SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2005
---------------------------------------------
FNB BANCORP
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(Exact name of registrant as specified in its charter)
California
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(State or other jurisdiction of incorporation)
000-49693 92-2115369
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
975 El Camino Real, South San Francisco, California 94080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 588-6800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock as of April 20,
2005: 2,566,332 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
March 31 December 31
2005 2004
------------ ------------
Cash and due from banks $ 17,110 $ 17,084
Federal funds sold 7,370 --
------------ ------------
Cash and cash equivalents 24,480 17,084
Securities available-for-sale 95,084 102,823
Loans, net 332,339 340,906
Bank premises, equipment, and leasehold improvements 11,576 11,614
Accrued interest receivable and other assets 18,343 17,627
------------ ------------
Total assets $ 481,822 $ 490,054
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand, noninterest bearing $ 108,843 $ 109,758
Demand, interest bearing 53,128 51,818
Savings and money market 164,956 160,062
Time 97,695 91,615
------------ ------------
Total deposits 424,622 413,253
Federal funds purchased -- 19,172
Accrued expenses and other liabilities 5,619 5,000
------------ ------------
Total liabilities 430,241 437,425
------------ ------------
Stockholders' equity
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 2,566,000 shares at March 31, 2005
and 2,586,000 shares at December 31, 2004 30,628 31,365
Additional paid-in capital 11 9
Retained earnings 20,939 20,689
Accumulated other comprehensive income 3 566
------------ ------------
Total stockholders' equity 51,581 52,629
------------ ------------
Total liabilities and stockholders' equity $ 481,822 $ 490,054
============ ============
See accompanying notes to consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands, except share and per share amounts)
Three months ended
March 31,
---------------------------
2005 2004
------------ ------------
Interest income:
Interest and fees on loans $ 5,694 $ 5,191
Interest on securities 441 223
Interest on tax-exempt securities 329 291
Federal funds sold 51 32
------------ ------------
Total interest income 6,515 5,737
------------ ------------
Interest expense:
Interest on deposits 909 563
Other interest expense 56 --
------------ ------------
Total interest expense 965 563
------------ ------------
Net interest income 5,550 5,174
Provision for loan losses 120 120
------------ ------------
Net interest income after provision for loan losses 5,430 5,054
------------ ------------
Noninterest income:
Service charges 567 661
Credit card fees 216 207
Other income 120 55
------------ ------------
Total noninterest income 903 923
------------ ------------
Noninterest expense:
Salaries and employee benefits 2,805 2,690
Occupancy expense 315 358
Equipment expense 370 422
Professional fees 250 250
Telephone, postage and supplies 194 313
Bankcard expenses 199 178
Securities write-down 66 --
Other expense 703 534
------------ ------------
Total noninterest expense 4,902 4,745
------------ ------------
Earnings before income tax expense 1,431 1,232
Income tax expense 415 329
------------ ------------
NET EARNINGS $ 1,016 $ 903
============ ============
Dividends declared per common share $ 0.30 $ 0.24
Earnings per share data:
Basic $ 0.39 $ 0.34
Diluted $ 0.39 $ 0.34
Weighted average shares outstanding:
Basic 2,577,000 2,641,000
Diluted 2,635,000 2,687,000
See accompanying notes to consolidated financial statements.
3
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in thousands)
Three months ended
March 31,
---------------------------
2005 2004
------------ ------------
Net earnings $ 1,016 $ 903
Unrealized gain/(loss) on AFS securities (563) 64
------------ ------------
Total comprehensive income $ 453 $ 967
============ ============
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three months ended
March 31
---------------------------
2005 2004
------------ ------------
Cash flow from operating activities
Net earnings $ 1,016 $ 903
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization 379 442
Stock-based compensation expense 2 1
Provision for loan losses 120 120
Securities write-down 66 --
Changes in assets and liabilities:
Accrued interest receivable and other assets (716) (1,388)
Accrued expenses and other liabilities 626 1,609
------------ ------------
Net cash provided by operating activities 1,493 1,687
------------ ------------
Cash flows from investing activities
Purchase of securities available-for-sale (3,746) --
Proceeds from matured/called/securities available-for-sale 10,361 11,183
Net decrease (increase) in loans 8,447 (3,030)
Net increase in other real estate owned -- (5,827)
Proceeds from sale of bank premises, equipment and leasehold
improvements -- 21
Purchases of bank premises, equipment, leasehold improvements (237) (700)
------------ ------------
Net cash provided by investing activities 14,825 1,647
------------ ------------
Cash flows from financing activities
Net increase in demand and savings deposits 5,289 5,557
Net increase (decrease) in time deposits 6,080 (1,447)
Net decrease in federal funds purchased (19,172) --
Dividends paid (382) (605)
Repurchase of common stock (765) (420)
Issuance of common stock 28 104
------------ ------------
Net cash provided by financing activities (8,922) 3,189
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,396 6,523
Cash and cash equivalents at beginning of period 17,084 30,644
------------ ------------
Cash and cash equivalents at end of period $ 24,480 $ 37,167
============ ============
Additional cash flow information
Interest paid $ 864 $ 553
Income taxes paid $ 337 $ 250
Non-cash financial activity
Accrued dividends $ 384 $ 303
See accompanying notes to consolidated financial statements.
