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, 2004, or
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities
Exchange Act of 1934
Commission File No. 000-49693
FNB BANCORP
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(Exact name of registrant as specified in its charter)
California 92-2115369
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
975 El Camino Real, South San Francisco, California 94080
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(Address of principal executive offices) (Zip code)
(650) 588-6800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act: None
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Securities registered pursuant to Section 12(g) of
the Act:
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Title of Class: Common Stock, no par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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: $73,460,064
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 22, 2005
No par value Common Stock - 2,566,332 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 2005 annual meeting of shareholders.
Page 1 of 87 pages
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
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owned and presently operates eleven full service banking offices within its
primary service area of San Mateo County, in the cities of Colma, Daly City,
South San Francisco, Millbrae, Pacifica, Half Moon Bay, San Mateo, Redwood City
and Pescadero. The Bank also provides reduced services since August 2003 for the
City and County of San Francisco through its Flower Mart facility in San
Francisco. These services 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 was introduced in
2004.
Most of First National Bank's deposits are obtained from commercial
businesses, professionals and individuals. As of December 31, 2004, 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, 2004, 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, 2004, the Company had total assets of $490,054,000, net
loans of $340,906,000, deposits of $413,253,000 and shareholders' equity of
$52,629,000. The Company competes with approximately 33 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 2.43% (based upon the most recent information available by the
Federal Deposit Insurance Corporation through June 30, 2004). See "Competitive
Data" below.
Employees
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At December 31, 2004, The Company employed 160 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.
Pending Transaction
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First National Bank has entered into an Acquisition Agreement dated
November 5, 2004, as amended, with Sequoia National Bank, a national banking
association based in San Francisco, California ("Sequoia"), Hemisphere National
Bank, a national banking association based in Miami, Florida ("HNB") and Privee
Financial, Inc., the holding company for HNB ("Privee"), whereby First National
Bank proposes to acquire, for cash, all of the assets, liabilities and banking
business of Sequoia and, simultaneously, HNB proposes to acquire and merge with
the remaining national bank charter of Sequoia and then relocate the charter to
Monterey Park, California. Pursuant to the terms of the Acquisition Agreement,
as amended, the two banking offices of Sequoia (located at 65 Post Street and at
699 Portola Drive in San Francisco, California) would become branches of First
National Bank. Consummation of the transactions contemplated by the Acquisition
Agreement, as amended, is subject to approval by the Sequoia shareholders and
the prior receipt of all necessary regulatory approvals. The Company and First
National Bank have filed applications with the Office of the Comptroller of the
Currency and the Board of Governors of the Federal Reserve System seeking their
respective approvals to consummate the proposed transaction, and such
applications are currently pending. HNB and Privee are also seeking the
approvals from the Office of the Comptroller of the Currency and the Board of
Governors of the Federal Reserve System, separate from the applications filed by
the Company and First National Bank. There can be no assurance that any or all
of the required regulatory approvals will be obtained in a timely manner, or at
all, or that consummation of the proposed transactions will occur as provided in
the Acquisition Agreement, as amended. The Sequoia shareholders approved the
proposed transactions at a special meeting of shareholders held on March 16,
2005.
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 10-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,
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or furnished to, the Securities and Exchange Commission. Also made available on
or through such website are the Section 16 reports of ownership and changes in
ownership of the Company's common stock which are filed with the Securities and
Exchange Commission by the directors and executive officers of the Company and
by any persons who own more than 10 percent of the outstanding shares of such
stock. 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
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.
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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 supervision and regulation by the Federal Deposit
Insurance Corporation, the Board of Governors, and the Office of the Comptroller
of the Currency. This 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 reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax unrealized gains on certain available-for-sale equity securities having
readily determinable fair values (i.e. the excess, if any, of fair market value
over the book value or historical cost of the investment security). The federal
regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
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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, 2004, The Company was in compliance with the
risk-weighted capital and leverage ratios. See "Capital" under Item 7 below.
Prompt Corrective Action
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The Board of Governors, Federal Deposit Insurance Corporation, and
Office of the Comptroller of the Currency have adopted regulations implementing
a system of prompt corrective action pursuant to Section 38 of the Federal
Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of les than 4%, or a leverage ratio of less than
4%; (4) "Significantly undercapitalized" - consisting of institutions with a
total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
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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
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
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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 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. 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")
utilizes the Uniform Institutions Rating System ("UFIRS"), commonly referred to
as "CAMELS," to classify and evaluate the soundness of financial institutions.
Bank examiners use the CAMELS measurements to evaluate capital adequacy, asset
quality, management, earnings, liquidity and sensitivity to market risk.
Effective January 1, 2005, bank holding companies such as the Company, will be
subject to evaluation and examination under a revised bank holding company
rating system. This so-called BOPEC rating system, implemented in 1979, has been
focused primarily on financial condition, consolidated capital and consolidated
earnings. The new rating system reflects a change toward analysis of risk
management (as reflected in bank examination under the CAMELS measurements), in
addition to financial factors and the potential impact of nondepository
subsidiaries upon depository institution subsidiaries.
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.
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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 has paid quarterly dividends for each quarter commencing
with the second quarter of 2002. Future dividends will continue to be determined
after consideration of the Company'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 the Company 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 Board of Directors.
