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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002, or
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities
Exchange Act of 1934
Commission File No. 000-49693
FNB BANCORP
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(Exact name of registrant as specified in its charter)
California 92-2115369
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
975 El Camino Real, South San Francisco, California 94080
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(Address of principal executive offices) (Zip code)
(650) 588-6800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Title of Class: Common Stock, no par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent files pursuant to item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrant's most
recently completed second fiscal quarter: $62,032,880
Number of shares outstanding of each of the registrant's classes of
common stock, as of March 25, 2003
No par value Common Stock - 2,437,043 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this
Form 10-K: Part III, Items 10 through 13 from Registrant's
definitive proxy statement for the 2003 annual meeting of shareholders.
Page 1 of 89 pages
The Index to the Exhibits is located at Page 86
PART I
ITEM 1. BUSINESS
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Forward-Looking Statements: Certain matters discussed or incorporated
by reference in this Annual Report on Form 10-K including, but not limited to,
matters described in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Forward-looking statements are certain written
and oral statements made or incorporated by reference from time to time by FNB
Bancorp or its representatives in this document or other documents filed with
the Securities and Exchange Commission, press releases, conferences, or
otherwise that are not historical facts, or are preceded by, followed by or that
include words such as "anticipate," "believe," "plan," "estimate," "seek," and
"intend," and words of similar import are intended to identify forward-looking
statements. Changes to such risks and uncertainties, which could impact future
financial performance, include, among others, (1) competitive pressures in the
banking industry; (2) changes in the interest rate environment; (3) general
economic conditions, nationally, regionally and in operating market areas; (4)
changes in the regulatory environment; (5) changes in business conditions and
inflation; (6) changes in securities markets; (7) data processing problems; (8)
the California power crisis; and (9) the U. S. "war on terrorism" and any U.S.
military action in the Middle East. Therefore, the information set forth therein
should be carefully considered when evaluating the business prospects of FNB
Bancorp and its subsidiary, First National Bank of Northern California.
All forward-looking statements of FNB Bancorp are qualified by and
should be read in conjunction with such risk disclosure. FNB Bancorp undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
General
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FNB Bancorp (sometimes referred to herein as 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. As a bank holding company, the Company is authorized to
engage in the activities permitted under the Bank Holding Company Act of 1956,
as amended, and regulations thereunder. Its principal office is located at 975
El Camino Real, South San Francisco, California 94080, and its telephone number
is (650) 588-6800.
The Company owns all of the issued and outstanding shares of common
stock of First National Bank of Northern California, a national banking
association ("First National Bank" or the "Bank"). The Company has no other
subsidiary. The Company was formed at the direction of the Board of Directors of
the Bank in order to reorganize the Bank into a holding company structure, with
the approval of the Office of the Comptroller of the Currency, pursuant to 12
U.S.C. 215a-2 and 12 CFRE 7.2000. The Bank and the Company entered into an
Agreement and Plan of Reorganization dated November 1, 2001 (the "Plan of
Reorganization") for this purpose, and the shareholders of the Bank approved the
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Plan of Reorganization at a Special Meeting of the shareholders of the Bank held
on February 27, 2002. The Plan of Reorganization was consummated on March 15,
2002. Each outstanding share of the common stock, par value $1.25 per share, of
the Bank (other than any shares as to which dissenters' rights of appraisal have
been properly exercised) was converted into one share of the common stock of the
Company, and the former holders of Bank common stock became the holders of all
of the Company common stock. As a subsidiary of the Company, the Bank continues
its business and operations as a national banking association, with the same
Board of Directors, officers and employees as existed prior to the
reorganization. Prior to consummation of the Plan of Reorganization, FNB Bancorp
had no significant assets or liabilities and its activities were limited to the
process of becoming a holding company for First National Bank. Consequently,
upon consummation of the Plan of Reorganization, the consolidated financial
statements of FNB Bancorp and First National Bank did not differ in any
significant respect from the historical financial statements of First National
Bank. The reorganization was accounted for in a manner similar to a pooling of
interests, using the historical costs of First National Bank Accordingly, the
historical financial position and results of operations of First National Bank
became those of FNB Bancorp. Prior to the reorganization, the common stock of
the Bank was quoted on the OTC Bulletin Board under the symbol "FNBD.OB."
Commencing on March 18, 2002, the common stock of the Company has been quoted on
the OTC Bulletin Board under the symbol "FNBG.OB."
The Bank was organized in 1963 as "First National Bank of Daly City."
In 1995, the shareholders approved a change in the name to "First National Bank
of Northern California." The administrative headquarters of the Bank is located
at 975 El Camino Real, South San Francisco, California. The Bank is locally
owned and presently operates twelve full service banking offices within its
primary service area of San Mateo County, in the cities of Colma, Daly City,
South San Francisco, Millbrae, Pacifica, Half Moon Bay, San Mateo, Redwood City
and Pescadero. The Bank also serves the City and County of San Francisco through
its Flower Mart Branch in San Francisco. The Bank's primary business is
servicing the business or commercial banking needs of individuals and small to
mid-sized businesses within San Mateo and San Francisco Counties.
The Bank is chartered under the laws of the United States and is
governed by the National Bank Act, and is a member of the Federal Reserve
System. The Federal Deposit Insurance Corporation insures the deposits of the
Bank up to the applicable legal limits. The Bank is subject to regulation,
supervision and regular examination by the Office of the Comptroller of the
Currency. The regulations of the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System, and the Office of the
Comptroller of the Currency govern many aspects of the Bank's business and
activities, including investments, loans, borrowings, branching, mergers and
acquisitions, reporting and numerous other areas. The Bank is also subject to
applicable provisions of California law to the extent those provisions are not
in conflict with or preempted by federal banking law. See "Supervision and
Regulation" below.
First National Bank offers a broad range of services to individuals and
businesses in its primary service area with an emphasis upon efficiency and
personalized attention. First National Bank provides a full line of business
financial products with specialized services such as courier, appointment
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banking, and business internet banking. The Bank offers personal and business
checking and savings accounts, including individual interest-bearing negotiable
orders of withdrawal ("NOW"), money market accounts and/or accounts combining
checking and savings accounts with automatic transfer capabilities, IRA
accounts, time certificates of deposit and direct deposit of social security,
pension and payroll checks and computer cash management with access through the
internet. First National Bank also makes available commercial, standby letters
of credit, construction, accounts receivable, inventory, automobile, home
improvement, residential real estate, commercial real estate, single family
mortgage, Small Business Administration, office equipment, leasehold improvement
and consumer loans as well as overdraft protection lines of credit. In addition,
the Bank sells travelers checks and cashiers checks, offers automated teller
machine (ATM) services tied in with major statewide and national networks and
offers other customary commercial banking services.
Most of First National Bank's deposits are obtained from commercial
businesses, professionals and individuals. As of December 31, 2002, First
National Bank had a total of 24,917 accounts. On occasion, the Bank has obtained
deposits through deposit brokers for which it pays a broker fee. As of December
31, 2002, First National Bank had no such deposits. There is no concentration of
deposits or any customer with 5% or more of First National Bank's deposits.
At December 31, 2002, the Company had total assets of $401,834,000,
total net loans of $284,889,000, deposits of $347,406,000 and shareholders'
equity of $51,203,000. The Company competes with approximately 28 other banking
or savings institutions in its service areas. The Company's market share of
Federal Deposit Insurance Corporation insured deposits in the service area of
San Mateo County is approximately 2.41% (based upon the most recent information
available by the Federal Deposit Insurance Corporation through June 30, 2002).
See "Competitive Data" below.
Employees
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At December 31, 2002, The Company employed 196 persons on a full-time
basis. The Company believes its employee relations are good. The Company is not
a party to any collective bargaining agreement.
