulative amount of unpaid interest on impaired loans was $3,228,000 for the nine months ended September 30, 2015, and $2,944,000 for the year ended December 31, 2014. Total outstanding principal of troubled debt restructured loans as of September 30, 2015 was $15,841,000, of which $9,346,000 was commercial real estate loans, $1,291,000 was real estate construction loans, $3,596,000 was real estate one to four family loans, and $1,608,000 was commercial and industrial loans. Total outstanding principal of troubled debt restructured loans at December 31, 2014 was $16,517,000, of which $9,498,000 was commercial real estate loans, $1,304,000 was real estate construction loans, $3,661,000 was real estate one to four family loans, and $2,054,000 was commercial and industrial loans.

Troubled Debt Restructurings

	Total troubled debt restructured loans outstanding at
(dollars in thousands)	September 30, 2015						December 31, 2014
			Non-						Non-
	Accrual		accrual		Total		Accrual		accrual		Total
	status		status		modifications		status		status		modifications

Commercial real estate	$	7,265	$	2,081	$	9,346	$	7,407	$	2,091	$	9,498
Real Estate construction		1,291		—		1,291		1,304		—		1,304
Real estate 1 to 4 family		3,596		—		3,596		3,153		508		3,661
Commercial & industrial		—		1,608		1,608		294		1,760		2,054
Total	$	12,152	$	3,689	$	15,841	$	12,158	$	4,359	$	16,517

Modification Categories

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, 2015, there were no commitments for additional funding of troubled debt restructured loans.

Modifications

For the nine months

ended September 30, 2015

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Contracts

Investment

(Dollar amounts in thousands)

Real estate 1 to 4 family

474

Total

474

All restructurings were a modification of interest rate and/or payment. There were no principal reductions granted. There were no payment defaults during the nine month period ended September 30, 2015 that were related to receivables modified as TDRs in the last twelve months.

There were no modifications for the three months ended September 30, 2015. There were no payment defaults during the three month period ended September 30, 2015 that were related to receivables modified as TDRs in the last twelve months.

	Modifications
	For the nine months
	ended September 30, 2014
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
(Dollar amounts in thousands)
Real estate 1 to 4 family		1	$	575	$	569
Commercial real estate		3		1,454		1,449
Total		4	$	2,029	$	2,018

There were no modifications in the three months ended September 30, 2014.

All restructurings were a modification of interest rate and/or payment. There were no principal reductions granted. There were no payment defaults during the three or nine month periods ended September 30, 2014 that were related to receivables modified as TDRs in the last twelve months.

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 weaknesses that could jeopardize the repayment of the debt. These well-defined weaknesses may include 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.

Real Estate – Multi-Family

Our multi-family commercial real estate loans are secured by multi-family properties located primarily in San Mateo and San Francisco Counties. These loans are made to investors where our primary source of repayment is from cash flows generated by the properties, through rent collections. The borrowers’ promissory notes are secured with recorded liens on the underlying properties. The borrowers would normally also be required to personally guarantee repayment of the loans. 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.

Commercial Real Estate Loans

Other commercial real estate loans consist of loans secured by non-farm, non-residential properties, including, but not limited to industrial, hotel, assisted care, retail, office and mixed use buildings.

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.

Real Estate-1 to 4 family 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.

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.

Consumer 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 if borrowers lose their primary source of income, or file for relief from creditors through bankruptcy proceedings.

	Age Analysis of Past Due Loans
	As of September 30, 2015
(Dollar amounts in thousands)
	30-59		60-89
	Days		Days		Over		Total
	Past		Past		90		Past				Total
Originated	Due		Due		Days		Due		Current		Loans
Commercial real estate	$	—	$	—	$	—	$	—	$	304,276	$	304,276
Real estate construction		—		713		—		713		29,682		30,395
Real estate multi family		—		—		—		—		47,264		47,264
Real estate-1 to 4 family		—		—		611		611		150,548		151,159
Commercial and industrial		—		—		1,813		1,813		26,004		27,817
Consumer		—		—		—		—		1,497		1,497
Total	$	—	$	713	$	2,424	$	3,137	$	559,271	$	562,408

Purchased
*Not credit impaired*
Commercial real estate	$	531	$	3,778	$	—	$	4,309	$	84,184	$	88,493
Real estate construction		—		—		—		—		5,473		5,473
Real estate multi-family		—		—		—		—		16,664		16,664
Real estate-1 to 4 family		14		—		400		414		20,707		21,121
Commercial and industrial		—		—		—		—		12,026		12,026
Total	$	545	$	3,778	$	400	$	4,723	$	139,054	$	143,777

Purchased
*Credit impaired*
Commercial real estate	$	—	$	—	$	—	$	—	$	1,321	$	1,321
Real estate construction		—		—		—		—		—		—
Real estate multi-family		—		—		—		—		—		—
Real estate-1 to 4 family		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	1,321	$	1,321

At September 30, 2015, there were no loans 90 days or more past due where interest was still accruing.

The over 90 days column includes nonaccruals that were over 90 days, but does not include loans that are in nonaccrual status for reasons other than past due.