The California General Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The California General
Corporation Law further provides that, in the event sufficient retained earnings
are not available for the proposed distribution, a corporation may nevertheless
make a distribution to its shareholders if, after giving effect to the
distribution, it meets two conditions, which generally stated are as follows:
(i) the corporation's assets must equal at least 125% of its liabilities; and
(ii) the corporation's current assets must equal at least its current
liabilities or, if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal years was less
than the average of the corporation's interest expense for those fiscal years,
then the corporation's current assets must equal at least 125% of its current
liabilities.
The Board of Governors of the Federal Reserve System generally
prohibits a bank holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be
funded only through borrowing or other arrangements that might adversely affect
a bank holding company's financial position. The Federal Reserve Board policy is
that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
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First National Bank of Northern California. First National Bank's
shareholder is entitled to receive dividends when and as declared by its Board
of Directors, out of funds legally available therefore, subject to the
restrictions set forth in the National Bank Act.
The payment of cash dividends by First National Bank may be subject to
the approval of the Office of the Comptroller of the Currency, as well as
restrictions established by federal banking law and the Federal Deposit
Insurance Corporation. Approval of the Office of the Comptroller of the Currency
is required if the total of all dividends declared by First National Bank's
board of directors in any calendar year will exceed First National Bank's net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus or to a fund for the
retirement of preferred stock. Additionally, the Federal Deposit Insurance
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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In its market area, First National Bank competes for deposit and loan
customers with other banks (including those with much greater resources),
thrifts and, to a lesser extent, credit unions, finance companies and other
financial service providers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which First National Bank is not authorized nor prepared to
offer currently. First National Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of First National Bank's
legal lending limits, First National Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other independent banks, retaining the portion of such loans which is
within its lending limits. As of December 31, 2004, First National Bank's
aggregate legal lending limits to a single borrower and such borrower's related
parties were $8,305,000 on an unsecured basis and $13,842,000 on a fully secured
basis, based on regulatory capital of $55,366,000.
First National Bank's business is concentrated in its service area,
which primarily encompasses San Mateo County, but also includes portions of the
City and County of San Francisco. 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 2004 Deposit and Market Share Report prepared by
California Banksite Corporation, there were 149 commercial and savings banking
offices in San Mateo County with a total of $16,967,470,000 in deposits at June
30, 2004. First National Bank had a total of 11 offices with total deposits of
$413,130,000 at the same date, or 2.43% of the San Mateo County totals. At
11
December 31, 2003, there were 148 commercial and savings banking offices in San
Mateo County with total deposits of $16,384,560,000, while First National Bank
had $374,640,000, or 2.29% 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 2005 from that in 2004.
General Competitive Factors
- ---------------------------
In order to compete with the financial institutions in their primary
service areas, community banks such as First National Bank use to the fullest
extent possible, the flexibility which is accorded by their independent status.
This includes an emphasis on specialized services, local promotional activity,
and personal contacts by their respective officers, directors and employees.
They also seek to provide special services and programs for individuals in their
primary service area who are employed in the agricultural, professional and
business fields, such as loans for equipment, furniture and tools of the trade
or expansion of practices or businesses. In the event there are customers whose
loan demands exceed their respective lending limits, they seek to arrange for
such loans on a participation basis with other financial institutions. They also
assist those customers requiring services not offered by either bank to obtain
such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's earnings. Commercial banks compete with savings and
loan associations, credit unions, other financial institutions and other
entities for funds. For instance, yields on corporate and government debt
securities and other commercial paper affect the ability of commercial banks to
attract and hold deposits. Commercial banks also compete for loans with savings
and loan associations, credit unions, consumer finance companies, mortgage
companies and other lending institutions.
The interest rate differentials of a bank, and therefore their
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by statutes and as implemented by federal agencies,
particularly the Federal Reserve Board. The Federal Reserve Board can and does
implement national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States government securities,
adjustments in the amount of interest free reserves that banks and other
financial institutions are required to maintain, and adjustments to the discount
rates applicable to borrowing by banks from the Federal Reserve Board. These
activities influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
timing of any future changes in monetary policies and their impact on First
National Bank are not predictable.
12
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.
The Gramm-Leach-Bliley Act (the "Act"), eliminated 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 repealed Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can
now, among other matters, acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The Act includes provisions
which permit national banks to conduct financial activities through a subsidiary
that are permissible for a national bank to engage in directly, as well as
certain activities authorized by statute, or that are financial in nature or
incidental to financial activities to the same extent as permitted to a
"financial holding company" or its affiliates. This liberalization of United
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms and insurance is
now possible, as is the conduct of commercial banking, merchant banking,
investment management, securities underwriting and insurance within a single
financial institution using a 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 removed these restrictions and substantially
eliminated 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
13
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 was 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 the Company nor First National Bank has determined whether or
when it may seek to acquire and exercise new powers or activities under the Act,
and the extent to which competition will change among financial institutions
affected by the Act has not yet become clear.
RECENT LEGISLATION
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
14
Section 313 (a) of the Patriot Act prohibits any insured financial
institution such as First National 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.
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 First National 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.