Other Matters
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Pursuant to Regulation S-K, Item 101, paragraphs (e) (3) and (4),
please be advised that the Bank's website address is www.FNBNC.com. The
Company's annual report on Form 10-K, quarterly reports on 10-Q, current reports
on 8-K and all amendments thereto will be made available on or through such
website as soon as reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange Commission.
4
SUPERVISION AND REGULATION
General
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FNB Bancorp. The common stock of FNB Bancorp is subject to the
registration requirements of the Securities Act of 1933, as amended, and the
qualification requirements of the California Corporate Securities Law of 1968,
as amended. FNB Bancorp has registered its common stock under Section 12 (g) of
the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, annual, quarterly and other current reports with the Securities and
Exchange Commission.
FNB Bancorp is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors of the Federal Reserve System (the "Board of Governors"). FNB Bancorp
is required to obtain the approval of the Board of Governors before it may
acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, FNB Bancorp would own or control more than 5% of the
voting shares of such bank. The Bank Holding Company prohibits FNB Bancorp from
acquiring any voting shares of, or interest in, all or substantially all of the
assets of, a bank located outside the State of California unless such an
acquisition is specifically authorized by the laws of the state in which such
bank is located. Any such interstate acquisition is also subject to the
provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994.
FNB Bancorp, and any subsidiaries, which it may acquire or organize,
are deemed to be "affiliates" of The Company within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
limitations (a) on loans by First National Bank to its affiliates, and (b) on
investments by First National Bank in affiliates' stock as collateral for loans
to any borrower. FNB Bancorp and First National Bank are also subject to certain
restrictions with respect to engaging in the underwriting, public sale and
distribution of securities.
In addition, regulations of the Board of Governors under the Federal
Reserve Act require that reserves be maintained by First National Bank in
conjunction with any liability of FNB Bancorp under any obligation (promissory
note, acknowledgment of advance, banker's acceptance or similar obligation) with
a weighted average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying funds to
First National Bank for use in its banking business, or to maintain the
availability of such funds.
First National Bank of Northern California. As a national banking
association licensed under the national banking laws of the United States, First
National Bank is regularly examined by the Office of the Comptroller of the
Currency and is subject to the supervision of the Federal Deposit Insurance
Corporation, The Board of Governors, and the Office of the Comptroller of the
Currency. The supervision and regulation includes comprehensive reviews of all
major aspects of First National Bank's business and condition, including its
capital ratios, allowance for possible loan losses and other factors. However,
no inference should be drawn that such authorities have approved any such
factors. First National Bank is required to file reports with the Office of the
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Comptroller of the Currency and the Federal Deposit Insurance Corporation. First
National Bank's deposits are insured by the Federal Deposit Insurance
Corporation up to the applicable legal limits.
Capital Standards.
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The Board of Governors, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency have adopted risk-based guidelines
for evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, First National Bank is required to
maintain (and FNB Bancorp and First National Bank will be required to maintain)
capital equal to at least 8.0% of its assets and commitments to extend credit,
weighted by risk, of which at least 4.0% must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax unrealized gains on certain available-for-sale equity securities having
readily determinable fair values (i.e. the excess, if any, of fair market value
over the book value or historical cost of the investment security). The federal
regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
A leverage capital standard was adopted as a supplement to the
risk-weighted capital guidelines. Under the leverage capital standard, an
institution is required to maintain a minimum ratio of Tier 1 capital to the sum
of its quarterly average total assets and quarterly average reserve for loan
6
losses, less intangibles not included in Tier 1 capital. Period-end assets may
be used in place of quarterly average total assets on a case-by-case basis. The
Board of Governors and the Federal Deposit Insurance Corporation have also
adopted a minimum leverage ratio for bank holding companies as a supplement to
the risk-weighted capital guidelines. The leverage ratio establishes a minimum
Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank
holding companies or those that have implemented the risk-based capital market
risk measure. All other bank holding companies must maintain a minimum Tier 1
leverage ratio of 4% with higher leverage capital ratios required for bank
holding companies that have significant financial and/or operational weakness, a
high risk profile, or are undergoing or anticipating rapid growth.
At December 31, 2002, The Company was in compliance with the
risk-weighted capital and leverage ratios. Upon consummation of the Plan of
Reorganization, FNB Bancorp and First National Bank were, and remain, in
compliance with the risk-weighted capital and leverage ratios. See "Capital"
under Item 7 below.
Prompt Corrective Action
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The Board of Governors, Federal Deposit Insurance Corporation, and
Office of the Comptroller of the Currency have adopted regulations implementing
a system of prompt corrective action pursuant to Section 38 of the Federal
Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of les than 4%, or a leverage ratio of less than
4%; (4) "Significantly undercapitalized" - consisting of institutions with a
total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions that are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
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increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized". FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without prior
regulatory approval and regulators must prohibit a critically undercapitalized
institution from taking certain other actions without prior approval, including
(1) entering into any material transaction other than in the usual course of
business, including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply with any law,
regulation or order; (4) making any material change in accounting methods; (5)
engaging in certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond prevailing rates in
the institution's normal market areas.
Additional Regulations
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Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
8
portfolio diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent Federal Deposit Insurance Corporation determination that the
activity would not pose a significant risk to the Bank Insurance Fund, and that
such bank is, and will continue to be, within applicable capital standards.
The Federal Financial Institutions Examination Council ("FFIEC") on
December 16, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included in
the so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing financial institution's capital adequacy in
conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. First
National Bank has a current rating of "satisfactory" for CRA compliance.
Limitation on Dividends
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The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
9
dividends and/or management fees from First National Bank. First National Bank's
ability to pay cash dividends is subject to restrictions imposed under the
National Bank Act and regulations promulgated by the Office of the Comptroller
of the Currency. Prior to the reorganization, First National Bank has paid cash
dividends in each of the last 60 consecutive quarters.
FNB Bancorp. FNB Bancorp has paid quarterly dividends commencing with
the second quarter of 2002. Future dividends will continue to be determined
after consideration of FNB Bancorp's earnings, financial condition, future
capital funds, regulatory requirements and other factors such as the board of
directors may deem relevant. It is the intention of FNB Bancorp to pay cash
dividends, subject to legal restrictions on the payment of cash dividends and
depending upon the level of earnings, management's assessment of future capital
needs and other factors to be considered by the FNB Bancorp board of directors.
The California General Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The California General
Corporation Law further provides that, in the event sufficient retained earnings
are not available for the proposed distribution, a corporation may nevertheless
make a distribution to its shareholders if, after giving effect to the
distribution, it meets two conditions, which generally stated are as follows:
(i) the corporation's assets must equal at least 125% of its liabilities; and
(ii) the corporation's current assets must equal at least its current
liabilities or, if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal years was less
than the average of the corporation's interest expense for those fiscal years,
then the corporation's current assets must equal at least 125% of its current
liabilities.
The Board of Governors of the Federal Reserve System generally
prohibits a bank holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be
funded only through borrowing or other arrangements that might adversely affect
a bank holding company's financial position. The Federal Reserve Board policy is
that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
First National Bank of Northern California. First National Bank's
shareholder is entitled to receive dividends when and as declared by its board
of directors, out of funds legally available therefore, subject to the
restrictions set forth in the National Bank Act.
The payment of cash dividends by First National Bank may be subject to
the approval of the Office of the Comptroller of the Currency, as well as
restrictions established by federal banking law and the Federal Deposit
Insurance Corporation. Approval of the Office of the Comptroller of the Currency
is required if the total of all dividends declared by First National Bank's
board of directors in any calendar year will exceed First National Bank's net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus or to a fund for the
retirement of preferred stock. Additionally, the Federal Deposit Insurance
10
Corporation and/or the Office of the Comptroller of the Currency, might, under
some circumstances, place restrictions on the ability of a bank to pay dividends
based upon peer group averages and the performance and maturity of that bank.
