SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2007
---------------------------------------------
FNB BANCORP
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
000-49693 92-2115369
(Commission File Number) (IRS Employer Identification No.)
975 El Camino Real, South San Francisco, California 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 588-6800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock as of April 30,
2007: 2,861,455 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
March 31, December 31,
2007 2006
------------ ------------
Cash and due from banks $ 16,731 $ 18,297
Federal funds sold 23,420 8,725
------------ ------------
Cash and cash equivalents 40,151 27,022
Securities available-for-sale at fair value 90,679 94,945
Loans, net 440,487 419,437
Bank premises, equipment, and leasehold improvements 13,723 13,476
Goodwill 1,841 1,841
Accrued interest receivable and other assets 28,106 24,549
------------ ------------
Total assets $ 614,987 $ 581,270
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 120,720 $ 123,884
Demand, interest bearing 62,728 60,378
Savings and money market 187,284 162,915
Time 143,805 134,390
------------ ------------
Total deposits 514,537 481,567
Federal Home Loan Bank advances 30,000 30,000
Accrued expenses and other liabilities 7,744 7,640
------------ ------------
Total liabilities 552,281 519,207
------------ ------------
Stockholders' equity:
Common stock, no par value, authorized 10,000,000 shares;
Issued and outstanding 2,853,000 shares at March 31, 2007
and 2,853,000 shares at December 31, 2006 39,824 39,824
Additional paid-in capital 149 141
Retained earnings 22,706 22,102
Accumulated other comprehensive income (loss) 27 (4)
------------ ------------
Total stockholders' equity 62,706 62,063
------------ ------------
Total liabilities and stockholders' equity $ 614,987 $ 581,270
============ ============
See accompanying notes to consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands, except share and per share amounts)
Three months ended
March 31,
-----------------------
2007 2006
---------- ----------
Interest income:
Interest and fees on loans $ 8,741 $ 7,660
Interest on taxable securities 368 560
Interest on tax-exempt securities 525 445
Federal funds sold 270 172
---------- ----------
Total interest income 9,904 8,837
---------- ----------
Interest expense:
Deposits 2,672 1,951
Federal Home Loan Bank advances 413 --
Federal funds purchased 1 --
---------- ----------
Total interest expense 3,086 1,951
---------- ----------
Net interest income 6,818 6,886
Provision for loan losses 150 193
---------- ----------
Net interest income after provision for loan losses 6,668 6,693
---------- ----------
Noninterest income:
Gain on sale of other equity securities -- 1,348
Service charges 612 603
Credit card fees 199 193
Other income 193 172
---------- ----------
Total noninterest income 1,004 2,316
---------- ----------
Noninterest expense:
Salaries and employee benefits 3,225 3,179
Occupancy expense 449 416
Equipment expense 381 433
Professional fees 386 273
Telephone, postage and supplies 291 249
Bankcard expenses 179 184
Other expense 847 752
---------- ----------
Total noninterest expense 5,758 5,486
---------- ----------
Earnings before income tax expense 1,914 3,523
Income tax expense 455 1,075
---------- ----------
NET EARNINGS $ 1,459 $ 2,448
========== ==========
Earnings per share data:
Basic $ 0.51 $ 0.86
Diluted $ 0.50 $ 0.84
Weighted average shares outstanding:
Basic 2,853,000 2,837,000
Diluted 2,893,000 2,908,000
See accompanying notes to consolidated financial statements.
