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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, 2003, 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: __________
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 if disclosure of delinquent filers 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 Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
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: $58,126,136
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 26, 2004
No par value Common Stock - 2,514,060 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: Part
III, Items 10 through 14 from Registrant's definitive proxy statement for the
2004 annual meeting of shareholders.
Page 1 of 105 pages
The Index to the Exhibits is located at Page 83
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; and
(8) 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 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 eleven full service banking offices within its
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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 provides reduced services since August 2003 for the
City and County of San Francisco through its Flower Mart facility in San
Francisco These are limited to a night drop and an ATM machine. 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
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. During 2003, the Bank added
Debit Card and Online Banking, while the Bill Payment product will be introduced
in 2004.
Most of First National Bank's deposits are obtained from commercial
businesses, professionals and individuals. As of December 31, 2003, First
National Bank had a total of 23,441 accounts. On occasion, the Bank has obtained
deposits through deposit brokers for which it pays a broker fee. As of December
31, 2003, 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.
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At December 31, 2003, the Company had total assets of $429,448,000,
total net loans of $312,929,000, deposits of $374,214,000 and shareholders'
equity of $51,987,000. The Company competes with approximately 23 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 2.26% (based upon the most recent information
available by the Federal Deposit Insurance Corporation through June 30, 2003).
See "Competitive Data" below.
Employees
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At December 31, 2003, The Company employed 163 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.
Available Information
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FNB Bancorp and First National Bank maintain an Internet website at
http://www.FNBNORCAL.com. The Company's annual report on form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, are made available free of charge 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. Information
on such website is not incorporated by reference into this report.
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 Act prohibits FNB Bancorp
4
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
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 allowance.
5
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
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, 2003, the Company was in compliance with the
risk-weighted capital and leverage ratios. See "Capital" under Item 7 below.
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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)
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
7
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,
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.
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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
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.
FNB Bancorp. FNB Bancorp has declared and paid cash dividends for eight
consecutive quarters, 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
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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. FNB Bancorp, as First
National Bank's sole 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
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 over First National Bank
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, 2003, First
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National Bank's aggregate legal lending limits to a single borrower and such
borrower's related parties were $8,271,000 on an unsecured basis and $13,785,000
on a fully secured basis, based on regulatory capital of $55,141,000.
First National Bank's business is concentrated in its service area,
which primarily encompasses San Mateo County. 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 2003 Deposit and Market Share Report prepared by
California Banksite Corporation, there were 147 commercial and savings banking
offices in San Mateo County with a total of $15,508,900,000 in deposits at June
30, 2003. First National Bank had a total of 11 offices with total deposits of
$354,430,000 at the same date, or 2.29% of the San Mateo County totals. At
December 31, 2002, there were 152 commercial and savings banking offices in San
Mateo County with total deposits of $15,008,680,000, while First National Bank
had $347,820,000, or 2.32% 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 2004 from that in 2003.
General Competitive Factors
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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,
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 the 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
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
11
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 its 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
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
12
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
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 nor First National Bank has 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.
13
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
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.
14
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 became
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:
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 The Board of Directors of FNB Bancorp has adopted a Code of Ethics to
address the foregoing standards, and a copy of such Code of Ethics is
being filed as an exhibit to this report.
15
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
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.
16
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 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,
including:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's independent
accountant;
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.
On November 4, 2003, the Securities and Exchange Commission adopted
changes to the standards for the listing of issuer securities by the New York
Stock Exchange and the Nasdaq Stock Market. The revised standards for listing
conform to and supplement Rule 10A-3 under the Securities Exchange Act of 1934,
as amended, which the Securities and Exchange Commission adopted in April 2003
pursuant to the Act. In the future, if the Company's common stock is listed on
the Nasdaq Stock Market, the Company would be required to comply with these
listing standards, as revised, in addition to the rules promulgated by the
Securities and Exchange Commission pursuant to the Act.
17
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 former 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 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.
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
18
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. Since its incorporation on
February 28, 2001, FNB Bancorp has conducted its operations 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.
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.
19
First National Bank leases premises at 640 Brannan Street, Suite 102,
San Francisco, California, 94107, for its Flower Mart facility. 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. This facility currently offers ATM
machine and night drop services.