COMPETITION
Competitive Data
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Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which First National Bank is not authorized nor prepared to
offer currently. First National Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of First National Bank's
legal lending limits, First National Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other independent banks, retaining the portion of such loans which is
within its lending limits. As of December 31, 2002, First National Bank's
aggregate legal lending limits to a single borrower and such borrower's related
parties were $8,157,000 on an unsecured basis and $13,595,000 on a fully secured
basis, based on regulatory capital of $54,382,000.
First National Bank's business is concentrated in its service area,
which primarily encompasses San Mateo and San Francisco Counties. The economy of
First National Bank's service area is dependent upon government, manufacturing,
tourism, retail sales, population growth and smaller service oriented
businesses.
Based upon the June 2002 Deposit and Market Share Report prepared by
California Banksite Corporation, there were 152 commercial and savings banking
offices in San Mateo County with a total of $15,079,980,000 in deposits at June
30, 2002. First National Bank had a total of 12 offices with total deposits of
$362,890,000 at the same date, or 2.41% of the San Mateo County totals. At
December 31, 2001, there were 151 commercial and savings banking offices in San
Mateo County with total deposits of $14,324,430,000, while First National Bank
had $344,079,000, or 2.40% of the San Mateo County totals.
In 1996, pursuant to Congressional mandate, the Federal Deposit
Insurance Corporation reduced bank deposit insurance assessment rates to a range
from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. Based upon
the risk-based assessment rate schedule, First National Bank's current capital
ratios and level of deposits, First National Bank anticipates no change in the
assessment rate applicable to it during 2003 from that in 2002.
General Competitive Factors
- ---------------------------
In order to compete with the financial institutions in their primary
service areas, community banks such as First National Bank use to the fullest
extent possible, the flexibility which is accorded by their independent status.
This includes an emphasis on specialized services, local promotional activity,
11
and personal contacts by their respective officers, directors and employees.
They also seek to provide special services and programs for individuals in their
primary service area who are employed in the agricultural, professional and
business fields, such as loans for equipment, furniture and tools of the trade
or expansion of practices or businesses. In the event there are customers whose
loan demands exceed their respective lending limits, they seek to arrange for
such loans on a participation basis with other financial institutions. They also
assist those customers requiring services not offered by either bank to obtain
such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
The interest rate differentials of a bank, and therefore their
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by statutes and as implemented by federal agencies,
particularly the Federal Reserve Board. The Federal Reserve Board can and does
implement national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States government securities,
adjustments in the amount of interest free reserves that banks and other
financial institutions are required to maintain, and adjustments to the discount
rates applicable to borrowing by banks from the Federal Reserve Board. These
activities influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
timing of any future changes in monetary policies and their impact on First
National Bank are not predictable.
Legislative and Regulatory Impact
- ---------------------------------
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition or merger with an existing whole
bank, which has been in existence for at least five years.
The federal financial institution agencies, especially the Office of
the Comptroller of the Currency and the Board of Governors, have taken steps to
increase the types of activities in which national banks and bank holding
companies can engage, and to make it easier to engage in such activities. The
12
Office of the Comptroller of the Currency has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries subject to an expedited application process. In addition, a
national bank may apply to the Office of the Comptroller of the Currency to
engage in an activity through a subsidiary in which First National Bank itself
may not engage.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act"), which is potentially the most significant
banking legislation in many years. The Act eliminates most of the remaining
depression-era "firewalls" between banks, securities firms and insurance
companies which was established by the Banking Act of 1933, also known as the
Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate banks
as depository institutions from the perceived risks of securities dealing and
underwriting, and related activities. The Act repeals Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can
now, among other matters, acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The Act includes provisions
which permit national banks to conduct financial activities through a subsidiary
that are permissible for a national bank to engage in directly, as well as
certain activities authorized by statute, or that are financial in nature or
incidental to financial activities to the same extent as permitted to a
"financial holding company" or its affiliates. This liberalization of United
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms and insurance is
now possible, as is the conduct of commercial banking, merchant banking,
investment management, securities underwriting and insurance within a single
financial institution using a "financial holding company" structure authorized
by the Act.
Prior to the Act, significant restrictions existed on the affiliation
of banks with securities firms and related securities activities. Banks were
also (with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The Act removes these restrictions and substantially
eliminates the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies which qualify as
financial holding companies can now, among other matters, insure, guarantee, or
indemnify against loss, harm, damage, illness, disability, or death; issue
annuities; and act as a principal, agent, or broker regarding such insurance
services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the Act, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such an effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
13
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulation to implement
the policy that financial institutions must respect the privacy of their
customers and protect the security and confidentiality of customers' non-public
personal information. These regulations require, in general, that financial
institutions (1) may not disclose non-public information of customers to
non-affiliated third parties without notice to their customers, who must have an
opportunity to direct that such information not be disclosed; (2) may not
disclose customer account numbers except to consumer reporting agencies; and (3)
must give prior disclosure of their privacy policies before establishing new
customer relationships.
Neither FNB Bancorp or First National Bank have determined whether or
when they may seek to acquire and exercise new powers or activities under the
Act, and the extent to which competition will change among financial
institutions affected by the Act has not yet become clear.
RECENT LEGISLATION
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313 (a) of the Patriot Act
prohibits any insured financial institution such as the Bank, from providing
correspondent accounts to foreign banks which do not have a physical presence in
any country (designated as "shell banks"), subject to certain exceptions for
regulated affiliates of foreign banks. Section 313 (a) also requires financial
institutions to take reasonable steps to ensure that foreign bank correspondent
accounts are not being used to indirectly provide banking services to foreign
shell banks, and Section 319 (b) requires financial institutions to maintain
records of the owners and agent for service of process of any such foreign banks
with whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act creates a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
14
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Company and the Bank are not currently aware of any account
relationships between the Bank and any foreign bank or other person or entity as
described above under Sections 313 (a) or 312 of the Patriot Act. The terrorist
attacks on September 11, 2001 have realigned national security priorities of the
United States and it is reasonable to anticipate that the United States Congress
may enact additional legislation in the future to combat terrorism including
modifications to existing laws such as the Patriot Act to expand powers as
deemed necessary. The effects which the Patriot Act and any additional
legislation enacted by Congress may have upon financial institutions is
uncertain; however, such legislation would likely increase compliance costs and
thereby potentially have an adverse effect upon the Company's results of
operations.
Sarbanes-Oxley Act of 2002
- --------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, which responds to recent issues in corporate governance
and accountability. Among other matters, key provisions of the Act and rules
promulgated by the Securities and Exchange Commission pursuant to the Act
include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such services to be
pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the CEO and
CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions, and disclosure of any amendments or waivers to such code of
ethics. The disclosure obligation becomes effective for fiscal years ending on
or after July 15, 2003. The ethics code must contain written standards that are
reasonably designed to deter wrongdoing and to promote:
15
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports
and documents that a registrant files with, or submits to, the Securities and
Exchange Commission and in other public communications made by the registrant;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an "audit
committee financial expert." The disclosure obligation becomes effective for
fiscal years ending on or after July 15, 2003. To qualify as an "audit committee
financial expert," a person must have:
o An understanding of generally accepted accounting principles and
financial statements;
o The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant's financial statements, or
experience actively supervising one or more persons engaged in such activities;
o An understanding of internal controls and procedures for financial
reporting; and
o An understanding of audit committee functions.
A person must have acquired the above listed attributes to be deemed to qualify
as an "audit committee financial expert" through any one or more of the
following:
o Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or experience in
one or more positions that involve the performance of similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor or person
performing similar functions;
o Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or evaluation of
financial statements; or
16
o Other relevant experience.