The Check Clearing for the 21st Century Act (commonly referred to as
"Check 21") was signed into law in 2003 and became effective on October 28,
2004. The law facilitates check truncation by creating a new negotiable
instrument called a "substitute check" which permits banks to truncate original
checks, to process check information electronically and to deliver "substitute
checks" to banks that want to continue receiving paper checks. Check 21 is
intended to reduce the dependence of the check payment system on physical
transportation networks (which can be disrupted by terrorist attacks of the type
which occurred on September 11, 2001) and to streamline the collection and
return process. The law does not require banks to accept checks in electronic
form nor does it require banks to use the new authority granted by the Act to
create "substitute checks." The Company and First National Bank do not currently
anticipate that compliance with the Act will have a material effect upon their
financial position or results of operations or cash flows.
Sarbanes-Oxley Act of 2002
- --------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, which addressed certain concerns regarding corporate
governance and accountability. Among other matters, key provisions of the Act
15
and rules promulgated by the Securities and Exchange Commission pursuant to the
Act include the following:
Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
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.
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.
Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud lawsuits.
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. This 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:
Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
Full, fair, accurate, timely, and understandable disclosure in reports
and documents that a registrant files with, or submits to, the Securities and
Exchange Commission and in other public communications made by the registrant;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an "audit
committee financial expert." The disclosure obligation became 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;
16
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 disclosure obligation contains a specific safe harbor provision to clarify
that the designation of a person as an "audit committee financial expert" does
not cause that person to be deemed to be an "expert" for any purpose under
Section 11 of the Securities Act of 1933, as amended, or impose on such person
any duties, obligations or liability greater that the duties, obligations and
liability imposed on such person as a member of the audit committee and the
board of directors, absent such designation. Such a designation also does not
affect the duties, obligations or liability of any other member of the audit
committee or board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
17
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, reducing the
filing deadline for Form 10-K reports from the current 75 days(formerly 90 days)
after the fiscal year end to 60 days, and Form 10-Q reports from the current 45
days (formerly 45 days) after the fiscal quarter end to 35 days, in each case to
be effective for the respective reports filed for fiscal years ending on or
after December 15, 2005.
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.
The effect of the Act upon the Company is uncertain; however, 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
18
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
- -----------------------------------
The California Corporate Disclosure Act (the "CCD Act"), 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
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
19
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on the Company 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 second of which has been exercised
and expires on December 31, 2009.
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
20
exercised and expires on September 1, 2006. This facility currently offers ATM
machine and night drop services.
First National Bank leases premises at 150 East Third Avenue, San
Mateo, CA 94401, for its San Mateo Branch Office. The lease term is for 5 years,
which will expire July 31, 2008. The location consists of approximately 4,000
square feet of ground floor usable commercial space.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
- -------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------
Since March 18, 2002, the common stock of the Company has been quoted
on the OTC Bulletin Board under the trading symbol, "FNBG.OB." There has been
limited trading in the shares of common stock of the Company. On March 22, 2005,
the company had approximately 390 shareholders of common stock of record.
The following table summarizes sales of the common stock of 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 and December
21
15, 2004. 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 FNB Bancorp
Common Stock Cash
Dividends
High Low Declared (1)
---- --- ------------
2003
----
First Quarter $22.7665 $22.2222 $0.12
Second Quarter $24.0363 $22.3583 0.12
Third Quarter 26.7573 23.8095 0.12
Fourth Quarter 27.6644 26.3038 0.12
0.12 Special
Dividend
2004
----
First Quarter $35.2857 $28.7333 $0.12
Second Quarter 31.3333 29.5238 0.12
Third Quarter 31.9524 30.4762 0.12
Fourth Quarter 36.5000 33.5500 0.12
0.12 Special
Dividend
(1) See Item 1, "Limitations on Dividends," for a discussion of the limitations
applicable to the payment of dividends by FNB Bancorp.
Issuer Purchases of Equity Securities
- -----------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number Average Number of Shares Maximum Number (or
Of Shares (or Price Paid (or Units) Purchased Approximate Dollar Value)
Units) Per Share As Part of Publicly Of Shares (or Units) that
Purchased Announced Plans or May Yet Be Purchased
Programs Under the Plans or Programs
- -----------------------------------------------------------------------------------------------------------
Month #1
October 1 3,500 $35.25 3,500 39,461
through
October 31, 2004
- -----------------------------------------------------------------------------------------------------------
Month #2
November 1 14,958 $35.88 14,958 24,503
Through
November 30, 2004
- -----------------------------------------------------------------------------------------------------------
Month #3
December 1 5,000 $34.84 5,000 22,967
Through
December 31, 2004
- -----------------------------------------------------------------------------------------------------------
Total 23,458 23,458
- -----------------------------------------------------------------------------------------------------------
22
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
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, 2004, a total of 108,462
shares, or approximately 4.11% of the shares outstanding on that date (adjusted
for the stock dividend paid by the registrant on December 15, 2004, to
shareholders of record on December 1, 2004) had been repurchased pursuant to the
program. The program (as extended) calls for the further purchase of 22,967
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 reserved the right to suspend, terminate, modify or cancel the program
at any time for any reason. Column (d) above reflects the number of shares
available to be repurchased as of December 31, 2004, based on 5% of 2,586,269
shares outstanding, including a stock dividend paid on December 15, 2004, minus
all repurchases to date. The Board of Directors of the registrant has terminated
the stock repurchase program, effective as of March 25, 2005.