	Age Analysis of Past Due Loans
	As of December 31, 2014
(Dollar amounts in thousands)
	30-59		60-89
	Days		Days		Over		Total
	Past		Past		90		Past				Total
Originated	Due		Due		Days		Due		Current		Loans
Commercial real estate	$	8	$	879	$	—	$	887	$	284,365	$	285,252
Real estate construction		—		708		—		708		37,119		37,827
Real estate multi family		3,575		—		—		3,575		39,804		43,379
Real estate 1 to 4 family		330		200		1,112		1,642		121,880		123,522
Commercial & industrial		775		73		1,710		2,558		39,993		42,551
Consumer		—		—		64		64		1,384		1,448
Total	$	4,688	$	1,860	$	2,886	$	9,434	$	524,545	$	533,979

Purchased
*Not credit impaired*
Commercial real estate	$	—	$	—	$	—		—	$	31,852	$	31,852
Real estate construction		—		—		—		—		1,944		1,944
Real estate multi-family		—		—		—		—		10,445		10,445
Real estate 1 to 4 family		—		400		—		400		4,810		5,210
Commercial & industrial		—		—		—		—		9,111		9,111
Total	$	—	$	400	$	—	$	400	$	58,162	$	58,562

Purchased
*Credit impaired*
Commercial real estate	$	—	$	—	$	—	$	—	$	1,323	$	1,323
Real estate construction		—		—		—		—		—		—
Real estate multi-family		—		—		—		—		—		—
Real estate 1 to 4 family		—		—		—		—		—		—
Commercial & industrial		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	1,323	$	1,323

At December 31, 2014 there were no loans that were 90 days or more past due where interest was still accruing.

	Credit Quality Indicators
	As of September 30, 2015

(Dollar amounts in thousands)
			Special		Sub-				Total
Originated	Pass		mention		standard		Doubtful		loans
Commercial real estate	$	298,182	$	1,862	$	4,232	$	—	$	304,276
Real estate construction		29,333		—		1,062		—		30,395
Real estate multi-family		47,264		—		—		—		47,264
Real estate-1 to 4 family		150,346		—		813		—		151,159
Commercial and industrial		27,211		—		441		165		27,817
Consumer loans		1,497		—		—		—		1,497
Totals	$	553,833	$	1,862	$	6,548	$	165	$	562,408

Purchased
*Not credit impaired*
Commercial real estate	$	66,703	$	7,745	$	14,031	$	14	$	88,493
Real estate construction		5,473		—		—		—		5,473
Real estate multi-family		16,664		—		—		—		16,664
Real estate-1 to 4 family		20,720		—		401		—		21,121
Commercial and industrial		11,931		—		95		—		12,026
Total	$	121,491	$	7,745	$	14,527	$	14	$	143,777

*Credit impaired*
Commercial real estate									$	1,321
Total									$	1,321

	Credit Quality Indicators
	As of December 31, 2014

(Dollar amounts in thousands)
			Special		Sub-				Total
Originated	Pass		mention		standard		Doubtful		loans
Commercial real estate	$	281,216	$	1,913	$	2,031	$	92	$	285,252
Real estate construction		36,692		—		1,135		—		37,827
Real estate multi-family		43,379		—		—		—		43,379
Real estate 1 to 4 family		122,499		—		1,023		—		123,522
Commercial & industrial		41,394		—		1,157		—		42,551
Consumer loans		1,384		—		64		—		1,448
Totals	$	526,564	$	1,913	$	5,410	$	92	$	533,979

Purchased
*Not credit impaired*
Commercial real estate	$	26,009	$	—	$	5,843	$	—	$	31,852
Real estate construction		1,944		—		—		—		1,944
Real estate multi-family		10,445		—		—		—		10,445
Real estate 1 to 4 family		4,810		—		—		400		5,210
Commercial & industrial		9,111		—		—		—		9,111
Total	$	52,319	$	—	$	5,843	$	400	$	58,562

Purchased
*Credit impaired*
Commercial real estate									$	1,323
Total									$	1,323

NOTE F - BORROWINGS

Federal Home Loan Bank advances

There were no overnight advances at September 30, 2015.

Corporate loan

On March 27, 2014, FNB Bancorp received funding under a $6,000,000 term loan credit facility. This loan carries a variable rate of interest that fluctuates on a monthly basis. The interest rate is based on the 3 month LIBOR rate plus 4%. Payments of $50,000 in principal plus accrued interest are payable monthly. The first loan payment was due May 1, 2014. The maturity date on this credit facility is March 26, 2019. On the maturity date, all outstanding principal plus accrued interest shall become due and payable. FNB Bancorp has pledged its stock ownership in First National Bank of Northern California as collateral subject to the terms and conditions contained in the Loan Agreement and the Pledge and Security Agreement. FNB Bancorp retains the right to prepay this debt at any time upon not less than 7 days’ prior written notice to Lender. The proceeds from this loan were contributed to the Bank as an additional capital contribution. This capital contribution qualified as Tier 1 capital for the Bank under regulatory capital guidelines.

NOTE G – FAIR VALUE MEASUREMENT

The following tables present information about the Company’s assets and liabilities measured at fair value as of September 30, 2015 and December 31, 2014, 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. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. During the first nine months of 2015 and 2014, there were no transfers between levels of fair value hierarchy.

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

			Fair Value Measurements
(Dollar amounts in thousands)			at September 30, 2015, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	9/30/2015		(Level 1)		(Level 2)		(Level 3)
U. S. Treasury securities	$	6,079	$	6,079	$		$	—
Obligations of U.S. Government agencies		80,153		—		80,153		—
Mortgage-backed securities		63,496		—		63,496		—
Obligations of states and political subdivisions		125,028		—		125,028		—
Corporate debt		40,804		—		40,804		—
Total assets measured at fair value	$	315,560	$	6,079	$	309,481	$	—

			Fair Value Measurements
(Dollar amounts in thousands)			at December 31, 2014, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	12/31/2014		(Level 1)		(Level 2)		(Level 3)
U. S. Treasury securities	$	3,958	$	3,958	$	—	$	—
Obligations of U.S. Government agencies		63,062		—		63,062		—
Mortgage-backed securities		78,417		—		78,417		—
Obligations of states and political subdivisions		84,542		—		84,542		—
Corporate debt		34,902		—		34,902		—
Total assets measured at fair value	$	264,881	$	3,958	$	260,923	$	—