The rule contains a specific safe harbor provision to clarify that the
designation of a person as an "audit committee financial expert" does not cause
that person to be deemed to be an "expert" for any purpose under Section 11 of
the Securities Act of 1933, as amended, or impose on such person any duties,
obligations or liability greater that the duties, obligations and liability
imposed on such person as a member of the audit committee and the board of
directors, absent such designation. Such a designation also does not affect the
duties, obligations or liability of any other member of the audit committee or
board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other matters, to
report "up the ladder" to the audit committee, another board committee or the
entire board of directors certain material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to within 2
business days of the date a transaction triggers an obligation to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be phased-in over a four year
period reducing the filing deadline for Form 10-K reports from 90 days after the
fiscal year end to 60 days and Form 10-Q reports from 45 days after the fiscal
quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as soon as
reasonably practicable after such reports and material are filed with or
furnished to the Securities and Exchange Commission.
o Proposed rules requiring national securities exchanges and national
securities associations to prohibit the listing of any security whose issuer
does not meet audit committee standards established pursuant to the Act. These
proposed rules would establish audit committee:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's independent
accountant;
17
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside advisers
engaged by the audit committee.
The proposed audit committee rules provide a one-year phase-in period for
compliance. The Securities and Exchange Commission must adopt final rules by
April 26, 2003.
The effect of the Act upon the Company is uncertain; however, it is likely that
the Company will incur increased costs to comply with the Act and the rules and
regulations promulgated pursuant to the Act by the Securities and Exchange
Commission and other regulatory agencies having jurisdiction over the Company.
The Company does not currently anticipate, however, that compliance with the Act
and such rules and regulations will have a material adverse effect upon its
financial position or results of its operations or its cash flows.
California Corporate Disclosure Act
- -----------------------------------
On September 28, 2002, California Governor Gray Davis signed into law
the California Corporate Disclosure Act (the "CCD Act"), which became effective
January 1, 2003. The CCD Act requires publicly traded corporations incorporated
or qualified to do business in California to disclose information about their
past history, auditors, directors and officers. The CCD Act requires the Company
to disclose:
o The name of the a company's independent auditor and a description of
services, if any, performed for the company during the previous 24 months;
o The annual compensation paid to each director and executive officer,
including stock or stock options not otherwise available to other company
employees;
o A description of any loans made to a director at a "preferential" loan
rate during the previous 24 months, including the amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its directors
or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any
securities or banking provisions of California law during the previous 10 years
for which the company was found liable or fined more than $10,000.
18
The Company does not currently anticipate that compliance with the CCD Act will
have a material adverse effect upon its financial position or results of its
operations or its cash flows.
Future Legislation and Regulations
- ----------------------------------
Certain legislative and regulatory proposals that could affect FNB
Bancorp, First National Bank, and the banking business in general are
periodically introduced before the United States Congress, the California State
Legislature and Federal and state government agencies. It is not known to what
extent, if any, legislative proposals will be enacted and what effect such
legislation would have on the structure, regulation and competitive
relationships of financial institutions. It is likely, however, that such
legislation could subject FNB Bancorp and First National Bank to increased
regulation, disclosure and reporting requirements, competition, and costs of
doing business.
In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on FNB Bancorp and First National
Bank.
ITEM 2. PROPERTIES
- -------------------
FNB Bancorp does not own any real property. FNB Bancorp has conducted
its operations since consummation of the Plan of Reorganization at the
administrative offices of First National Bank, located at 975 El Camino Real,
South San Francisco, California 94080.
First National Bank owns the land and building at 975 El Camino Real,
South San Francisco, California 94080. The premises consist of a modern,
three-story building of approximately 20,000 square feet and off-street parking
for employees and customers of approximately 45 vehicles. The Buri Buri Branch
Office of First National Bank is located on the ground floor of this three-story
building and administrative offices, including the offices of senior management,
occupy the second and third floors.
First National Bank owns the land and two-story building occupied by
the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land
and two-story building occupied by the Colma Branch Office (1300 El Camino Real,
Colma, CA 94014); the land and two-story building occupied by the South San
Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080);
the land and two-story building occupied by the Redwood City Branch Office (700
El Camino Real, Redwood City, CA 94063); the land and two-story building
occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA
94030); the land and single-story building occupied by the Half Moon Bay Branch
Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story
building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA
94060). All properties include adequate vehicle parking for customers and
employees.
19
All of the foregoing properties are owned by First National Bank, free
and clear of any mortgage lien or similar encumbrance, with the exception of
1300 El Camino Real, Colma, California, on which there is recorded a deed of
trust securing a note with a principal balance of approximately $78,000 as of
December 31, 2002.
First National Bank leases premises at 1450 Linda Mar Shopping Center,
Pacifica, California 94044, for its Linda Mar Branch Office. This ground floor
space of approximately 4,100 square feet is leased from Fifty Associates and
Demartini/Linda Mar, LLC. The lease term is 10 years and expires on September 1,
2009.
First National Bank leases premises at 210 Eureka Square, Pacifica,
California 94044, for its Eureka Square Branch Office. This ground floor space
of approximately 3,000 square feet is leased from Joseph A. Sorci and Eldiva
Sorci. The lease term is for 5 years, commencing January 1, 1995, with two
5-year options to extend the lease term, the first of which has been exercised
and expires on December 31, 2004.
First National Bank leases premises at 640 Brannan Street, Suite 102,
San Francisco, California, 94107, for its Flower Mart Branch Office. This ground
floor space of approximately 300 square feet is leased from California Flower
Market, Inc. The lease term is for 5 years, commencing September 1, 1996, with
two 5-year options to extend the lease term, the first of which has been
exercised and expires on September 1, 2006.
First National Bank leases premises at 491 El Camino Real, Suite B, San
Mateo, CA 94402, for its San Mateo Branch Office. Suite B is ground floor space
of approximately 3,349 square feet, and is subleased from Union Bank of
California N.A. under its master lease with Nikko Capital Corp. for the entire
building (Suites A and B) at that address, consisting of approximately 5,753
total square feet. The sublease is for 7 years and expires on January 31, 2004.
First National Bank leases approximately 2,242 square feet of office
space as an office building located at 520 South El Camino Real, San Mateo,
California. The Business Banking Division of First National Bank occupies Suite
430 at that address. The landlord is Westlake Development Company, Inc. The
lease is for 3 years, expiring June 15, 2003. There are no plans to renew the
lease, and the staff was relocated to the Redwood City Branch.
The foregoing summary descriptions of leased premises are qualified in
their entirety by reference to the full text of the lease agreements listed as
exhibits to this report.
20
ITEM 3. 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 is 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The Plan of Reorganization between FNB Bancorp and the Bank was
consummated on March 15, 2002. At the close of business on March 15, 2002, all
shares of the common stock of the Bank became owned by FNB Bancorp and ceased to
be quoted on the OTC Bulletin Board. Commencing at the opening of business on
March 18, 2002, and to the present, the common stock of FNB Bancorp has been
quoted on the OTC Bulletin Board under the trading symbol "FNBG.OB." On March
18, 2002, FNB Bancorp had approximately 465 shareholders of common stock of
record.
There has been limited trading in the shares of common stock of FNB
Bancorp.