3
--------------------------------------------------------------------------------
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Three months ended
March 31,
-----------------------
2007 2006
---------- ----------
Net earnings
$ 1,459 $ 2,448
Unrealized gain/(loss) on AFS securities 31 (25)
---------- ----------
Total comprehensive income $ 1,490 $ 2,423
========== ==========
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three months ended
March 31,
------------------------
2007 2006
---------- ----------
Cash flow from operating activities:
Net earnings $ 1,459 $ 2,448
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 273 373
Stock-based compensation expense 8 3
Provision for loan losses 150 193
Gain on sale of other equity securities -- (1,348)
Changes in assets and liabilities:
Accrued interest receivable and other assets (1,480) 1,302
Accrued expenses and other liabilities (344) 1,242
---------- ----------
Net cash provided by operating activities 66 4,213
---------- ----------
Cash flows from investing activities:
Purchase of securities available-for-sale (10,964) (14,183)
Proceeds from matured and called securities available-for-sale 13,220 6,251
Net (increase)/decrease in loans (21,200) 22,691
Purchase of bank premises, equipment and leasehold improvements (535) (650)
---------- ----------
Net cash (used) provided by investing activities (19,479) 14,109
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits 23,555 (8,114)
Net increase (decrease) in time deposits 9,415 (1,346)
Dividends paid (428) (405)
Issuance of common stock -- 78
---------- ----------
Net cash provided by financing activities 32,542 (9,787)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,129 8,535
Cash and cash equivalents at beginning of period 27,022 35,298
---------- ----------
Cash and cash equivalents at end of period $ 40,151 $ 43,833
========== ==========
Additional cash flow information:
Interest paid $ 2,964 $ 1,799
Income taxes paid $ -- $ 410
Non-cash investing and financing activity:
Accrued dividends 427 405
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
FNB Bancorp (the "Company") is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. The Company was incorporated
under the laws of the State of California on February 28, 2001. The consolidated
financial statements include the accounts of FNB Bancorp and its wholly owned
subsidiary, First National Bank of Northern California (the "Bank"). The Bank
provides traditional banking services in San Mateo and San Francisco counties.
All intercompany transactions and balances have been eliminated in
consolidation. The financial statements include all adjustments of a normal and
recurring nature, which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2006.
Results of operations for interim periods are not necessarily
indicative of results for the full year.
NOTE B - STOCK OPTION PLANS
There were no options granted during the first quarter of 2007. The
amount of compensation expense for options recorded in the quarters ended March
31, 2007 and March 31, 2006 was $8,000 and $5,000, respectively. The income tax
benefit recognized in the income statements for these amounts was under $1,000
for the same two periods.
There were no options exercised during the first quarter of 2007. The
total intrinsic value of options exercised during the quarter ended March 31,
2006 was $19,000 under the 2002 Plan and $26,000 under the 1997 Plan.
The amount of total unrecognized compensation expense related to
non-vested options at March 31, 2007 was $84,000, and the weighted average
period it will be amortized over is 2.6 years. The amount of total unrecognized
compensation expense related to non-vested options at March 31, 2006 was
$56,000, and the weighted average period it will be amortized over is 3.1 years.
5
NOTE C - EARNINGS PER SHARE CALCULATION
Earnings per common share (EPS) are computed based on the weighted
average number of common shares outstanding during the period. Basic EPS
excludes dilution and is computed by dividing net earnings by the weighted
average of common shares outstanding. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Earnings per share have been computed based on the following (dollars
in thousands):
Three months ended
March 31,
2007 2006
---------- ----------
Net earnings $ 1,459 $ 2,448
Average number of shares outstanding 2,853,000 2,837,000
Effect of dilutive options 40,000 71,000
Average number of shares outstanding used
to calculate diluted earnings per share 2,893,000 2,908,000
All outstanding options were included in the 2007 and 2006
computations.
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income consists of net unrealized gains
and losses on investment securities available-for-sale. Comprehensive income for
the three months ended March 31, 2007 was $1,490,000 compared to $2,423,000 for
the three months ended March 31, 2006.
NOTE E - SALE OF SHARES OF PACIFIC COAST BANKERS' BANCSHARES.
During the first quarter of 2006, a sale of 3,950 shares of Pacific
Coast Bankers' Bancshares was arranged by Pacific Coast Bankers' Bancshares
(PCBB) as part of its desire to expand the number of PCBB shareholders. The Bank
continues to hold a remaining 1,450 shares. The sale resulted in a pre-tax gain
on sale of equity securities of $1,348,000 during the first quarter of 2006.
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
6
results in the future to differ significantly from those expected at the current
time. Those risks and uncertainties include, although they are not limited to,
the following:
Increased Competition. Increased competition from other banks and
financial service businesses, mutual funds and securities brokerage and
investment banking firms that offer competitive loan and investment products
could require us to reduce interest rates and loan fees to attract new loans or
to increase interest rates that we offer on time deposits, either or both of
which could, in turn, reduce interest income and net interest margins.