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


			Fair Value Measurements
(Dollar amounts in thousands)			at September 30, 2015, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	9/30/2015		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate	$	123	$	—	$	—	$	123
Residential-1 to 4 family		238		—		—		238
Commercial and industrial		1,016		—		—		1,016
Other real estate owned		838		—		—		838
Total impaired assets measured at fair value	$	2,215	$	—	$	—	$	2,215

			Fair Value Measurements
(Dollar amounts in thousands)			at December 31, 2014, Using
			Quoted Prices in
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	12/31/2014		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate	$	381	$	—	$	—	$	381
Residential-1 to 4 family		323		—		—		323
Commercial and industrial		1,472		—		—		1,472
Consumer		56		—		—		56
Other real estate owned		763		—		—		763
Total impaired assets measured at fair value	$	2,995	$	—	$	—	$	2,995

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 less costs to sell. An appraisal is obtained at the time the Bank 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 is recorded along with a corresponding reduction in the book carrying value of the property.

The Company obtains third party appraisals on its impaired loans held-for-investment and foreclosed assets to determine fair value. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for selling costs which is applied to all properties, regardless of size. Generally, the third party appraisals apply the “market approach,” which is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. Adjustments are then made based on the type of property, age of appraisal, current status of property and other related factors to estimate the current value of collateral. The value of OREO is determined based on independent appraisals, similar to the process used for impaired loans, discussed above, and is generally classified as Level 3.

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 including Interest Bearing Time Deposits with Financial Institutions.

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.

Other Equity Securities.

These are mostly Federal Reserve Bank stock and Federal Home Loan Bank stock, carried in Other Assets. They are not traded, and not available for sale, and have no fair market value.

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 on similar products.

Note payable.

The fair value of the note payable is based on the current balance outstanding. The fair value is calculated on discounted cash flows. The discount rate is equal to the market rate offered on similar products.

Accrued 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 defined by the Codification (ASC 820-10-15-A), such as Bank premises and equipment, deferred taxes and other liabilities. In addition, the Bank has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of the Financial Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.

The following table provides summary information on the estimated fair value of financial instruments at September 30, 2015:

September 30, 2015	Carrying		Fair		Fair value measurements
(Dollar amounts in thousands)	amount		value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	40,282	$	40,282	$	40,282
Interest-bearing time deposits with financial institutions		1,246		1,250	$	1,250
Securities available for sale		315,560		315,560		6,079		309,481
Loans		707,506		709,391					$	709,391
Other equity securities		6,748		6,748						6,748
Accrued interest receivable		4,326		4,326				4,326

Financial liabilities:

Deposits		989,365		989,845				989,845
Note payable		5,100		5,100				5,100
Accrued interest payable		237		237				237

Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit		—		1,707						1,707

The carrying amount of loans includes $5,192,000 of nonaccrual loans (loans that are not accruing interest) as of September 30, 2015. 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, 2014:

December 31, 2014	Carrying		Fair		Fair value measurements
(Dollar amounts in thousands)	amount		value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	14,978	$	14,978	$	14,978
Interest-bearing time deposits with financial institutions		2,784		2,813	$	2,813
Securities available for sale		264,881		264,881		3,958		260,923
Loans		593,864		594,524					$	594,524
Other equity securities		5,769		5,769						5,769
Accrued interest receivable		3,725		3,725				3,725

Financial liabilities:
Deposits		792,194		792,472				792,472
Federal Home Loan Bank advances		9,000		9,000				9,000
Note payable		5,550		5,550				5,550
Accrued interest payable		182		182				182

Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit		—		1,449						1,449

The carrying amount of loans includes $5,648,000 of nonaccrual loans (loans that are not accruing interest) as of December 31, 2014. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

NOTE H – ACQUISITION OF AMERICA CALIFORNIA BANK

On May 14, 2015, the Company entered into an Agreement and Plan of Reorganization and Merger dated May 14,2015 (the “Agreement”) to acquire all of the outstanding common stock and preferred stock of America California Bank, a San Francisco, California banking corporation. The all-cash agreed upon purchase price for the outstanding shares of America California Bank was $10.60 per share, or approximately $21,500,000. The purpose of the acquisition was to increase the size of our earning asset and interest bearing liability portfolios with customers located in and around San Francisco.

On September 4, 2015, the company completed the merger of America California Bank. The only branch location of America California Bank was closed on September 4, 2015 and all loan and deposit accounts were transferred to our Battery Street office in San Francisco. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at fair values as of the acquisition date in accordance with ASC 805, Business Combinations. These fair value estimates are subject to change for up to one year after the acquisition as additional information relative to acquisition date fair values becomes available.