21
The following table summarizes sales of the common stock of First
National Bank and FNB Bancorp during the periods indicated of which management
of the Bank has knowledge, including the approximate high and low bid prices
during such periods and the per share cash dividends declared for the periods
indicated. All information has been adjusted to reflect stock dividends effected
December 13, 2002. The prices indicated below reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Bid Price of First National Bank
Common Stock (1) Cash
Dividends
2001 High Low Declared (2)
---- ---- --- ------------
First Quarter $26.7500 $25.5000 $0.12
Second Quarter 26.6250 25.0000 0.12
Third Quarter 26.5000 25.0000 0.12
Fourth Quarter 26.1000 25.0000 0.12
0.52 Special
Dividend
2002
----
First Quarter $29.9000 $25.2500 $0.12
Bid Price of FNB Bancorp
Common Stock (1) Cash
Dividends
High Low Declared (2)
---- --- ------------
2002
----
Second Quarter $31.0500 $27.5000 $0.12
Third Quarter 28.0000 27.5000 0.12
Fourth Quarter 27.5000 23.0000 0.12
0.12 Special
Dividend
(1) As estimated by First National Bank of Northern California, based upon
trades of which First National Bank of Northern California was aware.
(2) See Item 1, "Limitations on Dividends," for a discussion of the limitations
applicable to the payment of dividends by First National Bank and FNB
Bancorp.
22
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table presents a summary of selected financial
information that should be read in conjunction with the Company's financial
statements and notes thereto included under Item 8 - "FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA."
Dollars in thousands, except per
share amounts and ratios 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Total interest income $ 26,159 $ 30,844 $ 30,862 $ 27,586 $ 24,739
Total interest expense 4,288 7,935 8,191 6,998 6,877
---------- ---------- ---------- ---------- ----------
Net interest income 21,871 22,909 22,671 20,588 17,862
Provision for loan losses 150 300 425 750 750
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 21,721 22,609 22,246 19,838 17,112
Total non interest income 3,308 3,007 3,780 2,785 2,654
Total non interest expenses 18,705 17,911 15,977 14,519 14,215
---------- ---------- ---------- ---------- ----------
Earnings before taxes 6,324 7,705 10,049 8,104 5,551
Income tax expense 1,510 2,468 2,921 2,887 1,508
---------- ---------- ---------- ---------- ----------
Net earnings $ 4,814 $ 5,237 $ 7,128 $ 5,217 $ 4,043
========== ========== ========== ========== ==========
PER SHARE DATA Net earnings per share:
Basic $ 1.98 $ 2.15 $ 2.93 $ 2.23 $ 1.81
Diluted $ 1.97 $ 2.15 $ 2.92 $ 2.23 $ 1.81
Cash dividends per share $ 0.60 $ 1.00 $ 1.23 $ 1.00 $ 0.36
Weighted average shares outstanding:
Basic 2,436,000 2,435,000 2,435,000 2,335,000 2,239,000
Diluted 2,445,000 2,441,000 2,437,000 2,335,000 2,239,000
Shares outstanding at period end 2,437,043 2,318,849 2,208,658 2,103,694 2,003,759
Book value per share $ 21.01 $ 20.06 $ 19.52 $ 17.83 $ 17.85
BALANCE SHEET DATA
Investment securities 75,963 65,311 87,241 70,658 78,865
Net loans 284,889 288,067 229,669 237,062 203,884
Allowance for loan losses 3,396 3,543 3,332 2,920 2,224
Total assets 401,834 397,388 379,102 348,054 321,031
Total deposits 347,406 344,079 330,457 305,361 280,589
Shareholders' equity 51,203 46,523 43,128 37,507 35,761
SELECTED PERFORMANCE DATA
Return on average assets 1.17% 1.30% 1.97% 1.53% 1.33%
Return on average equity 9.87% 11.43% 17.42% 13.96% 11.31%
Net interest margin 5.83% 6.34% 6.97% 6.73% 6.61%
Average loans as a percentage of
average deposits 80.79% 77.67% 75.42% 75.02% 74.47%
Average total stockholder's equity as
a percentage of average total assets 11.86% 11.41% 11.31% 10.96% 11.72%
Dividend payout ratio 29.35% 43.38% 37.50% 38.55% 17.15%
SELECTED ASSET QUALITY RATIOS
Net loan charge-offs to average loans 0.10% 0.03% 0.01% 0.02% 0.10%
Allowance for loan losses/Total Loans 1.18% 1.21% 1.43% 1.22% 1.08%
CAPITAL RATIOS
Tier 1 risk-based 13.92% 12.98% 14.54% 13.18% 17.02%
Total risk-based 14.87% 13.98% 15.67% 14.18% 18.10%
Leverage 12.16% 11.41% 11.28% 11.00% 10.88%
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF FNB BANCORP AND SUBSIDIARY
- --------------------------------------------------------------------------------
Note: Certain matters discussed or incorporated by reference in this
Annual Report on Form 10-K including, but not limited to matters described in
this section are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected.
Critical Accounting Policies And Estimates
- ------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policy requires significant judgments and
estimates used in the preparation of its 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 given 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
charge-offs and loan loss provisions.
Prospective Accounting Changes
- ------------------------------
FASB Statement No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. The provisions of this Statement are effective for exit and
disposal activities that are initiated after December 31, 2002. This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The Company does not
currently have plans to exit or dispose of activities.
FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This Interpretation addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
24
characteristics: 1) the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional financial support from
other parties, or 2) the equity investors lack one or more of the following
essential characteristics of a controlling financial interest: a) the direct or
indirect ability to make decisions about the entity's activities through voting
or similar rights, b) the obligation to absorb the expected losses of the entity
if they occur, or c) the right to receive the expected residual returns of the
entity if they occur. The Interpretation requires existing variable interest
entities to be consolidated if those entities do not effectively disburse risks
among parties involved. The Company has determined that it has no ownership in
variable interest entities which would require consolidation.
Earnings Analysis
- -----------------
Net earnings in 2002 were $4,814,000, an 8.1% decrease from 2001
earnings of $5,237,000. Earnings for the year 2001 decreased $1,891,000 or 26.5%
from year 2000 earnings of $7,128,000. The principal source on earnings is
interest income on loans. The period from the year 2000 through 2002 saw a
series of decreases in the prime lending rate. At the beginning of 2000, the
rate was 8.50%, and the year ended at 9.50%. In the year 2001, the rate started
at 9.50%, and ended at 4.75%, after a succession of decreases between 0.50% and
0.25% at a time. The year 2002 remained flat at 4.75% until November 7, when it
was dropped to 4.25%. In addition to the rate changes, the year ended December
31, 2000 included a non-recurring pre-tax gain on sale of bank premises of
$701,000. The year 2000 also included an accrual for a tax receivable of
$342,000, representing a tax refund related primarily to the recapture of
certain tax credits earned in prior years, but received in January 2001.
Basic earnings per share were $1.98 in 2002; $2.15 in 2001 and $2.93 in
2000. Diluted earnings per share were $1.97 in 2002; $2.15 in 2001; and $2.92 in
2000.
Net interest income for 2002 was $21,871,000, a decrease of $1,038,000
or 4.5% from 2001. Interest income was $26,159,000 in 2002, a decrease of
$4,685,000 or 15.2% from 2001. Average interest earning assets in 2002 were
$375,288,000, an increase of $13,671,000 or 3.8% from 2001. The yield on
interest earning assets declined 156 basis points in 2002 compared to 2001. The
principal earning assets were loans, and their average increased $17,184,000 in
2002 versus 2001, while their yield declined 174 basis points. The declining
yield was from the succession of prime rate cuts by the Federal Reserve,
mentioned earlier, which did not increase in 2002. Net interest income was
$22,909,000 in 2001, an increase of $238,000 or 1.1% over 2000, which was
$22,671,000. Interest income was $30,844,000 in 2001, down $18,000 or 0.1% from
2000, which was $30,862,000. Average interest earning assets in 2001 were
$361,617,000, and $325,239,000 in 2000, an increase of $36,378,000 or 11.2%,
while the yield declined 96 basis points. Average loans were $271,449,000 in
2001, and $238,167,000 in 2000, an increase of $33,282,000, or 14.0%, but the
yield decreased 125 basis points.