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 2004 2003 2002 2001 2000
STATEMENT OF INCOME DATA
Total interest income $ 24,046 $ 22,867 $ 26,159 $ 30,844 $ 30,862
Total interest expense 2,533 2,658 4,288 7,935 8,192
---------- ---------- ---------- ---------- ----------
Net interest income 21,513 20,209 21,871 22,909 22,670
Provision for loan losses 480 780 150 300 425
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 21,033 19,429 21,721 22,609 22,245
Total non interest income 3,787 4,026 3,308 3,007 3,781
Total non interest expenses 18,555 17,918 18,705 17,911 15,977
---------- ---------- ---------- ---------- ----------
Earnings before taxes 6,265 5,537 6,324 7,705 10,049
Income tax expense 1,577 1,396 1,510 2,468 2,921
---------- ---------- ---------- ---------- ----------
Net earnings $ 4,688 $ 4,141 $ 4,814 $ 5,237 $ 7,128
========== ========== ========== ========== ==========
PER SHARE DATA - see note
Net earnings per share:
Basic $ 1.79 $ 1.55 $ 1.80 $ 1.96 $ 2.66
Diluted $ 1.76 $ 1.54 $ 1.79 $ 1.95 $ 2.66
Cash dividends per share $ 0.60 $ 0.60 $ 1.00 $ 1.23 $ 1.00
Weighted average shares outstanding:
Basic 2,619,000 2,668,000 2,679,000 2,678,000 2,678,000
Diluted 2,670,000 2,695,000 2,688,000 2,684,000 2,660,000
Shares outstanding at period end 2,586,269 2,518,559 2,437,043 2,318,849 2,208,658
Book value per share $ 20.35 $ 20.64 $ 21.01 $ 20.06 $ 19.52
BALANCE SHEET DATA
Investment securities 102,823 63,692 75,963 65,311 87,241
Net loans 340,906 316,213 284,889 288,067 229,669
Allowance for loan losses 3,334 3,284 3,396 3,543 3,332
Total assets 490,054 429,448 401,834 397,388 379,102
Total deposits 413,253 374,214 347,406 344,079 330,457
Shareholders' equity 52,629 51,987 31,203 46,523 43,128
SELECTED PERFORMANCE DATA
Return on average assets 1.02% 1.00% 1.17% 1.30% 1.97%
Return on average equity 8.94% 8.00% 9.87% 11.43% 17.42%
Net interest margin 5.16% 5.33% 5.83% 6.34% 6.97%
Average loans as a percentage of
average deposits 79.98% 82.93% 80.79% 77.67% 75.42%
Average total stockholder's equity as
a percentage of average total assets 11.37% 12.49% 11.86% 11.41% 11.31%
Dividend payout ratio 32.54% 35.63% 29.35% 43.38% 37.50%
SELECTED ASSET QUALITY RATIOS
Net loan charge-offs to average loans 0.13% 0.30% 0.10% 0.03% 0.01%
Allowance for loan losses/Total Loans 0.97% 1.04% 1.18% 1.21% 1.43%
CAPITAL RATIOS
Tier 1 risk-based 12.69% 13.29% 13.92% 12.98% 14.54%
Total risk-based 13.50% 14.15% 14.87% 13.98% 15.67%
Leverage 10.71% 12.06% 12.16% 11.41% 11.28%
Note: per share data has been adjusted for stock dividends.
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 forward-looking statements that are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected. Reference should be made to the risks and uncertainties
described under the heading, "Forward-Looking Statements," on page 2 of this
report. Reference should also be made to the information set forth under the
heading, "Pending Transaction," on page 4 of this report.
Critical Accounting Policies And Estimates
- ------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. 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
- ------------------------------
On December 12, 2003, AICPA issued Statement of Position 03-3 which
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
25
debt securities (loans) acquired in a transfer if those differences are
attributable, at least in part, to credit quality. It includes loans with
evidence of deterioration of credit quality since origination acquired by
completion of a transfer, including such loans acquired in purchase business
combinations. SOP 03-3 is effective for loans acquired in fiscal years beginning
after December 15, 2004. The Company is prospectively adopting SOP 03-03
effective for loans acquired beginning January 1, 2005.
In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No.
123(R) requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments using a fair-value method, and
record such expense in its financial statements, for interim or annual reporting
periods beginning after June 15, 2005. The revised Statement eliminates an
entity's ability to account for share-based compensation transactions using the
intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock
Issued to Employees, which was permitted under Statement 123, as originally
issued. In addition, the adoption of SFAS No. 123(R) will require additional
accounting related to the income tax effects and additional disclosure regarding
the cash flow effects resulting from share-based payment arrangements.
This accounting change is not expected to have a material effect on the
consolidated financial statements.