First National Bank leased premises at 491 El Camino Real, Suite B, San
Mateo, California 94402, for its San Mateo Branch Office. The branch has
relocated to 150 East Third Avenue, San Mateo, California 94401, and the Bank
has entered into a new 5-year lease for this property with Song Development
Company, a California corporation, which will expire July 31, 2008. The new
location consists of approximately 4,000 square feet of ground floor usable
commercial space. Leasehold improvements to permit its use as a full service
bank have been made, including an after-hours depository and ATM service.
First National Bank leased approximately 2,242 square feet of office
space in a building located at 520 South El Camino Real, San Mateo, California.
The Business Banking Division occupied Suite 430 at that address. The lease
expired June 15, 2003, and was not renewed. 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.
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.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
----------------------------------------------------------------------
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.
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 15, 2003. 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
2002 High Low Declared (2)
- --------------- -------- -------- ------------
First Quarter $28.4762 $24.0476 $0.12
Bid Price of FNB Bancorp
--------------------------------------
Common Stock (1) Cash
--------------------- Dividends
2002 High Low Declared (2)
- --------------- -------- -------- ------------
Second Quarter $29.5714 $26.1905 $0.12
Third Quarter 26.6667 26.1905 0.12
Fourth Quarter 26.1905 21.9048 0.12
0.12 Special
Dividend
21
Bid Price of FNB Bancorp
--------------------------------------
Common Stock (1) Cash
--------------------- Dividends
2003 High Low Declared (2)
- --------------- -------- -------- ------------
First Quarter $23.9048 $23.3333 $0.12
Second Quarter 25.2381 23.4762 0.12
Third Quarter 28.0952 25.0000 0.12
Fourth Quarter 29.0476 27.6190 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.
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d) (e)
Total Number Average Identity of Number of Shares Maximum Number (or
Of Shares (or Price Paid Broker-dealer(s) (or Units) Purchased Approximate Dollar Value)
Units) Per Shared Used to Effect As Part of Publicly Of Shares (or Units) that
Purchased Purchases Announced Plans or May Yet Be Purchased
Programs Under the Plans or
Programs
- ------------------------------------------------------------------------------------------------------------------------------
Month #1
October 1 3,218 $27.71 Wedbush, 3,218 88,729
Through Morgan
October 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Month #2
November 1 None N/a N/a None 88,729
Through
November 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Month #3
December 1 3,444 $28.95 The Seidler 3,444 85,285
Through Companies
December 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Total 6,662 6,662
- ------------------------------------------------------------------------------------------------------------------------------
Footnote: on July 25, 2003 the Board of Directors of the Company authorized a
stock repurchase program which calls for the repurchase of up to five percent
(5%) of the Company's then outstanding shares of common stock, or approximately
121,852 shares. The repurchases are to be made from time to time in the open
market as conditions allow and will be structured to comply with Commission Rule
10b-18. All repurchased shares reflected in the table above were made in open
market transactions and then retired. The Board of Directors has reserved the
22
right to suspend, terminate, modify or cancel this repurchase program at any
time for any reason. On January 23, 2004 the Board of Directors of the
registrant authorized an extension of the FNB Bancorp stock repurchase program
previously adopted on July 25, 2003. On December 31, 2003, a total of 42,660
shares, or approximately 1.69% of the shares outstanding on that date (adjusted
for the stock dividend paid by the registrant on December 15, 2003, to
shareholders of record on November 28, 2003) had been repurchased pursuant to
the program. The program (as extended) calls for the further purchase of an
additional 85,285 shares, subject to an aggregate limit of five percent (5%) of
the registrant's outstanding shares of common stock. All such transactions,
including any block purchases, will be structured to comply with Commission Rule
10b-18 and all shares that are purchased under this program will be retired. The
Board of Directors has reserved the right to suspend, terminate, modify or
cancel the program at any time for any reason. The transactions in the above
table have been adjusted for the 5% stock dividend mentioned above.