Possible Adverse Changes in Economic Conditions. Adverse changes in
national or local economic conditions could (i) reduce loan demand which could,
in turn, reduce interest income and net interest margins; (ii) adversely affect
the financial capability of borrowers to meet their loan obligations, which, in
turn, could result in increases in loan losses and require increases in
provisions for possible loan losses, thereby adversely affecting operating
results; and (iii) lead to reductions in real property values that, due to the
Company's reliance on real property to secure many of its loans, could make it
more difficult to prevent losses from being incurred on non-performing loans
through the sale of such real properties.
Possible Adverse Changes in National Economic Conditions and Federal
Reserve Board Monetary Policies. Changes in national economic policies, such as
increases in inflation or declines in economic output often prompt changes in
Federal Reserve Board monetary policies that could reduce interest income or
increase the cost of funds to the Company, either of which could result in
reduced earnings.
Changes in Regulatory Policies. Changes in federal and national bank
regulatory policies, such as increases in capital requirements or in loan loss
reserve or asset/liability ratio requirements, could adversely affect earnings
by reducing yields on earning assets or increasing operating costs.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this report, which speak only as of the date of this report, or to
make predictions based solely on historical financial performance. The Company
also disclaims any obligation to update forward-looking statements contained in
this report.
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
7
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 borrowers' ability to repay
loans. Determination of the allowance is in part objective and in part a
subjective judgment by management based on the information it currently has in
its possession. Adverse changes in any of these factors or the discovery of new
adverse information could result in higher than expected charge-offs and loan
loss provisions.
Goodwill
--------
Goodwill arises from the Company's purchase price exceeding the fair
value of the net assets of an acquired business. Goodwill represents the value
attributable to intangible elements acquired. The value of this goodwill is
supported ultimately by profit from the acquired business. A decline in earnings
could lead to impairment, which would be recorded as a write-down in the
Company's consolidated statements of income. Events that may indicate goodwill
impairment include significant or adverse changes in results of operations of
the acquired business or asset, economic or political climate; an adverse action
or assessment by a regulator; unanticipated competition; and a
more-likely-than-not expectation that a reporting unit will be sold or disposed
of at a loss.
Provision for Income Taxes
--------------------------
The Company is subject to income tax laws of the United States, its
states, and 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 taxing
authorities.
Recent Accounting Changes
-------------------------
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48,
"Accounting for Uncertainty in Income Taxes." This interpretation guides the
accounting and reporting of income taxes where interpretation of the law is
uncertain. FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of income tax
uncertainties with respect to positions taken or expected to be taken in income
tax returns. FIN 48 is effective for fiscal years beginning after December 31,
2006. The Company adopted this Statement on January 1, 2007. As a result of the
8
implementation of FIN 48, it was not necessary for the Company to recognize any
increase in the liability for unrecognized tax benefits. The total amount of
unrecognized tax benefits as of the adoption of FIN 48, including estimated
penalties and interest, was $35,000 and relates to the level of Enterprise Zone
credits that have been claimed on filed California tax returns.
The Company and its subsidiary file income tax returns in the U. S.
federal jurisdiction and in California. The Company is no longer subject to U.
S. federal and California examinations by tax authorities for years before 2003
and 2001, respectively.
The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in income tax expense.
In February 2007, the Financial Accounting Standards Board ("FASB")
issued Statement No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities - Including an amendment of FASB Statement No. 115.
Statement No. 159 establishes a fair value option that allows an entity to
designate individual financial assets and liabilities as fair value option
instruments. Under the fair value option, the change in unrealized gains and
losses created by the change in fair value of financial instruments shall be
reported in an entity's earnings for each reporting period. Additional
disclosures regarding fair value for financial assets and liabilities accounting
for under the fair value option are also required. This statement is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of FASB Statement No, 157, Fair Value Measurements, makes the
choice within 120 days of the beginning of the fiscal year of adoption, and
provided the entity has not yet issued interim financial statements in the year
of adoption. If an entity elects early adoption, any unrealized gains and losses
related to assets and liabilities that are accounted for using the fair value
option that existed as of the beginning of the reporting period shall be charged
to the opening balance of retained earnings. The Company does not intend to
early adopt and does not expect this standard to have a material impact on the
Company's financial statements.