Earnings Analysis
- -----------------
Net earnings in 2004 were $4,688,000, a 13.2% increase from 2003
earnings of $4,141,000. Earnings for the year 2003 decreased $673,000 or 14.0%
from year 2002 earnings of $4,814,000. The principal source of earnings is
interest income on loans. The period from the year 2002 through 2003 saw a
series of decreases in the prime lending rate. At the beginning of 2002, the
rate was 4.75%, and the year ended at 4.25%. In the year 2003, the rate started
at 4.25%, and ended at 4.00%. In 2004, the rate started to rise. The year 2004
started at 4.00% and ended at 5.25 %.
Basic earnings per share were $1.79 in 2004; $1.55 in 2003 and $1.80 in
2002. Diluted earnings per share were $1.76 in 2004; $1.54 in 2003; and $1.79 in
2002.
Net interest income for 2004 was $21,513,000, an increase of $1,304,000
or 6.5% from 2003. Net interest income was $20,209,000 in 2003, a decrease of
$1,662,000 or 7.6% from 2002. Interest income was $24,046,000 in 2004, an
increase of $1,179,000 or 5.2% over 2003. Interest income was $22,867,000 in
2003, a decrease of $3,292,000, or 12.6% from 2002. Average interest earning
assets in 2004 were $418,323,000, an increase of $39,054,000 or 10.3% from 2003.
In 2003, they were $379,269,000. an increase of $3,981,000, or 1.1% over 2002.
The yield on interest earning assets declined 27 basis points in 2004 compared
to 2003. The yield on interest earning assets declined 94 basis points in 2003
compared to 2002. The principal earning assets were loans, and their average
increased $23,250,000 in 2004 versus 2003, while their yield declined 11 basis
points. Average loans were $296,327,000 in 2003, an increase of $7,694,000 over
2002, while their yield declined 110 basis points.
26
Interest expense for 2004 was $2,533,000 and $2,658,000 in 2003, a
decrease of $125,000 or 4.7%. Interest expense was $2,658,000 in 2003, a
decrease of $1,630,000 compared to 2002, or 38.0%. Average interest bearing
liabilities were $295,062,000 in 2004, and $264,905,000 in 2003, an increase of
$30,157,000 or 11.4%. They were $264,905,000 in 2003, and $269,766,000 in 2002,
a decrease of $4,861,000 or 1.8%. The cost of these liabilities declined 14
basis points in 2004 compared to 2003, and declined 59 basis points in 2003
compared to 2002. The principal cost was in time deposits, which declined 38
basis points in 2004 compared to 2003, and 79 basis points in 2003 compared to
2002.
Net Interest Income
- -------------------
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets. Net interest income is affected by the interest rate earned or paid and
by volume changes in loans, investment securities, deposits and borrowed funds.
TABLE 1 Net Interest Income and Average Balances
-------------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
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 $319,577 $ 21,226 6.64% $296,327 $ 19,990 6.75% $288,633 $ 22,664 7.85%
Taxable Securities 48,536 1,418 2.92% 40,221 1,446 3.60% 42,088 1,944 4.62%
Nontaxable Securities 36,293 1,250 3.44% 36,012 1,358 3.77% 29,526 1,311 4.44%
Federal funds sold 13,917 152 1.09% 6,709 73 1.09% 15,041 240 1.60%
-------- -------- -------- -------- -------- --------
Total interest earning
assets $418,323 $ 24,046 5.75% $379,269 $ 22,867 6.03% $375,288 $ 26,159 6.97%
-------- -------- -------- -------- -------- --------
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,106 $ 18,069 18,303
Premises and equipment 13,320 10,916 11,573
Other assets 10,342 6,155 5,933
-------- -------- --------
Total noninterest earning
assets $ 42,768 $ 35,140 $ 35,809
-------- -------- --------
TOTAL ASSETS $461,091 $414,409 $411,097
======== ======== ========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 56,561 ($ 113) (0.20%) $ 51,981 ($ 105) (0.20%) $ 52,240 ($ 229) (0.44%)
Money Market 86,598 (757) (0.87%) 66,189 (571) (0.86%) 69,701 (1,096) (1.57%)
Savings 60,040 (161) (0.27%) 56,281 (183) (0.33%) 52,282 (295) (0.56%)
Time deposits 88,627 (1,429) (1.61%) 90,280 (1,797) (1.99%) 95,286 (2,653) (2.78%)
Fed funds purchased
and other borrowings 3,236 (73) (2.26%) 174 (2) (1.15%) 257 (15) (5.84%)
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities $295,062 ($ 2,533) (0.86%) $264,905 ($ 2,658) (1.00%) $269,766 ($ 4,288) (1.59%)
-------- -------- -------- -------- -------- --------
NONINTEREST BEARING LIABILITIES:
Demand deposits 107,758 92,609 87,768
Other liabilities 5,833 5,148 4,792
-------- -------- --------
Total noninterest bearing
liabilities $113,591 $ 97,757 $ 92,560
-------- -------- --------
Total liabilities $408,653 $362,662 $362,326
Stockholders' equity $ 52,438 $ 51,747 $ 48,771
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $461,091 $414,409 $411,097
======== ======== ========
NET INTEREST INCOME
AND MARGIN ON TOTAL
EARNING ASSETS $ 21,513 5.14% $ 20,209 5.33% $ 21,871 5.83%
======== ======== ========
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
-------------------------------------- --------------------------------------