23
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 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Total interest income $ 22,867 $ 26,159 $ 30,844 $ 30,862 $ 27,586
Total interest expense 2,658 4,288 7,935 8,192 6,998
---------- ---------- ---------- ---------- ----------
Net interest income 20,209 21,871 22,909 22,670 20,588
Provision for loan losses 780 150 300 425 750
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 19,429 21,721 22,609 22,245 19,838
Total non interest income 4,021 3,308 3,007 3,781 2,785
Total non interest expenses 17,913 18,705 17,911 15,977 14,519
---------- ---------- ---------- ---------- ----------
Earnings before taxes 5,537 6,324 7,705 10,049 8,104
Income tax expense 1,396 1,510 2,468 2,921 2,887
---------- ---------- ---------- ---------- ----------
Net earnings $ 4,141 $ 4,814 $ 5,237 $ 7,128 $ 5,217
========== ========== ========== ========== ==========
PER SHARE DATA
Net earnings per share:
Basic $ 1.63 $ 1.88 $ 2.05 $ 2.79 $ 2.13
Diluted $ 1.61 $ 1.88 $ 2.05 $ 2.79 $ 2.13
Cash dividends per share $ 0.60 $ 0.60 $ 1.00 $ 1.23 $ 1.00
Weighted average shares outstanding:
Basic 2,545,000 2,556,000 2,554,000 2,554,000 2,454,000
Diluted 2,572,000 2,565,000 2,560,000 2,560,000 2,454,000
Shares outstanding at period end 2,518,559 2,437,043 2,318,849 2,208,658 2,103,694
Book value per share $ 20.64 $ 21.01 $ 20.06 $ 19.52 $ 17.83
BALANCE SHEET DATA
Investment securities 63,692 75,963 65,311 87,241 70,658
Net loans 312,929 284,889 288,067 229,669 237,062
Allowance for loan losses 3,284 3,396 3,543 3,332 2,920
Total assets 429,448 401,834 397,388 379,102 348,054
Total deposits 374,214 347,406 344,079 330,457 305,361
Shareholders' equity 51,987 51,203 46,523 43,128 37,507
SELECTED PERFORMANCE DATA
Return on average assets 1.00% 1.17% 1.30% 1.97% 1.53%
Return on average equity 8.00% 9.87% 11.43% 17.42% 13.96%
Net interest margin 5.33% 5.83% 6.34% 6.97% 6.73%
Average loans as a percentage of
average deposits 82.93% 80.79% 77.67% 75.42% 77.02%
Average total stockholder's equity as
a percentage of average total assets 12.49% 11.86% 11.41% 11.31% 10.96%
Dividend payout ratio 35.63% 29.35% 43.38% 37.50% 38.55%
SELECTED ASSET QUALITY RATIOS
Net loan charge-offs to average loans 0.30% 0.10% 0.03% 0.01% 0.02%
Allowance for loan losses/Total Loans 1.04% 1.18% 1.21% 1.43% 1.22%
CAPITAL RATIOS
Tier 1 risk-based 13.29% 13.92% 12.98% 14.54% 13.18%
Total risk-based 14.15% 14.87% 13.98% 15.67% 14.18%
Leverage 12.06% 12.16% 11.41% 11.28% 11.00%
24
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
25
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 2003 were $4,141,000, a 14.0% decrease from 2002
earnings of $4,814,000. Earnings for the year 2002 decreased $423,000 or 8.1%
from year 2001 earnings of $5,237,000. The principal source of earnings is
interest income on loans. The period from 2001 through 2003 saw a series of
decreases in the prime lending rate. At the beginning of 2001, the rate was
9.50%, and the year ended at 4.75%. In 2002, the rate started at 4.75%, and
ended at 4.25%. The year 2003 started at 4.25% and ended at 4.00%. The sharpest
decline was during 2001,when the rate ended at half of the starting rate. The
impact of the decreasing interest rates was that both interest income and net
interest income have been steadily decreasing for the past two years. Net
interest income in 2003 was $20,209,000, a decrease of $1,662,000 or 7.6% from
2002. In 2002, net interest income was $21,871,000, a decrease of $1,038,000 or
4.5% from 2001. Interest income itself was $22,867,000 in 2003, a decrease of
$3,292,000 or 12.6% from 2002. Interest income was $26,159,000 in 2002, a
decrease of$4,685,000 or 15.2% from 2001.