Earnings Analysis
-----------------
Net earnings for the quarter ended March 31, 2007 were $1,459,000,
compared to net earnings of $2,448,000 for the quarter ended March 31, 2006, a
decrease of $989,000, or 40.4%. Earnings before income tax expense for the
quarter ended March 31, 2007 were $1,914,000, compared to $3,523,000 for the
quarter ended March 31, 2006, a decrease of $1,609,000, or 45.7%. The principal
contributor to the decreased income was a non-recurring gain on sale of other
equity securities (common stock of Pacific Coast Bankers' Bancshares), which
resulted in a pre tax profit of $1,348,000 in the first quarter of 2006.
Net interest income for the quarter ended March 31, 2007 was
$6,818,000, compared to $6,886,000 for the quarter ended March 31, 2006, a
decrease of $68,000, or 0.99%. The prime lending rate was 8.25% for the entire
first quarter of 2007. The prime lending rate was 7.25% at the end of 2005,
increased to 7.5% on January 31, 2006 and 7.75% on March 28, 2006. The Federal
Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds Index for the
three months ended March 2007 (based on the three Index Months ended February
28), averaged 4.39%, compared to 3.42% for the three months ended March 2006
(based on the three Index Months ended February 28). The rate of increase in the
rates paid for interest bearing liabilities exceeded the rate of increase in
9
rates earned on interest earning assets during the first quarter of 2007,
effectively causing a rate related drop in net interest income compared to the
same period in 2006.
Basic earnings per share were $0.51 for the first quarter of 2007
compared to $0.86 for the first quarter of 2006. Diluted earnings per share were
$0.50 for the first quarter of 2007 compared to $0.84 for the first quarter of
2006.
The following table presents an analysis of net interest income and
average earning assets and liabilities for the three-month period ended March
31, 2007 compared to the three-month period ended March 31, 2006.
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
------- FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Three months ended March 31,
-------------------------------------------------------------------------------
2007 2006
------------------------------------- -------------------------------------
Annualized Annualized
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
---------- ---------- ---------- ---------- ---------- ----------
Loans, gross $ 429,405 $ 8,741 8.26% $ 378,617 $ 7,660 8.21%
Taxable securities 31,351 368 4.76 60,514 560 3.75
Nontaxable securities 59,041 525 3.61 51,892 445 3.48
Federal funds sold 20,683 270 5.29 15,583 172 4.48
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets $ 540,480 $ 9,904 7.43 $ 506,606 $ 8,837 7.07
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,043 $ 19,320
Premises and equipment 13,700 12,152
Other assets 23,803 23,477
---------- ----------
Total noninterest earning assets $ 55,546 $ 54,949
---------- ----------
TOTAL ASSETS $ 596,026 $ 561,555
========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 60,911 ($ 103) (0.69)% $ 60,535 ($ 60) (0.40)%
Money market 120,075 (965) (3.26) 122,284 (713) (2.36)
Savings 50,469 (65) (0.52) 57,162 (57) (0.40)
Time deposits 141,109 (1,539) (4.42) 140,094 (1,121) (3.25)
Federal Home Loan Bank advances 30,000 (413) (5.58) -- -- --
Federal funds purchased 100 (1) (4.06) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities $ 402,664 ($ 3,086) (3.11) $ 380,075 ($ 1,951) (2.08)
---------- ---------- ---------- ----------
NONINTEREST BEARING LIABILITIES
Demand deposits 122,530 117,480
Other liabilities 8,240 7,417
---------- ----------
Total noninterest bearing liabilities $ 130,770 $ 124,897
---------- ----------
TOTAL LIABILITIES $ 533,434 $ 504,972
Stockholders' equity $ 62,592 $ 56,583
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 596,026 $ 561,555
========== ==========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 6,818 5.12% $ 6,886 5.51%
Interest income is reflected on an actual basis, not on a fully taxable
equivalent basis. Yield on gross loans was not adjusted for nonaccrual loans,
which were not considered material for this calculation.
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets.
10
Table 1, above, shows the various components that contributed to
changes in net interest income for the three months ended March 31, 2007 and
2006. The principal interest earning assets are loans, from a volume as well as
from an earnings rate perspective. For the quarter ended March 31, 2007, average
loans outstanding represented 79.4% of average earning assets. For the quarter
ended March 31, 2006, they represented 74.7% of average earning assets.