2004 Compared to 2003 2003 Compared to 2002
Increase (decrease) Increase (decrease)
Interest Interest
Income/ Variance Income/ Variance
Expense Attributable To Expense Attributable To
Variance Rate Volume Variance Rate Volume
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EARNING ASSETS:
Loans $ 1,236 ($ 308) $ 1,544 ($ 2,674) ($ 3,193) $ 519
Taxable Securities (28) (327) 299 (498) (412) (86)
Nontaxable Securities (108) (119) 11 47 (241) 288
Federal Funds sold 79 -- 79 (167) (76) (91)
---------- ---------- ---------- ---------- ---------- ----------
Total $ 1,179 ($ 754) $ 1,933 ($ 3,292) ($ 3,922) $ 630
---------- ---------- ---------- ---------- ---------- ----------
INTEREST BEARING LIABILITIES:
Demand deposits $ 8 ($ 1) $ 9 ($ 124) ($ 123) ($ 1)
Money market 186 8 178 (525) (495) (30)
Savings deposits (22) (32) 10 (112) (125) 13
Time deposits (368) (335) (33) (856) (717) (139)
Federal funds purchased and
other
Borrowings 71 2 69 (13) (12) (1)
---------- ---------- ---------- ---------- ---------- ----------
Total ($ 125) ($ 358) $ 233 ($ 1,630) ($ 1,472) ($ 158)
---------- ---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME $ 1,304 ($ 396) $ 1,700 ( $1,662) ($ 2,450) $ 788
========== ========== ========== ========== ========== ==========
In 2004, net interest income represented 85.28% of net revenue (net
interest income plus non-interest income), compared to 75.16% in 2003 and 74.22%
in 2002. The net yield on average earning assets was 5.16% in 2004 compared to
5.33% in 2003 and 5.83% in 2002. The average rate earned on interest earning
28
assets was 5.76% in 2004, down from 6.03% in 2003, and from 6.97% in 2002. The
average cost for interest-bearing liabilities was 0.86% in 2004, compared to
1.00% in 2003 and 1.59% in 2002. The net effect of the above changes resulted in
a 19 basis point decline in net interest margin.
As mentioned before under the heading "Earnings Analysis", there were
declines in the prime lending rate during 2002 and 2003, finally followed by an
increase in 2004, as a result of action by the Federal Open Market Committee of
the Federal Reserve, which affected interest-bearing assets and interest-bearing
liabilities.
Yield on average loans was 6.64% in 2004, decreasing from 6.75% in 2003
and 7.85% in 2002. Interest on average taxable securities was 2.92% in 2004,
decreasing from 3.60% in 2003, and 4.62% in 2002. Interest on average nontaxable
securities was 3.44% in 2004, decreasing from 3.77% in 2003 and 4.44% in 2002.
Interest on average federal funds sold was 1.09% in 2004 and 2003, decreasing
from 1.60% in 2002. Interest on average total interest earning assets was 5.76%
in 2004, decreasing from 6.03% in 2003, and 6.97% in 2002. On the expense side,
interest on average interest bearing demand deposits was 0.20% in 2004,
unchanged from 0.20% in 2003 and decreasing from 0.44% in 2002. Interest on
average money market accounts was 0.87% in 2004, increasing from 0.86% in 2003
and decreasing from 1.57% in 2002. Interest on average savings accounts was
0.27% in 2004, decreasing from 0.33% in 2003 and 0.56% in 2002. Interest on
average time deposits was 1.61% in 2004, decreasing from 1.99% in 2003, and
2.78% in 2002. Interest on average federal funds purchased and other borrowings
was 2.26% in 2004, increasing from 1.15% in 2003 and decreasing from 5.84% in
2002. Interest on average total interest bearing liabilities was 0.86% in 2004,
decreasing from 1.00% in 2003 and 1.59% in 2002.
Allowance For Loan Losses
- -------------------------
The Bank has the responsibility of assessing the overall risks in its
loan portfolio, assessing the specific loss expectancy, and determining the
adequacy of the loan loss reserve. The level of reserves is determined by
internally generating credit quality ratings, reviewing economic conditions in
the Bank's market area, and considering the Bank's historical loan loss
experience. The Bank is committed to maintaining adequate reserves, identifying
credit weaknesses by consistent review of loans, and maintaining the ratings and
changing those ratings in a timely manner as circumstances change.
In addition to the $383,000 charged to the allowance for loan losses
for an office building loan described under the heading "Nonperforming assets"
(below), the Company maintains a specific allowance for this loan. The allowance
is based on the value of the related collateral, which was obtained from a
recent appraisal of the office building located in Mountain View. Further, the
company has reserved for the unsecured portion of this loan.
Real estate loans outstanding increased by $40,845,000 in 2004 compared
to 2003 and increased $3,114,000 in 2003 over 2002. The proportion of the
Allowance for Loan Losses attributable to real estate loans was $1,529,000 in
2004 compared to $1,428,000 in 2003 and $2,008,000 in 2002. As a percentage of
29
total loans, the amount allocated to these loans was 73.9% in 2004, 67.5% in
2003 and 72.9% in 2002.