Basic earnings per share were $1.63 in 2003; $1.88 in 2002 and $2.05 in
2001. Diluted earnings per share were $1.61 in 2003; $1.88 in 2002; and $2.05 in
2001.
The provision for loan losses was $780,000 in 2003, $150,000 in 2002
and $300,000 in 2001. At the end of 2003, the allowance was 1.04% of gross loans
outstanding; at the end of 2002, it was 1.18% of gross loans outstanding; and at
the end of 2001, it was1.21%.The provision for loan losses was increased in 2003
principally as a result of a $739,000 loss in connection with loans secured by
two office buildings included in nonperforming assets.
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.
26
TABLE 1 Net Interest Income and Average Balances
-------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31,
2003 2002 2001
----------------------------- ---------------------------- ----------------------------
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 $296,327 $ 19,990 6.75% $288,633 $ 22,664 7.85% $271,449 $ 26,024 9.59%
Taxable Securities 40,221 1,446 3.60% 42,088 1,944 4.62% 45,650 2,630 5.76%
Nontaxable Securities 36,012 1,358 3.77% 29,526 1,311 4.44% 31,129 1,579 5.07%
Federal funds sold 6,709 73 1.09% 15,041 240 1.60% 13,389 611 4.56%
-------- -------- -------- -------- -------- --------
Total interest earning assets $379,269 $ 22,867 6.03% $375,288 $ 26,159 6.97% $361,617 $ 30,844 8.53%
-------- -------- -------- -------- -------- --------
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,069 $ 18,303 $ 22,654
Premises and equipment 10,916 11,573 11,728
Other assets 6,155 5,933 5,413
-------- -------- --------
Total noninterest
earning assets $ 35,140 $ 35,809 $ 39,795
-------- -------- --------
TOTAL ASSETS $414,409 $411,097 $401,412
======== ======== ========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 51,981 $ (105) (0.20%) $ 52,240 $ (229) (0.44%) $ 54,539 $ (653) (1.20%)
Money Market 66,189 (571) (0.86%) 69,701 (1,096) (1.57%) 55,670 (1,490) (2.68%)
Savings 56,281 (183) (0.33%) 52,282 (295) (0.56%) 46,312 (727) (1.57%)
Time deposits 90,280 (1,797) (1.99%) 95,286 (2,653) (2.78%) 105,224 (5,054) (4.80%)
Fed funds purchased and other
borrowings 174 (2) (1.15%) 257 (15) (5.84%) 274 (11) (4.01%)
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities $264,905 $ (2,658) (1.00%) $269,766 $ (4,288) (1.59%) $262,019 $ (7,935) (3.03%)
-------- -------- -------- -------- -------- --------
NONINTEREST BEARING LIABILITIES:
Demand deposits 92,609 87,768 87,726
Other liabilities 5,148 4,792 5,859
-------- -------- --------
Total noninterest bearing
liabilities $ 97,757 $ 92,560 $ 93,585
-------- -------- --------
Total liabilities $362,662 $362,326 $355,604
Stockholders' equity $ 51,747 $ 48,771 $ 45,808
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $414,409 $411,097 $401,412
======== ======== ========
NET INTEREST INCOME AND
MARGIN ON TOTAL EARNING
ASSETS $ 20,209 5.33% $21,871 5.83% $ 22,909 6.34%
======== ======= ========
Interest income is reflected on an actual basis, not on a fully taxable
equivalent basis. Yields on gross loans were not adjusted for nonaccrual loans,
as these were considered not material for this calculation.