Interest expense for 2002 was $4,288,000 and $7,935,000 in 2001, a
decrease of $3,647,000 or 46.0%. Average interest bearing liabilities were
$269,766,000 in 2002, and $262,019,000 in 2001, an increase of $7,747,000 or
3.0%. The cost of these liabilities declined 144 basis points, following the
further decline in the prime rate. Average time deposits were $95,286,000 in
25
2002, and $105,224,000 in 2001, a decrease of $9,938,000, or 9.4%, and costs
decreased 202 basis points.
Interest expense for 2001 was $7,935,000 and $8,191,000 in 2000, a
decrease of $256,000 or 3.1%. Average interest bearing liabilities were
$262,019,000 in 2001, and $231,948,000 in 2000, an increase of $30,071,000 or
13.0%. The cost of these liabilities declined 50 basis points, following the
declines in prime rate, but at a slower pace, as the rates paid on existing time
deposits did not change until renewal. Average time deposits were $105,224,000
in 2001, and $102,214,000 in 2000, an increase of $3,010,000, or 2.9%, but costs
decreased 44 basis points.
The provision for loan losses was $150,000 in 2002, and $300,000 in
2001. The provision was $425,000 in 2000. At the end of 2002, the allowance was
1.18% of gross loans outstanding; at the end of 2001, it was 1.21% of gross
loans outstanding; and at the end of 2000, it was 1.43%.
Net Interest Income
- -------------------
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets. Net interest income is affected by the interest rate earned or paid and
by volume changes in loans, investment securities, deposits and borrowed funds.
TABLE 1 Net Interest Income and Average Balances
---------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31
2002 2001 2000
---------------------------- ---------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Income Yield Average Income Yield Average Income Yield
Balance (Expense) (Cost) Balance (Expense) (Cost) Balance (Expense) (Cost)
-------- -------- ------- -------- -------- ------- -------- -------- -------
INTEREST EARNING ASSETS
Loans, gross $288,633 $ 22,664 7.85% $271,449 $ 26,024 9.59% $238,167 $ 25,811 10.84%
Taxable Securities 42,088 1,944 4.62% 45,650 2,630 5.76% 44,584 2,860 6.41%
Nontaxable Securities 29,526 1,311 4.44% 31,129 1,579 5.07% 32,120 1,524 4.74%
Federal funds sold 15,041 240 1.60% 13,389 611 4.56% 10,368 667 6.43%
-------- -------- -------- -------- -------- --------
Total interest earning
assets $375,288 $ 26,159 6.97% $361,617 $ 30,844 8.53% $325,239 $ 30,862 9.49%
-------- -------- -------- -------- -------- --------
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,303 $ 22,654 $ 20,782
Premises and equipment 11,573 11,728 10,730
Other assets 5,933 5,413 5,092
-------- -------- --------
Total noninterest earning
assets $ 35,809 $ 39,795 $ 36,604
-------- -------- --------
TOTAL ASSETS $411,097 $401,412 $361,843
======== ======== ========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 52,240 ($ 229) (0.44%) $ 54,539 ($ 653) (1.20%) $ 42,157 ($ 527) (1.25%)
Money Market 69,701 (1,096) (1.57%) 55,670 (1,490) (2.68%) 43,599 (1,438) (3.30%)
Savings 52,282 (295) (0.56%) 46,312 (727) (1.57%) 43,689 (851) (1.95%)
Time deposits 95,286 (2,653) (2.78%) 105,224 (5,054) (4.80%) 102,214 (5,353) (5.24%)
Fed funds purchased and other
Borrowings 257 (15) (5.84%) 274 (11) (4.01%) 289 (23) (7.96%)
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities $269,766 ($4,288) (1.59%) $262,019 ($ 7,935) (3.03%) $231,948 ($ 8,192) (3.53%)
-------- -------- -------- -------- -------- --------
26
NONINTEREST BEARING LIABILITIES:
Demand deposits 87,768 87,726 84,127
Other liabilities 4,792 5,859 4,848
-------- -------- --------
Total noninterest bearing
liabilities $ 92,560 $ 93,585 $ 88,975
-------- -------- --------
Total liabilities $362,326 $355,604 $320,923
Stockholders' equity $ 48,771 $ 45,808 $ 40,920
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $411,097 $401,412 $361,843
======== ======== ========
NET INTEREST INCOME AND
MARGIN ON TOTAL EARNING
ASSETS $ 21,871 5.83% $ 22,909 6.34% $ 22,670 6.97%
======== ======== ========
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, as
these were considered not material for this calculation.
The following table analyzes the dollar amount of change in interest income and
expense and the changes in dollar amounts attributable to (a) changes in volume
(changes in volume at the current year rate), (b) changes in rate (changes in
rate times the prior year's volume) and (c) changes in rate/volume (changes in
rate times changes in volume). In this table, the dollar change in rate/volume
is prorated to volume and rate proportionately.
TABLE 2 Rate/Volume Variance Analysis
--------------------------------------------------------------------------------
(In thousands)
Year Ended December 31
--------------------------------------------------------------------------------
2002 Compared To 2001 2001 Compared to 2000
Increase (decrease) Increase (decrease)
-------------------------------------- --------------------------------------
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense ------------------------ Expense ------------------------
Variance Rate Volume Variance Rate Volume
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EARNING ASSETS:
Loans ($ 3,360) ($ 4,709) $ 1,349 $ 213 ($ 2,978) $ 3,191
Taxable Securities (686) (481) (205) (230) (298) 68
Nontaxable Securities (268) (187) (81) 55 102 (47)
Federal Funds sold (371) (397) 26 (56) (194) 138
---------- ---------- ---------- ---------- ---------- ----------
Total ($ 4,685) ($ 5,774) $ 1,089 ($ 18) ($ 3,368) $ 3,350
---------- ---------- ---------- ---------- ---------- ----------
INTEREST BEARING LIABILITIES:
Demand deposits ($ 424) ($ 396) ($ 28) $ 126 ($ 29) $ 155
27
Money market (394) (615) 221 52 (271) 323
Savings deposits (432) (466) 34 (124) (165) 41
Time deposits (2,401) (1,924) (477) (299) (457) 158
Federal funds purchased and other
Borrowings 4 5 (1) (12) (11) (1)
---------- ---------- ---------- ---------- ---------- ----------
Total ($ 3,647) ($ 3,396) ($ 251) ($ 257) ($ 933) 676
---------- ---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME ($ 1,038) ($ 2,378) $ 1,340 $ 239 (2,435) $ 2,674
========== ========== ========== ========== ========== ==========
In 2002, net interest income represented 86.86% of net revenue (net
interest income plus non-interest income, compared to 88.40% in 2001 and 85.71%
in 2000. The net yield on average earning assets was 5.83% in 2002 compared to
6.34% in 2001 and 6.97% in 2000. The average rate earned on interest earning
assets was 6.97% in 2002, down from 8.53% in 2001 and 9.49% in 2000. The average
cost for interest-bearing liabilities was 1.59% in 2002, compared to 3.03% in
2001 and 3.53% in 2000.
The decrease in net interest income in 2002 was due to the fact that
the prime rate remained steady at 4.75% until November 7, when it declined to
4.25%, compared to 2001, which saw the rate decline from a high of 9.50% at the
beginning of the year to a low of 4.75% at the end of the year. In the year
2000, the prime rate started at 8.00% and ended at 9.50%. The effect of these
declines was as follows.