The following table reflects the estimated fair values of the assets acquired and liabilities assumed related to the America California Bank acquisition:

	America California
	Bank
	September 4, 2015
	(In thousands)
Assets
Cash and due from banks	$	3,019
Interest-bearing time deposits with financial institutions		7,836
Other equity securities		679
Loans		92,969
Premises and equipment, net		62
Bank owned life insurance		2,971
Accrued interest receivable		313
Prepaid expense		1,808
Goodwill		2,739
Other assets		2,731
Total Assets	$	115,127

Liabilities
Deposits:
Demand deposits		14,500
NOW accounts		6,122
Savings and money market deposits		42,680
Time deposits		26,824
Total deposits		90,126

Accrued expenses and other liabilities		3,501
Total Liabilities		93,627
Merger consideration (cash)	$	21,500

America California Bank tangible Stockholders’ Equity	$	18,440
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Loans		2,178
Core deposit intangible		727
Certificates of deposit		(243	)
Accrued expenses		(1,832	)
Other borrowings		(86	)
Subtotal net fair value adjustments		744
Deferred tax liability related to purchase		(423	)
Total fair value adjustments	$	321
Fair value of Net Assets Acquired		18,761

Merger Consideration		21,500
Less: Fair Value of Net Assets Acquired		(18,761	)
Goodwill		2,739

Goodwill represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair value of liabilities assumed. It arises mainly from expected synergies related to the combined operating activities of First National Bank of Northern California and America California Bank. It is evaluated for impairment annually. The following is a description of the methods used to determine the fair values of significant assets and liabilities at the date of acquisition:

Loans

The fair values for acquired loans were developed based upon the present values of the expected cash flows utilizing market-derived discount rates. Expected cash flows for each acquired loan were projected based on contractual cash flows adjusted for expected prepayment, expected default (the probability of default and the magnitude of the expected loss given a default), and principal recovery.

Prepayment rates were applied to the principal outstanding based on the type of loan, where appropriate. Prepayments were based on a constant prepayment rate (“CPR”) applied over the life of each loan. The Company used CPRs ranging from 0% to 24%, depending on the characteristics of the loan being evaluated.

All loans purchased were non-credit impaired loans that were evaluated using evaluation metrics that were applied uniformly to loans that were similar in type, collateral, risk classification, fixed or variable in interest rate, term of the loan, and whether the loan was amortizing or interest only. The discount rates used were applied uniformly for similar loans based on current market rates for new originations of comparable loans, where available, and include adjustments for credit and liquidity factors. To the extent comparable market rates are not readily available, a discount rate was derived based on the assumptions of a market participant’s cost of funds, servicing costs, and rate of return requirements for comparable risk assets. The gross contractual amounts receivable totaled $93.4 million as of the acquisition date.

Core Deposit Intangible

The recorded core deposit intangible represents estimated future benefits of acquired deposits that have no stated maturity and is recorded separately from the liability in other assets. The value of the core deposit intangible asset was determined using a discounted cash flow approach to arrive at the cost differential between the core deposits (checking, savings and money market accounts) and alternative funding sources. The core deposit intangible is computed as the present value of the difference in cash flows between maintaining the existing deposits (interest and net maintenance costs) and the cost of an equal amount of funds from an alternative source having similar attributes as the core deposit base. The core deposit intangible is amortized over an estimated 15 year life. The core deposit intangible asset is evaluated periodically for impairment.

Time Deposits

The fair values for the time deposits were estimated using a discounted cash flow calculation that applied interest rates offered by market participants as of the acquisition date on time deposits with similar maturity terms as the discount rates.

Acquisition Costs

Costs that were incurred by the Company related to contractual commitments made by America California Bank prior to the completion of the merger were capitalized by the Company and are recorded in goodwill. Capitalized costs were composed primarily of severance payments and retention bonuses paid to qualifying officers, employees and directors of America California Bank. Total America California Bank acquisition costs were $1,832,000.

Acquisition Related Expense

Costs incurred by the Company related to gaining operational efficiencies in the America California Bank acquisition were charged to operational expense during the third quarter of 2015. The following table summarized the estimated operational expenses recorded during the third quarter of 2015:

Acquisition Related Expense
(Amounts in thousands)

Occupancy	$	345
Data processing		515
Legal and accounting		150
D & O insurance -tail end coverage		35

Total	$	1,045

Fair Market Valuation Adjustment Amortization and Accretion

The amortization and accretion of the fair value adjustments that were recorded as part of the acquisition of America California Bank will be ratably charged to income and expense over the estimate lives of the interest earning assets and interest bearing liabilities acquired. The following table presents the pro-forma effect on earnings of the amortization and accretion of the fair value adjustments assuming that the acquisition had occurred at the beginning of each year presented. The pro forma consolidated condensed statements of earnings do not reflect any adjustment to America California’s historical provision for credit losses or the net interest income earned by America California Bank prior to the acquisition.

The pro forma consolidated condensed statement of earnings for FNB Bancorp and America California Bank for the nine months ended September 30, 2015 and 2014 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 2014, nor does it indicate the results of operations in future periods.

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

	Nine months ended
	9/30/2015				9/30/2014
	As Reported		As Adjusted		As Reported		As Adjusted
Net interest income after provision for loan losses	$	26,236	$	29,289	$	25,907	$	29,271
Noninterest income		3,367		3,518		3,067		3,263
Noninterest expense		21,211		23,952		21,107		23,878
Earnings before provision for income tax expense		8,392		8,855		7,867		8,656
Provision for income tax expense		2,283		2,467		2,581		2,895
Net earnings	$	6,109	$	6,388	$	5,286	$	5,761

Earnings per share data:
Basic	$	1.42	$	1.49	$	1.25	$	1.36
Diluted	$	1.38	$	1.45	$	1.21	$	1.32

Weighted average shares outstanding:
Basic		4,293		4,293		4,222		4,222
Diluted		4,414		4,414		4,364		4,364

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 over an extended period of time could (i) reduce loan demand which could, in turn, reduce interest income and net interest margins; (ii) adversely affect the financial capability of borrowers to meet their loan obligations, which, in turn, could result in increases in loan losses and require increases in provisions for possible loan losses, thereby adversely affecting operating results; and (iii) lead to reductions in real property values that, due to the Company’s reliance on real property to secure many of its loans, could make it more difficult to prevent losses from being incurred on non-performing loans through the sale of such real properties.