27
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,
-----------------------------------------------------------------------------
2003 Compared To 2002 2002 Compared to 2001
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 $(2,674) $(3,193) $ 519 $(3,360) $(4,709) $ 1,349
Taxable Securities (498) (412) (86) (686) (481) (205)
Nontaxable Securities 47 (241) 288 (268) (187) (81)
Federal Funds sold (167) (76) (91) (371) (397) 26
------- ------- ------- ------- ------- -------
Total $(3,292) $(3,922) $ 630 $(4,685) $(5,774) $ 1,089
------- ------- ------- ------- ------- -------
INTEREST BEARING LIABILITIES:
Demand deposits $ (124) $ (123) $ (1) $ (424) $ (396) $ (28)
Money market (525) (495) (30) (394) (615) 221
Savings deposits (112) (125) 13 (432) (466) 34
Time deposits (856) (717) (139) (2,401) (1,924) (477)
Federal funds purchased and other
Borrowings (13) (12) (1) 4 5 (1)
------- ------- ------- ------- ------- -------
Total $(1,630) $(1,472) $ (158) $(3,647) $(3,396) $ (251)
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $(1,662) $(2,450) $ 788 $(1,038) $(2,378) $ 1,340
======= ======= ======= ======= ======= =======
In 2003, net interest income represented 83.39% of net revenue (net
interest income plus non-interest income), compared to 86.86% in 2002 and 88.40%
in 2001. This reduction displays the bank's increased emphasis on non-interest
income and the effects of decreasing interest rates. The net yield on average
earning assets was 5.33% in 2003 compared to 5.83% in 2002 and 6.34% in 2001.
The average rate earned on interest earning
28
assets was 6.03% in 2003, down from 6.97% in 2002, and from 8.53% in 2001. The
average cost for interest-bearing liabilities was 1.00% in 2003, compared to
1.59% in 2002 and 3.03% in 2001.
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 allowance. The level of the allowance is determined by
internally generating credit quality ratings, reviewing economic conditions in
the Bank's market area, and considering the Bank's historical loan loss
experience. The Bank is committed to maintaining adequate allowance for loan
losses, identifying credit weaknesses by consistent review of loans, and
maintaining the ratings and changing those ratings in a timely manner as
circumstances change.
In addition to the $739,000 charged to the allowance for loan losses
for the two loans secured by two office buildings described under the heading
"Nonperforming Loans" (below), the Company maintains specific allowances for
these loans. These allowances are based on the value of the related collateral,
which was obtained from the sales price in the case of the San Francisco
property and a recent appraisal in the case of the Mountain View property, less
all estimated selling costs associated with the sale. Further, the company
provided for the unsecured portions of each of these loans.
Real estate loans outstanding increased by $3,114,000 in 2003 but
declined about $6,176,000 in 2002 compared to 2001. The proportion of the
Allowance for Loan Losses attributable to real estate loans was $1,428,000 in
2003 compared to $2,008,000 in 2002 and $1,912,000 in 2001. As a percentage of
total loans, the amount allocated to these loans was 67.5% in 2003, 72.9% in
2002 and 74.1% in 2001. The decline in the amount allocated to Real estate loans
was the result of the $739,000 charged off on the loans secured by the two
office buildings mentioned earlier.
The allowance for loan losses totaled $3,284,000, $3,396,000, and
$3,543,000 at December 31, 2003, 2002 and 2001, respectively. This represented
1.04%, 1.18% and 1.21% 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 noted above.
During 2003, the provision for loan losses was $780,000, while write-offs
totaled $896,000, compared to a provision of $150,000 and total write-offs of
$305,000 in 2002, and a provision of $300,000 and total write-offs of $94,000 in
2001. The allowance is considered adequate after writing off the unsecured
portion of the two loans that are well secured by office buildings.
29
TABLE 3 Allocation of the Allowance for Loan Losses
-----------------------------------------------------------------------------------------------------------------
(In thousands)
2003 2002 2001 2000 1999
--------------------- ---------------------- ------------------- ------------------ ------------------
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 $1,428 67.5% $2,008 72.9% $1,912 74.1% $ 955 62.8% $1,024 63.0%
Construction 1,087 15.3% 989 11.4% 504 11.6% 1,196 18.9% 566 18.3%
Commercial 158 16.4% 221 14.7% 387 13.4% 264 16.7% 415 17.1%
Consumer 22 0.8% 43 1.0% 226 0.9% 352 1.6% 526 1.6%
Unfunded
Commitments 129 -- 135 -- 514 -- 565 -- 389 --
Unallocated 460 -- -- -- -- -- -- -- -- --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $3,284 100.0% $3,396 100.0% $3,543 100.0% $3,332 100.0% $2,920 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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, 2003. The amount added to
the provision and charged to operating expenses for each period is based on the
risk profile of the loan portfolio.