Yield on average loans was 7.85% in 2002, decreasing from 9.59% in 2001
and 10.84% in 2000; interest on average taxable securities was 4.62% in 2002,
decreasing from 5.76% in 2001 and 6.41% in 2000; interest on average nontaxable
securities was 4.4% in 2002, decreasing from 5.07% in 2001 and 4.74% in 2000;
and interest on average federal funds sold was only 1.60% in 2002, decreasing
from 4.56% in 2001 and 6.43% in 2000; interest on average total interest earning
assets was 6.97% in 2002, decreasing from 8.53% in 2001 and 9.49% in 2000. On
the expense side, interest on average interest bearing demand deposits was 0.44%
in 2002, decreasing from 1.20% in 2001 and 1.25%; interest on average money
market accounts was 1.57% in 2002, decreasing from 2.68% in 2001 and 3.30% in
2000; interest on average savings accounts was 0.56% in 2002, decreasing from
1.57% in 2001 and 1.95% in 2000; interest on average time deposits was 2.78% in
2002, decreasing from 4.80% in 2001 and 5.24% in 2000; interest on average
federal funds purchased and other borrowings was 5.84% in 2002, increasing from
4.01% in 2001 but decreasing from 7.96% in 2000; interest on average total
interest bearing liabilities was 1.59%, decreasing from 3.03% in 2001 and 3.53%.
Provision and Allowance For Loan Losses
- ---------------------------------------
The Bank has the responsibility of assessing the overall risks in its
loan portfolio, assessing the specific loss expectancy, and determining the
adequacy of the loan loss reserve. The level of reserves is determined by
internally generating credit quality ratings, reviewing economic conditions in
28
the Bank's market area, and considering the Bank's historical loan loss
experience. The Bank is committed to maintaining adequate reserves, identifying
credit weaknesses by consistent review of loans, and maintaining the ratings and
changing those ratings in a timely manner as circumstances change.
Based on a review of the five years ended December 31, 2002 the Bank
has had a very low loan loss experience, with only $59,000 in real estate loan
losses. Real estate loans outstanding declined about $6,176,000 in 2002 compared
to 2001. In 2001, they increased $70,529,000 over 2000. The proportion of the
Allowance for Loan Losses attributable to real estate loans was $955,000 in 2000
or 62.8%, and increased to $1,912,000 in 2001, or 74.1%, and was $2,008,000 or
72.9% in 2002. The increase in the proportion of the allowance from 2000 to 2001
took into account (a) the significant increase in real estate loans outstanding;
(b) the state of the economy; and (c) the increase in vacancy factors in the
current commercial real estate market. Net pay downs on real estate loans
resulted in a slight decline from 2001 to 2002.
The allowance for loan losses totaled $3,396,000, $3,543,000, and
$3,332,000 at December 31, 2002, 2001 and 2000, respectively. This represented
1.18%, 1.21% and 1.43% of outstanding loans on those respective dates. The
balances reflect an amount that, in management's judgment, is adequate to
provide for potential loan losses based on the considerations listed above.
During 2002, the provision for loan losses was $150,000, while write-offs
totaled $305,000, compared to a provision of $300,000 and total write-offs of
$94,000 in 2001, and a provision of $425,000 and total write-offs of $23,000.
There was no significant single loan write off in the periods mentioned.
TABLE 3 Allocation of the Allowance for Loan Losses
(In thousands)
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
in each in each in each in each In each
category category category category category
to total to total to total to total To total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Real Estate $ 2,008 72.9% $ 1,912 74.1% $ 955 62.8% $ 1,024 63.0% $ 795 68.7%
Construction 989 11.4% 504 11.6% 1,196 18.9% 566 18.3% 393 11.2%
Commercial 221 14.7% 387 13.4% 264 16.7% 415 17.1% 416 18.2%
Consumer 43 1.0% 226 0.9% 352 1.6% 526 1.6% 294 1.9%
Unfunded
Commitments 135 -- 514 -- 565 -- 389 -- 326 --
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total $ 3,396 100.0% $ 3,543 100.0% $ 3,332 100.0% $ 2,920 100.0% $ 2,224 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
29
Table 4 summarizes transactions in the allowance for loan losses and
details the charge-offs, recoveries and net loan losses by loan category for
each of the last five fiscal years ended December 31, 2002. The amount added to
the provision and charged to operating expenses for each period is based on the
risk profile of the loan portfolio.
1998 and 1999 saw a change in the portfolio mix, with an increase in
loan size, and lending in Enterprise Zones, which implies a slightly higher
risk. Favorable payment histories for these loans indicated that the allowance
needed a smaller provision. Thus, the provision declined from 2000 onwards. Net
loan charge-offs throughout the 5-year period has been very low, and are only
nominal when compared to total loans.
TABLE 4 Allowance for Loan Losses
Historical Analysis
-------------------------------------------------------
(In thousands)
For the year ended December 31
-------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Balance at Beginning of Period $ 3,543 $ 3,332 $ 2,920 $ 2,224 $ 1,666
Provision for Loan Losses 150 300 425 750 750
Charge-offs:
Real Estate (59) -- -- -- --
Commercial (216) (22) -- (51) (169)
Consumer (30) (72) (23) (19) (38)
------- ------- ------- ------- -------
Total (305) (94) (23) (70) (207)
Recoveries:
Commercial 2 -- 1 10 7
Consumer 6 5 9 6 8
------- ------- ------- ------- -------
Total 8 5 10 16 15
Net Charge-offs (297) (89) (13) (54) (192)
Balance at End of Period $ 3,396 $ 3,543 $ 3,332 $ 2,920 $ 2,224
Percentages
Allowance for Loan Losses/Total Loans 1.18% 1.21% 1.43% 1.22% 1.08%
Net charge-offs/Real Estate Loans 0.18% -- -- -- --
Net charge-offs//Commercial Loans 0.50% 0.06% 0.00% 0.10% 0.43%
Net charge-offs/Consumer Loans 0.81% 2.58% 0.36% 0.33% 0.76%
Net charge-offs/Total Loans 0.10% 0.03% 0.01% 0.02% 0.09%
Non-performing Assets
- ---------------------
Non-performing assets consist of nonaccrual loans, foreclosed assets,
and loans that are 90 days or more past due but are still accruing interest. The
accrual of interest on non-accrual loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they became due. For the
year ended December 31, 2002 had nonaccrual loans performed as agreed,
approximately $75,000 in interest would have been accrued.
30
Table 5 provides a summary of contractually past due loans for the most
recent five years. Nonperforming loans were 0.7% of total loans at the end of
2002. Nonperforming loans were 0.7% of total loans at the end of 2001, and 0.5%
of total loans at the end of 2000. Management believes the current list of past
due loans are collectible and does not anticipate any losses. There were no
foreclosed assets as of the periods indicated.
TABLE 5 Analysis of Nonperforming Assets
------------------------------------------
(In thousands)
Year ended December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Accruing loans 90 days or more $ -- $ -- $ -- $ -- $ --
Nonaccrual loans 2,161 1,959 1,218 1,999 3,232
------ ------ ------ ------ ------
Total $2,161 $1,959 $1,218 $1,999 $3,232
====== ====== ====== ====== ======
There was no commitment to lend additional funds to any customer whose loan was
classified nonperforming at December 31, 2002, 2001 and 2000.
Noninterest Income
- ------------------
The following table sets forth the principal components of noninterest
income:
TABLE 6 Noninterest Income
-------------------------------
(Dollars in thousands)
Years Ended December 31
-------------------------------
2002 2001 2000
------- ------- -------
Service charges $ 1,989 $ 1,657 $ 1,661
Credit card fees 921 913 975
Gain on sale of premises, equipment
and leasehold improvements -- -- 701
Gain (loss) on sales of securities 121 58 (1)
Other income 277 379 444
------- ------- -------
Total noninterest income $ 3,308 $ 3,007 $ 3,782
======= ======= =======
Noninterest income for the year ended December 31, 2002 was $3,308,000 compared
to $3,007,000 for 2001 and $3,782,000 for 2000. Service charges represented the
major portion of noninterest income. 2000 and 2001 were essentially the same,
but a more accurate system to track and apply service charges was installed
during 2002, resulting in $332,000 or 20.0% more income for 2002 compared to
2001. The only other significant item was a non-recurring $701,000 gain on sale
of bank premises in 2000.