Possible Adverse Changes in National Economic Conditions and Federal Reserve Board Monetary Policies. Changes in national economic policies and conditions, 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 that 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 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 from the information currently available. Adverse changes in information could result in higher than expected charge-offs and loan loss provisions.

Goodwill

Goodwill arises when the Company’s purchase price exceeds 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 earnings. 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 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 tax authorities.

Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-01 Accounting for Investments in Qualified Affordable Housing Projects. This ASU provides “guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.” It allows the proportional amortization method to be used by a reporting entity if certain conditions are met. The ASU also defines when a qualified affordable housing project through a limited liability entity should be tested for impairment. If a qualified affordable housing project does not meet the conditions for using the proportional amortization method, the investment should be accounted for using an equity method investment or a cost method investment. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods therein. The Company continues to account for our low-income housing tax credit investments using the equity method subsequent to the adoption of ASU 2014-01.

In January 2014, FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted.

The adoption of this update did not have a significant impact on the Company’s consolidated financial statements.

In September 2015, FASB issued ASU 2015-16, Business Combinations (Topic 805) –Simplifying the Accounting for Measurement-Period Adjustments. GAAP requires that during the amendment period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this Update eliminate the requirement to retrospectively account for those adjustments. These amendments in this Update are effective for fiscal years beginning after December 15, 2015.

Earnings Analysis

Net earnings for the quarter ended September 30, 2015 were $2,239,000, compared to net earnings of $1,823,000 for the quarter ended September 30, 2014. Net earnings for the nine months ended September 30, 2015 were $6,109,000 compared to net earnings of $5,286,000 for the nine months ended September 30, 2014. Earnings during the third quarter of 2015 benefited from a tax settlement with the Franchise Tax board that resulted in a tax benefit of $535,000. This benefit was offset by acquisition related expenses of $1,045,000, pertaining to the acquisition of America California Bank.

Net interest income for the quarter ended September 30, 2015 was $9,202,000, compared to $8,762,000 for the quarter ended September 30, 2014. Net interest income for the nine months ended September 30, 2015 was $26,461,000 compared to $25,982,000 for the nine months ended September 30, 2014. The increase was a function of increased loan volume during the two periods.

The following tables present an analysis of net interest income and average earning assets and liabilities for the three-and nine-month periods ended September 30, 2015 compared to the three-and nine-month periods ended September 30, 2014.

TABLE 1	NET INTEREST INCOME AND AVERAGE BALANCES
	FNB BANCORP AND SUBSIDIARY
	Three months ended September 30,
	2015							2014
(Dollar amounts in thousands)					Annualized							Annualized
	Average				Average			Average				Average
	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	624,123	$	8,309		5.28	%	$	572,402	$	7,899		5.47	%
Taxable securities		195,513		924		1.88	%		192,595		883		1.82	%
Nontaxable securities (3)		111,790		868		3.08	%		75,192		665		3.51	%
Interest time deposits in other financial institutions		1,866		9		1.91	%		4,201		20		1.89	%
Total interest earning assets		933,292		10,110		4.30	%		844,390		9,467		4.45	%


Cash and due from banks		55,116							18,525
Premises		10,455							12,356
Other assets		41,186							27,951
Total noninterest earning assets		106,757							58,832
TOTAL ASSETS	$	1,040,049						$	903,222


Demand, int bearing	$	91,708		28		0.12	%	$	77,499		16		0.08	%
Money market		400,035		435		0.43	%		326,210		309		0.38	%
Savings		77,140		34		0.17	%		67,643		17		0.10	%
Time deposits		110,602		139		0.50	%		105,203		130		0.49	%
FHLB advances		—		—		n/a			6,022		3		0.20	%
Note payable		5,187		57		4.36	%		5,785		63		4.32	%
Total interest bearing liabilities		684,672		693		0.40	%		588,362		538		0.36	%

NONINTEREST BEARING LIABILITIES:
Demand deposits		242,130							212,282
Other liabilities		12,446							11,123
Total noninterest bearing liabilities		254,576							223,405

TOTAL LIABILITIES		939,248							811,767
Stockholders’ equity		100,801							91,455

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,040,049						$	903,222

NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	9,417		4.00	%			$	8,929		4.20	%

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

2) Amounts of interest earned include loan fees of $400,000 and $339,000 for the quarters ended September 30, 2015 and 2014, respectively.

3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $217,000 and $167,000 for the quarters ended September 30, 2015 and 2014, respectively, and 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,
	2015							2014
(Dollar amounts in thousands)					Annualized							Annualized
	Average				Average			Average				Average
	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	601,098	$	23,874		5.31	%	$	568,090	$	23,423		5.51	%
Taxable securities		184,492		2,597		1.88	%		189,915		2,577		1.81	%
Nontaxable securities (3)		97,019		2,339		3.22	%		73,674		1,973		3.58	%
Fed funds sold		—		—		—			11		—		—
Interest time deposits in other financial institutions		2,377		36		2.02	%		4,689		66		1.88	%
Tot interest earning assets		884,986		28,846		4.36	%		836,379		28,039		4.48	%

Cash and due from banks		36,536							18,998
Premises		10,646							12,473
Other assets		39,126							29,397
Tot noninterest earning assets		86,308							60,868
TOTAL ASSETS	$	971,294						$	897,247

Demand, int bearing	$	93,018		75		0.11	%	$	78,452		50		0.09	%
Money market		349,566		1,070		0.41	%		323,361		908		0.38	%
Savings		74,481		72		0.13	%		66,477		51		0.10	%
Time deposits		106,965		408		0.51	%		111,416		408		0.49	%
FHLB advances		330		2		0.81	%		11,996		14		0.16	%
Note payable		5,337		173		4.33	%		4,039		131		4.34	%
Tot interest bearing liabilities		629,697		1,800		0.38	%		595,741		1,562		0.35	%


Demand deposits		229,723							201,702
Other liabilities		12,318							10,066
Tot noninterest bearing liabilities		242,041							211,768

TOTAL LIABILITIES		871,738							807,509
Stockholders’ equity		99,556							89,738

TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY	$	971,294						$	897,247

NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	27,046		4.09	%			$	26,477		4.23	%

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

(2) Amounts of interest earned included loan fees of $1,081,000 and $996,000 for the nine months ended September 30, 2015 and 2014, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $585,000 and $495,000 for the nine months ended September 30, 2015 and 2014, 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.