5
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
FNB Bancorp (the "Company") is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. The Company was incorporated
under the laws of the State of California on February 28, 2001. The consolidated
financial statements include the accounts of FNB Bancorp and its wholly owned
subsidiary, First National Bank of Northern California (the "Bank"). The Bank
provides traditional banking services in San Mateo and San Francisco counties.
All intercompany transactions and balances have been eliminated in
consolidation. The financial statements include all adjustments of a normal and
recurring nature, which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2004.
Results of operations for interim periods are not necessarily
indicative of results for the full year.
NOTE B - ACQUISITION
On May 2, 2005, the Company announced that its wholly owned subsidiary,
First National Bank of Northern California, had completed its acquisition of
Sequoia National Bank, with two offices in San Francisco. Sequoia was
consolidated with and merged into First National Bank of Northern California
effective April 30, 2005. Sequoia had approximately $62,000,000 in total assets.
Under the terms of the Acquisition Agreement, holders of the 4,749,646 Sequoia
shares of common stock and options for 88,125 shares outstanding will receive
approximately $11,137,962 in cash, subject to an escrow holdback of $1,500,000
for a maximum of 120 days, in order to pay for certain contingencies specified
in the Acquisition Agreement. Effective May 2, 2005, the former banking offices
of Sequoia National Bank began operating as branch offices of First National
Bank of Northern California.
NOTE C - STOCK OPTION PLANS
At March 31, 2005, the Company has two stock-based employee
compensation plans. Prior to 2003, the Company accounted for the plan under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Effective January 1,
2003, the Company adopted the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, prospectively to all
employee awards granted, modified, or settled after January 1, 2003. Therefore,
the cost related to stock-based employee compensation included in the
determination of net income for 2004 and 2005 is less than that which would have
been recognized if the fair value based method had been applied to all awards
since the original effective date of Statement No. 123. Awards under the
6
Company's plan vest over periods ranging from three to five years. The following
table illustrates the effect on net income and earnings per share if the fair
value based method had been applied to all outstanding and unvested awards in
each period.
(In thousands, except per share) Three months ended
March 31
---------------------------
2005 2004
------------ ------------
Net income as reported $ 1,016 $ 903
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects 2 1
Deduct: total stock-based employee
compensation expense determined
under fair value method for all awards, net
of related tax effect (3) (1)
Pro forma net income $ 1,015 $ 903
Earnings per share:
Basic - as reported $ 0.39 $ 0.34
Basic - pro forma $ 0.39 $ 0.34
Diluted - as reported $ 0.39 $ 0.34
Diluted - pro forma $ 0.39 $ 0.34
NOTE D - EARNINGS PER SHARE CALCULATION
Earnings per common share (EPS) are computed based on the weighted
average number of common shares outstanding during the period. Basic EPS
excludes dilution and is computed by dividing net earnings by the weighted
average of common shares outstanding. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
(In thousands, except number of shares) Three months ended
March 31,
---------------------------
2005 2004
------------ ------------
Net earnings $ 1,106 $ 903
Weighted average basic shares outstanding 2,577,000 2,641,000
Effect of dilutive options 58,000 46,000
------------ ------------
Weighted average number of shares outstanding
used to calculate diluted earnings per share 2,635,000 2,687,000
============ ============
All outstanding options were included in the 2005 and 2004 computations.
NOTE E - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income consists of net unrealized gains
on investment securities available for sale. Comprehensive income for the three
months ended March 31, 2005 was $453,000 compared to $967,000 for the three
months ended March 31, 2004.