Net loan charge-offs from 1999 through 2002 had been very low, and are
only nominal when compared to total loans. Because of the 2003 charge-offs, the
provision was increased significantly.
Due to the continued downturn in the local economy, and increasing
vacancy rate in commercial buildings, it was considered prudent to have an
unallocated portion of $460,000 in addition to the specific allocated amounts.
TABLE 4 Allowance for Loan Losses
Historical Analysis
-------------------------------------------------------------------
(In thousands)
For the year ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Balance at Beginning of Year $ 3,396 $ 3,543 $ 3,332 $ 2,920 $ 2,224
Provision for Loan Losses 780 150 300 425 750
Charge-offs:
Real Estate (739) (59) -- -- --
Commercial (110) (216) (22) -- (51)
Consumer (47) (30) (72) (23) (19)
------- ------- ------- ------- -------
Total (896) (305) (94) (23) (70)
------- ------- ------- ------- -------
30
TABLE 4 (continued) Allowance for Loan Losses
Historical Analysis
-------------------------------------------------------------------
(In thousands)
For the year ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Recoveries:
Commercial 2 2 -- 1 10
Consumer 2 6 5 9 6
------- ------- ------- ------- -------
Total 4 8 5 10 16
Net Charge-offs (892) (297) (89) (13) (54)
------- ------- ------- ------- -------
Balance at End of Year $ 3,284 $ 3,396 $ 3,543 $ 3,332 $ 2,920
======= ======= ======= ======= =======
Percentages
Allowance for Loan Losses/Total Loans 1.04% 1.18% 1.21% 1.43% 1.22%
Net charge-offs/Real Estate Loans 1.52% 0.18% -- -- --
Net charge-offs/Commercial Loans 0.21% 0.50% 0.06% -- 0.10%
Net charge-offs/Consumer Loans 1.76% 0.81% 2.58% 0.36% 0.33%
Net charge-offs/Total Loans 0.28% 0.10% 0.03% 0.01% 0.02%
Allowance for Loan Losses/Non-Performing Loans 36.15% 157.15% 180.86% 273.56% 146.07%
Non-performing Loans
- --------------------
Non-performing loans 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, 2003 had non-accrual loans performed as agreed,
approximately $757,000 in interest would have been accrued. Allowance for Loan
Losses as a percentage of Non-performing loans has decreased significantly in
2003 because if a non-performing loan is well secured by Real Estate or other
readily marketable collateral, no provision is made, as in the case of the loans
secured by the two office buildings. If there is a portion not considered well
secured, a provision is made accordingly. These loans increased the
non-performing loans balance by $8,955,000, but as they are so well secured, are
only minimally reserved for, and as such coverage of non-performing loans
overall appears to have decreased. Excluding these loans, Allowance to
Non-performing loans was 2,526.15%.
Table 5 provides a summary of contractually past due loans for the most
recent five years. Nonperforming loans were 2.9% of total loans at the end of
2003. Nonperforming loans were 0.7% of total loans at the end of 2002, and 0.7%
of total loans at the end of 2001. 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.
Although the Allowance for possible loan losses appears as a smaller
percent of nonperforming loans in 2003, the loans are well secured Real Estate
supported by current appraisals. In the first quarter of 2004, one of the loans
was foreclosed and became Other Real Estate Owned for $5,827,000, and is
currently for sale.
31
TABLE 5 Analysis of Nonperforming Loans
------------------------------------------
(In thousands)
Year ended December 31,
------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Accruing loans 90 days or more $ -- $ -- $ -- $ -- $ --
Nonaccrual loans 9,085 2,161 1,959 1,218 1,999
------ ------ ------ ------ ------
Total $9,085 $2,161 $1,959 $1,218 $1,999
====== ====== ====== ====== ======
There were no commitments to lend additional funds to any customer whose loan
was classified nonperforming at December 31, 2003, 2002 and 2001.