The allowance for loan losses totaled $3,334,000, $3,284,000, and
$3,396,000 at December 31, 2004, 2003 and 2002, respectively. This represented
0.95%, 1.04% and 1.18% of outstanding loans on those respective dates. The
balances reflect an amount that, in management's judgment, is adequate to
provide for probable loan losses based on the considerations listed above.
During 2004, the provision for loan losses was $480,000, while write-offs
totaled $431,000, compared to a provision of $780,000 and total write-offs of
$896,000 in 2003, and a provision of $150,000 and total write-offs of $305,000
in 2002.
TABLE 3 Allocation of the Allowance for Loan Losses
(In thousands)
2004 2003 2002 2001 2000
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 $ 1,589 73.9% $ 1,428 67.5% $ 2,008 72.9% $ 1,912 74.1% $ 955 62.8%
Construction 618 8.4% 1,087 15.3% 989 11.4% 504 11.6% 1,196 18.9%
Commercial 340 17.0% 158 16.4% 221 14.7% 387 13.4% 264 16.7%
Consumer 19 0.7% 22 0.8% 43 1.0% 226 0.9% 352 1.6%
Unfunded
commitments 201 -- 129 -- 135 -- 514 -- 565 --
Unallocated 567 -- 460 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 3,334 100.0% $ 3,284 100.0% $ 3,396 100.0% $ 3,543 100.0% $ 3,332 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
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, 2004. The amount added to
the provision and charged to operating expenses for each period is based on the
risk profile of the loan portfolio.
Charge-offs between 2000 and 2002 were very low. However, there were
partial charge-offs for two loans secured by office buildings for $200,000 and
$539,000 respectively in 2003, which resulted in an increase in the provision
for probable loan losses to $780,000 in 2003. In 2004, the improvement in the
portfolio of nonperforming loans required a smaller provision.
30
TABLE 4 Allowance for Loan Losses
Historical Analysis
----------------------------------------------------------------------
(In thousands)
For the year ended December 31
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Balance at Beginning of Period $ 3,284 $ 3,396 $ 3,543 $ 3,332 $ 2,920
Provision for Loan Losses 480 780 150 300 425
Charge-offs:
Real Estate (383) (739) (59) -- --
Commercial (31) (110) (216) (22) --
Consumer (17) (47) (30) (72) (23)
---------- ---------- ---------- ---------- ----------
Total (431) (896) (305) (94) (23)
Recoveries:
Commercial 0 2 2 -- 1
Consumer 1 2 6 5 9
---------- ---------- ---------- ---------- ----------
Total 1 4 8 5 10
Net Charge-offs (430) (892) (297) (89) (13)
Balance at End of Period $ 3,334 $ 3,284 $ 3,396 $ 3,543 $ 3,332
Percentages
Allowance for Loan Losses/Total Loans 0.97% 1.04% 1.18% 1.21% 1.43%
Net charge-offs/Real Estate Loans 1.32% 1.52% 0.18% -- --
Net charge-offs//Commercial Loans 0.05% 0.21% 0.50% 0.06% --
Net charge-offs/Consumer Loans 0.62% 1.76% 0.81% 2.58% 0.36%
Net charge-offs/Total Loans 0.12% 0.28% 0.10% 0.03% 0.01%
Allowance for Loan Losses/Non-performing Loans 119.16% 36.15% 157.15% 180.86% 273.56%
Non-performing Assets
- ---------------------
Non-performing assets consist of nonaccrual loans, foreclosed assets,
and loans that are 90 days or more past due but are still accruing interest. The
accrual of interest on non-accrual loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they became due. For the
year ended December 31, 2004 had non-accrual loans performed as agreed,
approximately $255,000 in interest would have been accrued.
At December 31, 2004, nonaccrual loans totaled $2,798,000, of which a
loan secured by an office building located in the Silicon Valley community of
Mountain View, represented $2,679,000 of this total. At December 31, 2003, total
nonaccrual loans were $9,085,000. Most of this total was represented by a loan
to a residential care facility with a balance of $5,827,000, which was
subsequently foreclosed then sold with no loss of principal, and the Mountain
View loan, with a balance at that time of $3,128,000, since written down to
$2,679,000.
Table 5 provides a summary of contractually past due loans for the most
recent five years. Nonperforming loans were 0.8% of total loans at the end of
2004. Nonperforming loans were 2.9% of total loans at the end of 2003, and 0.7%
of total loans at the end of 2002. Management believes the current list of past
due loans are collectible and does not anticipate significant losses. There were
no foreclosed assets as of the periods indicated.
31
TABLE 5 Analysis of Nonperforming Assets
--------------------------------------------------------------
(In thousands)
Year ended December 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Accruing loans 90 days or more $ -- $ -- $ -- $ -- $ --
Nonaccrual loans 2,798 9,085 2,161 1,959 1,218
---------- ---------- ---------- ---------- ----------
Total $ 2,798 $ 9,085 $ 2,161 $ 1,959 $ 1,218
========== ========== ========== ========== ==========
There was no commitment to lend additional funds to any customer whose loan was
classified nonperforming at December 31, 2004, 2003 and 2002.