31
Noninterest Expenses
- --------------------
The following table sets forth the various components of noninterest
expense:
TABLE 7 Noninterest Expenses
(Dollars in thousands)
Years Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Salaries and employee benefits $10,604 $10,532 $ 9,453
Occupancy expense 1,246 1,290 1,122
Equipment expense 2,008 1,736 1,453
Advertising expense 324 384 428
Data processing expense 385 330 360
Professional fees 1,126 731 468
Director expense 150 150 132
Surety insurance 400 303 309
Telephone, postage, supplies 1,073 1,014 973
Bankcard expenses 787 735 693
Other 602 706 586
Total interest expense $18,705 $17,911 $15,977
Noninterest expenses for the year ended December 31, 2002 were
$18,705,000, an increase of $794,000 or 4.4% over 2001. For 2001, they were
$17,911,000, an increase of $1,934,000 or 12.1% over 2000. During 2001, the Bank
purchased computer hardware and software equipment to convert its accounting
system and related application systems. This resulted in increased costs arising
from overtime and additional staff working on the conversion of software
systems. Because of difficulties encountered upon conversion and lack of
functionality of the new software, the Bank evaluated these assets for
impairment. No impairment loss was recognized. However, the Bank revised the
estimated useful life of the software. Depreciation expense on the software with
an original purchase price of approximately $675,000 came to $336,000 for the
year ended December 31, 2001. The Bank converted back to its previous accounting
and related application systems by March 2002. An important part of the increase
in professional fees for 2001 was related to consultants hired to help with the
data conversion process. The additional increase in professional fees in 2002
over 2001 had to do with expenses related to the activation of FNB Bancorp.
Balance Sheet Analysis
- ----------------------
Total assets were $401,834,000 at December 31, 2002, which represented
a 1.1% increase over 2001. Total assets were $397,388,000 at December 31, 2001,
a 4.8% increase over 2000. Assets averaged $411.1 million in 2002, compared to
$401.4 million in 2001 and $361.8 million in 2000. Average earning assets
increased from $325.2 million in 2000 to $361.6 million in 2001 and $375.3
million in 2002. Average earning assets represented 89.9% of total average
assets in 2000, 90.1% in 2001, and 91.3% in 2002. Interest-bearing liabilities
averaged $269.8 million in 2002, $262.0 million in 2001, and $231.9 million in
2000.
32
Loans
- -----
The loan portfolio is the principal earning asset of the Bank. Loans
outstanding at December 31, 2002 decreased by $3.3 million or 1.1% compared to
2001, and loans outstanding at December 31, 2001 had increased $58.6 million or
25.2% over 2000.
Real Estate loans decreased by $6.2 or 2.8% in 2002 compared to 2001.
This followed an increase of $70.5 million or 47.9% in 2001 over 2000. A greater
emphasis was placed on developing new Commercial Real Estate business towards
the end of 2000. Some of the projects started in 2000 became fully funded in
2001, and although this business continued to increase during 2002, it did so at
a slower pace, following the current economic downturn. Construction loans
decreased by $1.1 million or 3.1% in 2002 compared to 2001. These loans had
declined $10.2 million or 23.1% in 2001 compared to 2000. Several construction
projects were completed and paid off in 2001. However, there was less new loan
activity in 2002, due to economic uncertainty, resulting in a further decline in
outstanding loans. Commercial loans increased by $3.4 million or 8.6% in 2002
over 2001. They were flat between 2001 and 1999. Consumer loans represent a
nominal portion of total loans. However, they increased by $0.4 million or 13.7%
in 2002 compared to 2001, after declining $1.3 million or 32.7% in 2001 compared
to 2000.
Table 8 presents a detailed analysis of loans outstanding at December
31, 1998 through December 31, 2002.
TABLE 8 Loan Portfolio
-------------------------------------------------------------
(in thousands)
December 31
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Real Estate loans $ 211,473 $ 217,650 $ 147,121 $ 152,320 $ 142,916
Construction loans 32,947 34,016 44,245 44,208 23,188
Commercial loans 42,549 39,195 39,010 41,295 37,812
Consumer loans 2,956 2,600 3,861 3,911 3,942
--------- --------- --------- --------- ---------
Sub total 289,925 293,461 234,237 241,734 207,858
Net deferred loan fees (1,640) (1,851) (1,236) (1,752) (1,750)
--------- --------- --------- --------- ---------
Total $ 288,285 $ 291,610 $ 233,001 $ 239,982 $ 206,108
========= ========= ========= ========= =========
33
The following table shows the Bank's loan maturities and sensitivities
to changes in interest rates as of December 31, 2002.
Maturing
Maturing After One Maturing
Within One But Within After Five
Year Five Years Years Total
---------- ---------- ---------- ----------
Real Estate loans $ 197,792 $ 3,941 $ 9,741 $ 211,473
Construction loans 30,815 614 1,518 32,947
Commercial loans 39,795 793 1,960 42,549
Consumer loans 2,765 55 136 2,956
---------- ---------- ---------- ----------
Sub total 271,167 5,403 13,355 289,925
Net deferred loan fees (1,534) (30) (76) (1,640)
---------- ---------- ---------- ----------
Total $ 269,633 $ 5,373 $ 13,279 $ 288,285
========== ========== ========== ==========
With predetermined interest rates $ 156,934 $ 3,127 $ 7,729 $ 167,790
With floating interest rates $ 112,699 $ 2,246 $ 5,550 $ 120,495
---------- ---------- ---------- ----------
Total $ 269,633 $ 5,373 $ 13,279 $ 288,285
========== ========== ========== ==========
Average loans earned 7.85% in 2002, 174 basis points less than in 2001. Average
loans in 2001 earned 9.59%, 125 basis points less than 2000. The prime rate held
at 4.75% throughout 2002, ranged from 9.00% on January 4, 2001 to 4.75% on
December 12, 2001, and from 8.50% in January 2000, to 9.50% from May 17 through
the end of 2000. Loans averaged $288,633,000 in 2002, $17,184,000 or 6.3% above
2001. Loans averaged $271,449,000 in 2001, an increase of $33,282,000 or 14.0%
over 2000. Although volumes increased from 2000 through 2002, income did not
follow the volume increase. Interest income on loans in 2002 was $22,664,000, a
decrease of $3,360,000 or 12.9% compared to 2001. Interest income on loans in
2001 was $26,024,000, an increase of $213,000 or 0.8% over 2000.
Investment Portfolio
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Investments at December 31, 2002 were $75,963,000, an increase of
$10,652,000 or 16.3% over 2001. Investments at December 31, 2001 were
$65,311,000, a decline of $21,930,000 or 25.1% compared to 2000.
Available funds are first used for Loans, then Investments, and the
remainder is sold as Federal Funds. The primary source of funds is the deposit
base,. If more funds are needed, the Investment Portfolio maturity may be used,
as well as sales and calls, which accounts for the volume variances in
Investments. The Bank's investment portfolio is concentrated in U. S. Government
Agencies and in obligations of States and their political subdivisions. The Bank
believes this provides for an appropriate liquidity level.
The following table sets forth the maturity distribution and interest rate
sensitivity of investment securities at December 31, 2002:
34
After After
One Five
Due Year Years Due
In One Through Through After Maturity
Year Five Ten Ten Fair In Average
Or Less Yield Years Yield Years Yield Years Yield Value Years Yield
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