The various components that contributed to changes in net interest income for the three and nine months ended September 30, 2015 and 2014 are shown in Tables 1 and 2, above. 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, 2015, average loans outstanding represented 66.8% of average earning assets. For the quarter ended September 30, 2014, they represented 67.8% of average earning assets. For the nine months ended September 30, 2015 and 2014, average loans outstanding represented 67.9% and 67.8%, respectively, of average earning assets.

The taxable equivalent yield on average interest earning assets for the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014 decreased from 4.45% to 4.30%. Average loans increased by $51,721,000, quarter over quarter, while their yield declined from 5.47% to 5.28%. Interest income on total interest earning assets for the quarter increased $643,000 on a fully-taxable equivalent basis.

For the three months ended September 30, 2015 compared to the three months ended September 30, 2014, the cost on total interest bearing liabilities increased to 0.40% from 0.36%. There was no interest on advances from the Federal Home Loan Bank for the quarter ended September 2015, compared to 0.20% for the quarter ended September 2014. Time deposit interest cost increased from 0.49% to 0.50%. The time deposit average balance outstanding increased by $5,399,000, while their expense increased from $130,000 to $139,000. Money market deposits average volume increased $74,000, or 22.6%, while their cost was increase from 0.49% to 0.50%%.

New customer deposits have been primarily in DDA, NOW and Money Market accounts during the first nine months of 2015. The low rates being offered on term deposits coupled with the possible increase in short term rates by the FOMC are, in part, the underlying reason for this migration.

For the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, interest income on interest earning assets increased $807,000 on a fully-taxable equivalent basis, while average earning assets increased $48,607,000. Average loans increased by $33,008,000. Interest on loans increased $451,000, while their yields decreased 20 basis points. The cost on total interest bearing liabilities increased from 0.35% to 0.38%. Time deposit averages decreased $4,451,000 and their yield increased 2 basis points. Money Market deposit average balances increased $26,205,000, and their cost increased $164,000. For the nine months ended September 30, 2015, Federal Home Loan Bank advances averaged $330,000 and their interest cost was $2,000. For the nine months ended September 30, 2014, Federal Home Loan Bank advances averaged $11,996,000, and their interest cost was $14,000.

For the three and nine month periods ended September 30, 2015 and September 30, 2014, 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)	2015 Compared to 2014
				Variance
	Interest			Attributable to
	Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	410		$	(279	)	$	689
Taxable securities		41			27			14
Nontaxable securities (1)		203			(81	)		284
Interest on time deposits with other financial institutions		(11	)		—			(11	)
Total	$	643		$	(333	)	$	976

INTEREST BEARING LIABILITIES
Demand deposits	$	(12	)	$	(9	)		(3	)
Money market		(126	)		(56	)		(70	)
Savings deposits		(17	)		(13	)		(4	)
Time deposits		(9	)		(2	)		(7	)
FHLB advances		3			—			3
Note payable		6			(1	)		7
Total	$	(155	)	$	(81	)	$	(74	)
NET INTEREST INCOME	$	488		$	(414	)	$	902

(1)

Includes tax equivalent adjustment of $217,000 and $167,000 in the three months ended September 30, 2015 and September 30, 2014, respectively.

TABLE 4	FNB BANCORP AND SUBSIDIARY
	RATE/VOLUME VARIANCE ANALYSIS
	Nine Months Ended September 30,
(Dollar amounts in thousands)	2015 Compared to 2014
				Variance
	Interest			Attributable to
	Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	451		$	(910	)	$	1,361
Taxable securities		20			94			(74	)
Nontaxable securities (1)		366			(197	)		563
Interest on time deposits with other financial institutions		(30	)		3			(33	)
Total	$	807		$	(1,010	)	$	1,817

INTEREST BEARING LIABILITIES
Demand deposits	$	(25	)	$	(16	)	$	(9	)
Money market		(164	)		(90	)		(74	)
Savings deposits		(21	)		(13	)		(8	)
Time deposits		—			(16	)		16
FHLB advances		12			(2	)		14
Note payable		(40	)		2			(42	)
Total	$	(238	)	$	(135	)	$	(103	)
NET INTEREST INCOME	$	569		$	(1,145	)	$	1,714

(1)

Includes tax equivalent adjustment of $585,000 and $495,000 in the nine months ended September 30, 2015 and September 30, 2014, 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)	2015		2014		Amount			Percent
Service charges	$	618	$	644	$	(26	)		-4.0	%
Net gain on sale of available-for-sale securities		29		100		(71	)		-71.0	%
Bank-owned life insurance policy earnings		90		86		4			4.7	%
Other income		287		211		76			36.0	%
Total noninterest income	$	1,024	$	1,041	$	(17	)		-1.6	%