The yield on average interest earning assets for the quarter ended
March 31, 2007 compared to the quarter ended March 31, 2006 increased from 7.07%
to 7.43%, or 36 basis points. Contributing to this was a larger volume invested
in loans, which increased by $50,788,000 or 13.41% quarter to quarter, with a
yield increase of 5 basis points. Interest income on total interest earning
assets increased $1,067,000 or 12.07%.
For the three months ended March 31, 2007 compared to the three months
ended March 31, 2006, the cost on total interest bearing liabilities increased
from 2.08% to 3.11%, an increase of 103 basis points. The most expensive as well
as principal source of deposit liabilities comes from time deposits. Their
average cost increased from 3.25% to 4.42%, and the expense on these deposits
increased $418,000 for the three months ended March 31, 2007 compared to 2006.
Their average volume increased by $1,015,000, or 0.72%. The other significant
increase was in Federal Home Loan Bank advances, which averaged $30,000,000 in
the quarter ended March 31, 2007, at a rate of 5.58%. There were no advances
during the same quarter of 2006.
For the three month periods ended March 31, 2007 and March 31, 2006,
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 2 FNB BANCORP AND SUBSIDIARY
------- RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended March 31,
(Dollars in thousands) 2007 Compared to 2006
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
-------------- ---------- ----------
INTEREST EARNING ASSETS
Loans $ 1,081 $ 47 $ 1,034
Taxable securities (192) 150 (342)
Nontaxable securities 80 16 64
Federal funds sold 98 42 56
-------------- ---------- ----------
Total $ 1,067 255 $ 812
-------------- ---------- ----------
INTEREST BEARING LIABILITIES
Demand deposits $ 43 $ 43 $ --
Money market 252 270 (18)
Savings deposits 8 17 (9)
Time deposits 418 410 8
Federal Home Loan Bank advances 413 -- 413
Federal funds purchased 1 -- 1
-------------- ---------- ----------
Total $ 1,135 $ 740 $ 395
-------------- ---------- ----------
NET INTEREST INCOME ($ 68) ($ 485) $ 417
============== ========== ==========
11
Noninterest income
------------------
The following table shows the principal components of noninterest
income for the periods indicated.
Table 3 NONINTEREST INCOME
(Dollars in thousands) Three months ended
March 31,
-----------------------
2007 2006
---------- ----------
Gain on sale of other equity securities $ -- $ 1,348
Service charges 612 603
Credit card fees 199 193
Other income 193 172
---------- ----------
Total noninterest income $ 1,004 $ 2,316
========== ==========
Noninterest income consists mainly of service charges on deposits,
credit card fees, and several other miscellaneous types of income. For the
quarter ended March 31, 2007 compared to quarter ended March 31, 2006, the only
significant change was the gain on sale of other equity securities in the first
quarter of 2006 (Common Stock of Pacific Coast Bankers' Bancshares, described
above).
Noninterest expense
-------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
Table 4 NONINTEREST EXPENSE
(Dollars in thousands) Three months ended
March 31,
-----------------------
2007 2006
---------- ----------
Salaries and employee benefits $ 3,225 $ 3,179
Occupancy expense 449 416
Equipment expense 381 433
Professional fees 386 273
Telephone, postage and supplies 291 249
Bankcard expense 179 184
Other expense 847 752
---------- ----------
Total noninterest expense $ 5,758 $ 5,486
========== ==========
Noninterest expense consists mainly of salaries and employee benefits.
For the three months ended March 31, 2007 compared to three months ended March
31, 2006, it represented 56.0% and 57.5% of total noninterest expenses. The
increase in salary and employee benefits expense in 2007 compared to the same
three month period in 2006 is attributable to normal salary progression,
partially offset by staff reductions in the Bank's proof operations. The proof
operations staff reduction was made possible by the implementation of item
capture processes performed by branch personnel. Occupancy expense increased
$33,000 for the quarter ended March 31, 2007 compared to the same quarter in
2006, as a result of lease rental adjustments on branch premises not owned by
the Bank, and depreciation on new leasehold improvements. Equipment expense
12
decreased $52,000 primarily as a result of a decrease in depreciation on
equipment fully depreciated by the first quarter of 2007. Professional fees
increased by $113,000, largely as a result of outside technical personnel
involved in the conversion to IBM computers, which should result in savings in
operating and maintenance costs in the near future. Other expense increased by
$95,000, quarter-over-quarter. The significant items in this group of accounts
were $52,000 in expenses in connection with investments in Low Income Housing,
(principally depreciation), commencing in January 2007, and a $27,000 increase
in surety insurance. The remaining accounts in this group increased by $16,000,
but individually represented small variances.