Noninterest Income
- ------------------
The following table sets forth the principal components of noninterest
income:
TABLE 6 Noninterest Income
--------------------------------
(Dollars in thousands)
Years Ended December 31,
--------------------------------
2003 2002 2001
------ ------ ------
Service charges $2,662 $1,989 $1,657
Credit card fees 946 921 913
Gain on sales of securities 165 121 58
Other income 248 277 379
------ ------ ------
Total noninterest income $4,021 $3,308 $3,007
====== ====== ======
Service charges and credit card fees represented the major portion of
noninterest income. In October of 2002, service charges per transaction, in
general, were increased, including charges for insufficient funds. The first
full year to benefit from this increase was 2003.
Noninterest Expenses
- --------------------
The following table sets forth the various components of noninterest
expense:
TABLE 7 Noninterest Expenses
---------------------------------
(Dollars in thousands)
Years Ended December 31,
---------------------------------
2003 2002 2001
------- ------- -------
Salaries and employee benefits $10,576 $10,604 $10,532
Occupancy expense 1,240 1,246 1,290
Equipment expense 1,577 2,008 1,736
Advertising expense 218 324 384
Data processing expense 394 385 330
32
TABLE 7 (continued) Noninterest Expenses
---------------------------------
(Dollars in thousands)
Years Ended December 31,
---------------------------------
2003 2002 2001
------- ------- -------
Professional fees 914 1,126 731
Director expense 152 150 150
Surety insurance 493 400 303
Telephone, postage, supplies 898 1,073 1,014
Bankcard expenses 818 787 735
Other 633 602 706
------- ------- -------
Total noninterest expense $17,913 $18,705 $17,911
======= ======= =======
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 and 2002 was related to
consultants hired to help with the data conversion process. Part of the
additional increase in professional fees in 2002 over 2001 had to do with
expenses related to the activation of FNB Bancorp. Most of the $792,000 decrease
in noninterest expense in 2003 compared to 2002 had to do with a drop of
$431,000 in equipment expense, a decrease of $212,000 in professional fees and a
decrease of $175,000 in telephone, postage and supplies as conversion-related
expenses ended, as did professional fees associated with the activation of FNB
Bancorp.
Balance Sheet Analysis
- ----------------------
Total assets were $429,448,000 at December 31, 2003, an increase of
6.9% over 2002. Total assets were $401,834,000 at December 31, 2002, an increase
of 1.1% over 2001. Assets averaged $414.4 in 2003, compared to $411.1 million in
2002 and $401.4 million in 2001. Average earning assets increased from $361.6
million in 2001 to $375.3 million in 2002 and $379.3 million in 2003. Average
earning assets represented 90.1% of total average assets in 2001, 91.3% in 2002
and 91.5% in 2003.. Interest-bearing liabilities averaged $262.0 million in
2001, $269.8 million in 2002, and $264.9 million in 2003.
Loans
- -----
The loan portfolio is the principal earning asset of the Bank. Loans
outstanding at December 31, 2003 increased by $27.9 million or 9.7% compared to
December 31, 2002, while loans outstanding at December 31, 2002 decreased by
$3.3 million or 1.1% compared to 2001.
Real Estate loans increased by $3.1 million or 1.5% in 2003 compared to
2002, and decreased by $6.2 or 2.8% in 2002 compared to 2001. Construction loans
increased by $15.7 million or 47.5% in 2003 compared to 2002, but decreased by
$1.1 million or 3.1% in 2002 compared to 2001. Commercial loans increased by
$9.7 million or 22.8% in 2003 compared to 2002, and increased by $3.4 million or
8.6% in 2002 over 2001. Consumer loans represent a nominal portion of total
33
loans. They decreased by $0.4 million or 13.7% in 2003 compared to 2002, but had
increased by $0.4 million or 13.7% in 2002 compared to 2001.
Table 8 presents a detailed analysis of loans outstanding at December
31, 1999 through December 31, 2003.
TABLE 8 Loan Portfolio
-------------------------------------------------------------
(In thousands)
December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Real Estate loans $ 214,588 $ 211,473 $ 217,650 $ 147,121 $ 152,320
Construction loans 48,610 32,947 34,016 44,245 44,208
Commercial loans 52,248 42,549 39,195 39,01