	Nine months
	ended September 30,				Variance
(Dollars in thousands)	2015		2014		Amount			Percent
Service charges	$	1,854	$	1,928	$	(74	)		-3.8	%
Net gain on sale of available-for-sale securities		250		139		111			79.9	%
Bank-owned life insurance policy earnings		261		273		(12	)		-4.4	%
Other income		1002		727		275			37.8	%
Total noninterest income	$	3,367	$	3,067	$	300			9.8	%

Noninterest income consists mainly of service charges on deposits, and earnings on bank owned life insurance policy earnings. Service charges were down during the third quarter and year to date of September 30, 2015 when compared to the same period during 2014 due primarily to a decrease in our overdraft fees. During the third quarter of 2015, the Bank sold or had called $3,187,000 for a pre-tax gain of $29,000. During the same period in 2014, the Bank sold or had called $32,196,000 for a pre-tax gain of $100,000. During the nine months of 2015, the Bank sold $11,463,000 in investment securities for a pre-tax gain of $250,000. During the nine months of 2014, the Bank sold $10,505,000 in investment securities for a pre-tax gain of $139,000.

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)	2015		2014		Amount			Percent
Salaries and employee benefits	$	4,100	$	4,241	$	(141	)		-3.3	%
Occupancy expense		592		704		(112	)		-15.9	%
Equipment expense		718		405		313			77.3	%
Professional fees		334		395		(61	)		-15.4	%
FDIC assessment		150		165		(15	)		-9.1	%
Telephone, postage & supplies		237		284		(47	)		-16.5	%
Advertising expense		112		118		(6	)		-5.1	%
Data processing expense		659		151		508			336.4	%
Low income housing expenses		70		109		(39	)		-35.8	%
Surety insurance		122		68		54			79.4	%
Directors expense		72		63		9			14.3	%
Other real estate owned expense, net		—		—		—			—
Other expense		313		352		(39	)		-11.1	%
Total noninterest expense	$	7,479	$	7,055	$	424			6.0	%

	NONINTEREST EXPENSE
	Nine months
	ended September 30,						Variance
(Dollars in thousands)	2015			2014			Amount			Percent
Salaries and employee benefits	$	12,513		$	12,636		$	(123	)		-1.0	%
Occupancy expense		1,906			2,078			(172	)		-8.3	%
Equipment expense		1,533			1,202			331			27.5	%
Professional fees		1,075			1,427			(352	)		-24.7	%
FDIC assessment		450			525			(75	)		-14.3	%
Telephone, postage & supplies		782			883			(101	)		-11.4	%
Advertising		381			339			42			12.4	%
Data processing expense		940			430			510			118.6	%
Low income housing expenses		212			329			(117	)		-35.6	%
Surety insurance		298			202			96			47.5	%
Directors expense		216			189			27			14.3	%
Other real estate owned expense, net		(6	)		87			(93	)		-106.9	%
Gain on sale of other real estate owned, net		—			(220	)		220			-100.0	%
Other expense		911			1,000			(89	)		-8.9	%
Total noninterest expense	$	21,211		$	21,107		$	104			-102.1	%

Noninterest expense consists mainly of salaries and employee benefits. For the three months ended September 30, 2015 compared to three months ended September 30, 2014, it represented 54.8% and 60.1% of total noninterest expenses. For the nine months ended September 30, 2015 and 2014, it was 59.0% and 59.9%, respectively, of total noninterest expenses. During the first nine months of 2015, reductions in professional fees and other real estate owned expenses are attributable primarily to improving credit quality within the loan portfolio which has resulted in less costs related to credit collection and loan workout expenses. The third quarter of 2015 included acquisition expenses of $1,045,000 related to the acquisition of America California Bank in September 2015. Acquisition costs include system and estimated system costs, lease termination costs, and other post acquisition related expenses.

Provision for Loan Losses

There was a provision for loan losses of $75,000 and $225,000 for the three and nine months ended September 30, 2015, respectively, but no provision for the three months ended September 30, 2014. Year to date for the nine months ended September 30, 2014, the provision was $75,000. The growth in the loan portfolio has been in line with management expectations, and the overall allowance for loan losses is considered adequate as of September 30, 2015.

The allowance for loan losses was $9,940,000 or 1.41% of total gross loans at September 30, 2015, compared to $10,774,000 or 1.87% of total gross loans at September 30, 2014. The allowance for loan losses is maintained at a level that management considered adequate to provide for probable loan losses inherent in the loan portfolio as of September 30, 2015.

Income Taxes

The effective tax rate for the quarter ended September 30, 2015 was 16.1% which compares to a 33.7% effective tax rate benefit for the quarter ended September 30, 2014. The effective tax rate for the nine months ended September 30, 2015 and September 30, 2014, was an effective tax rate of 27.2% and 32.8%, respectively. Tax preference items which affect our effective tax rate include changing amounts invested in tax-advantaged securities, and available Low Income Housing Credits. During the third quarter of 2015, the Company recorded a tax benefit of $535,000 related to the settlement with the Franchise Tax Board regarding outstanding Enterprise zone net Interest Deductions claimed between 2005 and 2013.

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 interest 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 the Company’s customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. Management believes the Company’s liquidity sources at September 30, 2015, are adequate to meet its operating needs in 2015 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

Financial Condition

Assets. Total assets increased to $1,111,458,000 at September 30, 2015 from $917,164,000 at December 31, 2014. The increases were primarily $50,679,000 in securities-available-for-sale and $113,173,000 in net loans.