Income Taxes
------------
The effective tax rate for the quarter ended March 31, 2007 was 23.8%
compared to 30.5% for the quarter ended March 31, 2006. This is affected by
changing amounts invested in tax-free securities, by available Low Income
Housing Credits, by amounts of interest income on qualifying loans in Enterprise
Zones, and by the effective state tax rate. The tax rate for 2006 was also
affected by the taxable gain on sale of equity securities. The decrease in the
effective tax rate provision for the first three months of 2007 compared to the
same period in 2006 is primarily related to changes in the relative proportion
of tax advantaged income in comparison to fully taxable income period over
period.
Asset and Liability Management
------------------------------
Ongoing management of the Company's interest rate sensitivity limits
interest rate risk through monitoring the mix and maturity of loans, investments
and deposits. Management regularly reviews the Company's position and evaluates
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth
and deposit withdrawals, as well as to provide for general needs, the Company
must maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
comes from Company's customer base, which provides core deposit growth. The
overall liquidity position of the Company is closely monitored and evaluated
regularly. Management believes the Company's liquidity sources at March 31, 2007
are adequate to meet its operating needs in 2007 and going forward into the
foreseeable future.
The Company's asset/liability gap is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. Alternatively, if
more liabilities than assets will reprice, the institution is in a
liability-sensitive position. Accordingly, net interest income would decline
when rates rose and increase when rates fell.
The following table sets forth information concerning interest rate
sensitive assets and liabilities as of March 31, 2007. The assets and
liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms. Since all interest rates and yields do
13
not adjust at the same speed or magnitude, and since volatility is subject to
change, the gap is only a general indicator of interest rate sensitivity.
Table 5 RATE SENSITIVE ASSETS/LIABILITIES
------- As of March 31, 2007
(Dollars in thousands)
Over
Three Three To Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
------------- ------------- ------------- ------------- ------------- -------------
Interest earning assets:
Federal funds sold $ 23,420 $ -- $ -- $ -- $ -- $ 23,420
Securities available for sale 6,332 18,479 32,204 33,664 -- 90,679
Loans 162,379 60,147 153,924 66,679 2,489 445,618
------------- ------------- ------------- ------------- ------------- -------------
Total interest earning assets 192,131 78,626 186,128 100,343 2,489 559,717
Cash and due from banks -- -- -- -- 16,731 16,731
Allowance for loan losses -- -- -- -- (5,131) (5,131)
Other assets -- -- -- -- 43,670 43,670
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 192,131 $ 78,626 $ 186,128 $ 100,343 $ 57,759 $ 614,987
============= ============= ============= ============= ============= =============
Interest bearing liabilities:
Demand, interest bearing $ 62,728 $ -- $ -- $ -- $ -- $ 62,728
Savings and money market 187,284 -- -- -- -- 187,284
Time deposits 57,932 71,534 14,339 -- -- 143,805
Federal Home Loan Bank advances -- 10,000 20,000 -- -- 30,000
------------- ------------- ------------- ------------- ------------- -------------
Total interest bearing
liabilities 307,944 81,534 34,339 -- -- 423,817
------------- ------------- ------------- ------------- ------------- -------------
Noninterest demand deposits -- -- -- -- 120,720 120,720
Other liabilities -- -- -- -- 7,744 7,744
Stockholders' equity -- -- -- -- 62,706 62,706
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity $ 307,944 $ 81,534 $ 34,339 $ -- $ 191,170 $ 614,987
============= ============= ============= ============= ============= =============
Interest rate sensitivity gap ($ 115,813) ($ 2,908) $ 151,789 $ 100,343 ($ 133,411) $ --
============= ============= ============= ============= ============= =============
Cumulative interest rate
sensitivity gap ($ 115,813) ($ 118,721) $ 33,068 $ 133,411 $ -- $ --
Cumulative interest rate
sensitivity gap ratio (60.28%) (43.85%) 7.24% 23.94% -- --
Financial Condition
-------------------
Assets. Total assets increased to $614,987,000 at March 31, 2007 from
$581,270,000 at December 31, 2006, an increase of $33,717,000. Most of this
increase was in net loans, which increased $21,050,000, and federal funds sold,
which increased $14,695,000. The remaining assets decreased a net $2,028,000.