Noninterest Income
- ------------------
The following table sets forth the principal components of noninterest
income:
TABLE 6 Noninterest Income
-------------------------------------
(Dollars in thousands)
Years Ended December 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
Service charges $ 2,500 $ 2,662 $ 1,989
Credit card fees 886 946 921
Gain (loss) on sales of investment securities (31) 165 121
Other income 432 248 277
---------- ---------- ----------
Total noninterest income $ 3,787 $ 4,021 $ 3,308
========== ========== ==========
Noninterest income for the year ended December 31, 2004 was $3,787,000 compared
to $4,021,000 for 2003 and $3,308,000 for 2002. Service charges and credit card
fees represented the major portion of noninterest income. In October of 2002,
service charges per incident, in general, were increased, including charges for
insufficient funds . Since the increase, fewer waivers were allowed. The
increase in these charges discouraged those customers in the habit of using
insufficient funds, and other service charge originating activities also
declined. In 2003, as part of liquidity management, certain securities were sold
during the fourth quarter for a net gain of $165,000. In 2004, the only
significant activity was a $27,000 write down the impaired value of one
investment security. Within Other Income, the most significant item was an
increase of $121,000 from Tax free income on Officers' Life Insurance in 2004
over 2003. The change resulted from an increase in investment in this insurance.
32
Noninterest Expenses
- --------------------
The following table sets forth the various components of noninterest
expense:
TABLE 7 Noninterest Expenses
------------------------------------
(Dollars in thousands)
Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Salaries and employee benefits $ 10,521 $ 10,576 $ 10,604
Occupancy expense 1,288 1,240 1,246
Equipment expense 1,662 1,577 2,008
Advertising expense 472 218 324
Data processing expense 344 394 385
Professional fees 1,086 914 1,126
Director expense 180 152 150
Surety insurance 479 493 400
Telephone, postage, supplies 1,103 898 1,073
Bankcard expenses 803 818 787
Other 617 633 602
---------- ---------- ----------
Total noninterest expense $ 18,555 $ 17,913 $ 18,705
========== ========== ==========
Noninterest expenses for the year ended December 31, 2004 were
$18,555,000, an increase of $642,000 or 3.6% compared to 2003. For 2003, they
were $17,913,000, a decrease of $792,000 or 4.2% from 2002. In 2004, Advertising
increased $254,000. This included an increase of $95,000 in donations and public
relations, and an increase of $159,000 in advertising and promotions in
connection with new products, including Automated Bill Pay and Debit Cards.
Professional fees, involving various compliance issues, such as the Patriot Act
and the Sarbanes-Oxley Act increased by $172,000, and Telephone, Postage and
Supplies expense increased $205,000, mainly from the installation of a new
telephone system and related communications systems.
Balance Sheet Analysis
- ----------------------
Total assets were $490,054,000 at December 31, 2004, an increase of
14.1% over 2003. Total assets were $429,448,000 at December 31, 2003, an
increase of 6.9% over 2002. Assets averaged $461.1 in 2004, compared to $414.4
million in 2003 and $411.1 million in 2002. Average earning assets increased
from $375.3 million in 2002 to $379.3 million in 2003 and $418.3 million in
2004. Average earning assets represented 91.3% of total average assets in 2002,
91.5% in 2003 and 90.7% in 2004. Interest-bearing liabilities averaged $269.8
million in 2002, $264.9 million in 2003, and $295.0 million in 2004.
Loans
- -----
The loan portfolio is the principal earning asset of the Bank. Loans
outstanding at December 31, 2004 increased by $28.0 million or 8.9% compared to
December 31, 2003, while loans outstanding at December 31, 2003 increased by
$27.9 million or 9.7% compared to 2002.
33
Real Estate loans increased by $40.8 million or 19.0% in 2004 compared
to 2003 and increased by $3.1 million or 1.5% in 2003 compared to 2002.
Construction loans decreased by $4.0 million or 12.0% in 2004 compared to 2003
and increased $15.7 million or 47.5% in 2003 compared to 2002. Commercial loans
increased by $16.3 million or 38.3% in 2004 compared to 2003, and increased by
$9.7 million or 22.8% in 2003 compared to 2002. Consumer loans represent a
nominal portion of total loans. They decreased by $0.4 million or 12.4% in 2004
compared to 2003, and decreased $0.4 million or 13.7% in 2003 compared to 2002.
Table 8 presents a detailed analysis of loans outstanding at December
31, 2000 through December 31, 2004.
TABLE 8 Loan Portfolio
------------------------------------------------------------------
(in thousands)
December 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Real Estate loans $ 255,433 $ 214,588 $ 211,473 $ 217,650 $ 147,121
Construction loans 28,997 48,610 32,947 34,016 44,245
Commercial loans 58,849 52,248 42,549 39,195 39,010
Consumer loans 2,589 2,551 2,956 2,600 3,861
---------- ---------- ---------- ---------- ----------
Sub total 345,868 317,997 289,925 293,461 234,237
Net deferred loan fees (1,628) (1,784) (1,640) (1,851) (1,236)
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Total $ 344,240 $ 316,213 $ 288,285 $ 291,610 $ 233,001
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