Loans. Gross loans (before net loan fees) at September 30, 2015 were $707,506,000, an increase of $113,642,000 over December 31, 2014. During the first nine months of 2015, gross commercial real estate loans increased $75,663,000, real estate construction loans decreased $3,903,000, real estate multi-family loans increased $10,104,000, real estate loans secured by 1 to 4 family residences increased $43,548,000, commercial and industrial loans increased $11,819,000, and consumer loans increased by $49,000. The portfolio breakdown was as follows:

TABLE 7	LOAN PORTFOLIO

	September 30			Percent			December 31			Percent
(Dollar amounts in thousands)	2015						2014
Commercial real estate	$	394,090			56	%	$	318,427			54	%
Real estate construction		35,868			5	%		39,771			7	%
Real estate multi family		63,928			9	%		53,824			9	%
Real estate-1 to 4 family		172,280			24	%		128,732			22	%
Commercial & industrial		39,843			6	%		51,662			9	%
Consumer loans		1,497			—			1,448			—
Gross loans		707,506			100	%		593,864			100	%
Net deferred loan fees		(678	)		—			(449	)		—
Total	$	706,828			100	%	$	593,415			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 deter-mined by internally generating credit quality ratings, reviewing economic conditions in the Company’s market area, and considering the Company’s historical loan loss experience. The Company’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 transactions in the allowance for loan losses for the nine months ended September 30, 2015 and September 30, 2014, respectively, is as follows:

TABLE 8	ALLOWANCE FOR LOAN LOSSES
	Nine months ended September 30,
(Dollar amounts in thousands)	2015			2014
Balance, beginning of period	$	9,700		$	9,879
Provision for loan losses		225			75
Recoveries		94			1,202
Amounts charged off		(79	)		(382	)
Balance, end of period	$	9,940		$	10,774

During the nine months ended September 30, 2015, there was a provision for loan losses of $225,000, compared to $75,000 for the same period in 2014. Loan charge-off levels have declined year over year, and remain close to historic norms.

In management’s judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at September 30, 2015. 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.

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, 2015, there was $6,030,000 in nonperforming assets, compared to $6,411,000 at December 31, 2014. Nonaccrual loans were $5,192,000 at September 30, 2015, compared to $5,648,000 at December 31, 2014. There were no loans past due 90 days and still accruing at either date.

There was one property valued at $838,000 in Other Real Estate Owned at September 30, 2015, and the same property valued at $763,000 in Other Real Estate Owned at December 31, 2014. Management intends to aggressively market our Other Real Estate Owned. While management believes the property will sell, there can be no assurance that the property 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, San Mateo and Santa Clara counties.

In September 30, 2015 compared to December 31, 2014, noninterest bearing demand deposits increased by $59,395,000, savings and money market increased by $117,858,000, interest bearing demand decreased $4,866,000 and time deposits increased $24,784,000.

The following table sets forth the maturity schedule of the time certificates of deposit on September 30, 2015:

TABLE 9

(Dollar amounts in thousands)	Under		$250,000
Maturities	$250,000		or more		Total
Three months or less	$	17,610	$	23,718	$	41,328
Over three through six months		14,093		8,665		22,758
Over six through twelve months		21,513		7,667		29,180
Over twelve months		23,769		12,908		36,677
Total	$	76,985	$	52,958	$	129,943

Regulatory Capital. The following table shows the risk-based capital ratios and leverage ratios at September 30, 2015 and December 31, 2014 for the Bank:

								Minimum
								“Well fully
TABLE 10								phased-in
	September 30,			December 31,				Capitalized”
Regulatory Capital Ratios	2015			2014				Requirements
Total Regulatory Capital Ratio		11.75	%		15.13	%	≥		10.50	%
Tier 1 Capital Ratio		10.67	%		13.88	%	≥		8.50	%
Leverage Ratios		9.68	%		10.79	%	≥		8.50	%
Common Equity Tier 1 Capital Ratio		10.67	%		N/A		≥		7.00	%

Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of September 30, 2015, liquid assets were $357,088,000, or 32.8% of total assets. As of December 31, 2014, liquid assets were $282,643,000, or 30.8% 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 $30,000,000, a Federal Home Loan Bank line up to 30% of total eligible 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, 2015, net loans were at 70.4% of deposits. On December 31, 2014, net loans were at 74% of deposits. See the consolidated statements of Cash Flows under Item I for further information on the Company’s cash flows.

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, 2015 and December 31, 2014, 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 $170,673,000 and $142,221,000 at September 30, 2015 and December 31, 2014, respectively. As a percentage of net loans, these off-balance sheet items represent 24.5% and 24.4% respectively. The Company does not expect all commitments to be funded.

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 4. Controls and Procedures.

(a)

Disclosure Controls and Procedures. The Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act of 1934 (the “Act”) as of the end of the Company’s fiscal quarter ended September 30, 2015. This evaluation was carried out under the supervision and with the participation of the Company’s Chief Executive Officer (principal executive officer) Chief Financial Officer (principal financial and accounting officer) and other members of the Company’s senior management. The Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer) concluded that the Company’s disclosure controls and procedures are effective in ensuring that material information required to be disclosed by the Company in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow timely decisions required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management of FNB Bancorp (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for reporting an assessment of the effectiveness of the internal control over financial reporting as of September 30, 2015. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparations of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transaction and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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% stockholder of the Company, or any associate of any such director, officer, affiliate or 5% stockholder 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, 2014 Form 10-K.

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 were 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

None.

Item 3.

Default upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

None.

Item 6.

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 5, 2015.	By:	/s/ Thomas C. McGraw
		Thomas C. McGraw
		Chief Executive Officer
		(Authorized Officer)
		(Principal Executive Officer)

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

FNB BANCORP/CA/ - FORM 10-Q - November 5, 2015

Attached files

FNB BANCORP/CA/ Reports