Most of the increase in total assets was funded by a $24,369,000 increase in
savings and money market accounts, an increase of $9,415,000 in time
certificates of deposit, a net decrease of $814,000 in other deposits, an
increase of $643,000 in stockholders' equity and a $104,000 increase in other
liabilities. The increase in savings and money market accounts and time deposit
volumes was primarily due to rate increases. There were no new product lines
introduced.
Loans. Gross loans at March 31, 2007 were $446,225,000, an increase of
$21,058,000 or 4.95% from December 31, 2006. Gross real estate loans increased
$13,711,000, construction loans increased $4,293,000, and commercial loans
increased $3,426,000, but consumer loans decreased by $372,000. The loan
portfolio breakdown was as follows:
14
Table 6 LOAN PORTFOLIO
-------
March 31, December 31,
(In thousands) 2007 Percent 2006 Percent
------------ ------------ ------------ ------------
Real Estate $ 332,366 74.4% $ 318,655 74.9%
Construction 41,387 9.3 37,094 8.7
Commercial 69,565 15.6 66,139 15.6
Consumer 2,907 0.7 3,279 0.8
------------ ------------ ------------ ------------
Gross loans 446,225 100.0% 425,167 100.0%
============ ============
Net deferred loan fees (607) (728)
Allowance for loan losses (5,131) (5,002)
------------ ------------
Net loans $ 440,487 $ 419,437
============ ============
Allowance for loan losses. The Company has the responsibility of
assessing the overall risks in its portfolio, assessing the specific loss
expectancy, and determining the adequacy of the allowance for loan losses. The
level of the allowance is determined by internally generating credit quality
ratings, reviewing economic conditions in the Company's market area, and
considering the Company's historical loan loss experience. The Company 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. It watches for the existence and effect of any concentrations of
credit, and changes in the level of such concentrations. The Company 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
three months ended March 31, 2007 and the three months ended March 31, 2006 is
as follows:
Table 7 ALLOWANCE FOR LOAN LOSSES
-------
Three months ended Three months ended
(In thousands) March 31, 2007 March 31, 2006
-------------- --------------
Balance, beginning of period $ 5,002 $ 4,374
Provision for loan losses 150 193
Recoveries 2 1
Amounts charged off (23) (6)
-------------- --------------
Balance, end of period $ 5,131 $ 4,562
============== ==============
In management's judgment, the allowance was adequate to absorb losses
currently inherent in the loan portfolio at March 31, 2007. However, changes in
prevailing economic conditions in the Company's markets or in the financial
condition of its customers could result in changes in the level of nonperforming
assets and charge-offs in the future and, accordingly, changes in the allowance.
Nonperforming assets. Nonperforming assets consist of nonaccrual loans,
foreclosed assets, and loans that are 90 days or more past due but are still
accruing interest and other real estate owned. At March 31, 2007, there was
$2,489,000 in non-accrual loans, which are well-secured, compared to $2,628,000
at December 31, 2006. The non accrual loans outstanding at December 31, 2006
have all paid off with no loss of principal or interest. There was no Other Real
Estate Owned at March 31, 2007, and there were no loans past due 90 days and
still accruing.
15
Deposits. Total deposits at March 31, 2007 were $514,537,000 compared
to $481,567,000 on December 31, 2006. Of these totals, noninterest-bearing
demand deposits were $120,720,000 or 23.5% of the total on March 31, 2007 and
$123,884,000 or 25.7% on December 31, 2006. Time deposits were $143,805,000 on
March 31, 2007 and $134,390,000 on December 31, 2006. During the first three
months of 2007, compared to the same period in 2006, the deposit mix has changed
to include a higher proportion of deposits in savings, money market and time
deposits. This change was driven primarily by the relatively higher interest
paid on these accounts.
The following table sets forth the maturity schedule of the time certificates of
deposit on March 31, 2007:
Table 8
-------
(Dollars in thousands) Under $100,000
Maturities: $100,000 Or more Total
------------ ------------ ------------
Three months or less $ 22,387 $ 35,545 $ 57,932
Over three to six months 13,077 19,593 32,670
Over six through twelve months 12,289 26,575 38,864
Over twelve months 9,636 4,703 14,339
------------ ------------ ------------
Total $ 57,389 $ 86,416 $ 143,805
------------ ------------ ------------
The following table shows the risk-based capital ratios and leverage
ratios at March 31, 2007 and December 31, 2006 for the Bank:
Table 9 Minimum "Well
-------
March 31, December 31, Capitalized"
Risk-Based Capital Ratios 2007 2006 Requirements
-------------------------- ---------- -------------- -------------
Tier 1 Capital 10.71% 11.03% > 6.00%
-
Total Capital 11.65% 11.98% > 10.00%
-
Leverage Ratios 10.07% 10.06% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimal loss. As of March 31, 2007, Liquid Assets were
$130,830,000, or 21.3% of total assets. As of December 31, 2006, Liquid Assets
were $121,967,000, or 21.0% 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 relationship between total net loans and total deposits is a useful
additional measure of liquidity. The Company also has federal funds borrowing
facilities for a total of $70,000,000, a Federal Home Loan Bank line of credit
up to 25% of total assets, and a Federal Reserve Bank borrowing facility.
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 March 31, 2007 net loans were at 85.6% of deposits. On
December 31, 2006 net loans were at 87.1% of deposits.
16
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. As of March 31,
2007 and December 31, 2006, 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 $151,485,000 and $137,221,000 at March 31, 2007 and December 31,
2006, respectively. As a percentage of net loans, these off-balance sheet items
represent 34.4% and 32.7% respectively.
Corporate Reform Legislation
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, in response to corporate accounting scandals. Among
other matters, the Act increased the penalties for securities fraud, established
new rules for financial analysts to prevent conflicts of interest, created a new
independent oversight board for the accounting profession, imposed restrictions
on the consulting activities of accounting firms that audit company records and
required certification of financial reports by corporate executives. The SEC has
adopted a number of rule changes to implement the provisions of the Act. The SEC
has also approved new rules proposed and adopted by the New York Stock Exchange
and the Nasdaq Stock Market to strengthen corporate governance standards for
listed companies. The Company estimates that compliance with the Act (including
the rules adopted pursuant to the Act) after the initial cost of compliance in
2005 and 2006, will increase the Company's ongoing operating expenses by an
estimated $300,000 to $400,000 annually.
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
(see discussion of comparative changes in the prime lending rate and the Federal
Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds, in the second
paragraph under Earnings Analysis on page 9 above).
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
17
and other members of the Company's senior management as of the end of the
Company's fiscal quarter ended March 31, 2007. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
(b) Internal Control Over Financial Reporting: An evaluation of
any changes in the Company's internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the
Company's fiscal quarter ended March 31, 2007, was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management.
The Company's Chief Executive Officer and Chief Financial Officer concluded that
no change identified in connection with such evaluation has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings adverse to the Company or First
National Bank to which any director, officer, affiliate of the Company, or 5%
shareholder of the Company, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company are a party, and none of the
foregoing persons has a material interest adverse to the Company or First
National Bank.
From time to time, the Company and/or First National Bank are a party
to claims and legal proceedings arising in the ordinary course of business. The
Company's management is not aware of any material pending legal proceedings to
which either it or First National Bank may be a party or has recently been a
party, which will have a material adverse effect on the financial condition or
results of operations of the Company and First National Bank, taken as a whole.
Item 1A. Risk Factors
There have been no material changes from risk factors previously
disclosed by the Company in response to Item 1A, Part 1 of Form 10-K as of
December 31, 2006.
Item 6. Exhibits
Exhibits
31: Rule 13a-14(a)/15d-14(a) Certifications
32: Section 1350 Certifications
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FNB BANCORP
(Registrant)
Dated:
May 7, 2007. By: /s/ THOMAS C. MCGRAW
-----------------------------
Thomas C. McGraw
Chief Executive Officer
(Authorized Officer)
By: /s/ DAVID A. CURTIS
-----------------------------
David A. Curtis
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
19