7
NOTE F - OTHER REAL ESTATE OWNED
Loans that have become delinquent through non payment of scheduled
principal and/or interest for 90 days are placed in nonaccrual and interest is
no longer accrued. If a favorable restructuring can not be made for the loan
(provided the market value of the collateral is sufficient), or, if
insufficient, or the borrower is unable to make further payments, foreclosure
procedures are initiated. If there are no bidders, or if bids are made and are
insufficient to cover the debt, the Bank will acquire the property at sale under
judgments, decrees, or mortgages where the property was originally security for
debts previously contracted. The Company had no other real estate owned property
at March 31, 2005 and December 31, 2004. On April 1, 2005, the Bank foreclosed
on a loan previously held in non accrual with a balance of $2,600,000, and is
currently in Other Real Estate Owned. The property securing the loan is a
research and development 19,000 square foot office building in Mountain View,
California.
NOTE G - STOCK REPURCHASE PROGRAM
On July 25, 2003, the Board of Directors authorized a stock repurchase
program, which calls for the repurchase of up to 5% of the Company's shares of
common stock.
The program was extended on January 23, 2004 and then terminated by
action of the Board of Directors on March 25, 2005.
NOTE H - OTHER-THAN-TEMPORARY IMPAIRMENTS OF CERTAIN INVESTMENTS
On March 31, 2004, the FASB ratified EITF Issue No. 03-01, which
provides guidance on recognizing other-than-temporary impairments on certain
investments. The issue is effective for other-than-temporary impairment
evaluations for investments accounted for under SFAS No. 115, as well as
non-marketable equity securities accounted for under the cost method and was
originally scheduled to become effective for reporting periods beginning July 1,
2004.
On September 30, 2004 the FASB delayed certain provisions of EITF
03-01.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 policies require significant judgments and estimates.
8
Allowance for Loan Losses
-------------------------
The allowance for loan losses is periodically evaluated for adequacy by
management. Factors considered include the Company's loan loss experience, known
and inherent risks in the portfolio, current economic conditions, known adverse
situations that may affect the borrower's ability to repay, regulatory policies,
and the estimated value of underlying collateral. The evaluation of the adequacy
of the allowance is based on the above factors along with prevailing and
anticipated economic conditions that may impact borrowers' ability to repay
loans. Determination of the allowance is in part objective and in part a
subjective judgment by management based on the information it currently has in
its possession. Adverse changes in any of these factors or the discovery of new
adverse information could result in higher than expected charge-offs and loan
loss provisions.
EARNINGS ANALYSIS
-----------------
Net earnings for the quarter ended March 31, 2005 were $1,016,000,
compared to net earnings of $903,000 for the quarter ended March 31, 2004. Gross
earnings before income tax expense for the quarter ended March 31, 2005 were
$1,431,000, compared to $1,232,000 for the quarter ended March 31, 2004. The
$113,000 improvement in net earnings was largely attributable to the changes in
prime rate and cost of funds, as mentioned below. The $376,000 increase in net
interest income was partly offset by a securities write-down of $66,000 in
recognition of impairment in value of certain equity securities and a $91,000
increase in noninterest expense.
Net interest income for the quarter ended March 31, 2005 was
$5,550,000, compared to $5,174,000 for the quarter ended March 31, 2004. The
prime lending rate was 5.25% at the beginning of 2005, and rose to 5.50% on
February 2, 2005 and 5.75% on March 22, 2005. This compares with 4.00% for the
first quarter of 2004. The Federal Home Loan Bank of San Francisco's Weighted
Monthly Cost of Funds Index, based on the months when it is announced, averaged
2.21% for the quarter ended March 31, 2005 compared with 1.85% for the quarter
ended March 31, 2004. This resulted in a $376,000 increase in net interest for
the quarter ended March 31, 2005 compared to March 31, 2004. The volume of loans
affected by the prime lending rate compared to the volume of interest-bearing
deposits, and the size of the rate changes, as well as the timing of when they
took effect all contributed to the improvement of 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.
Noninterest income was $903,000 and $923,000 for the quarters ended
March 31, 2005 and 2004, respectively, Service charges declined $94,000, mostly
from a decline in analysis charges and non- sufficient fund charges. Other
income increased $65,000, mainly from a $40,000 increase in tax free income on
officers' life insurance policies for the quarter March 31, 2005 over March 31,
2004.
Noninterest expense increased $157,000 in the quarter ended March 31,
2005 compared to the same quarter in 2004. The sub caption "Other Expense,"
which represents many small accounts, increased to $769,000 in the first quarter
of 2005 from $534,000 in the first quarter of 2004, an increase of $235,000.
This was the main fluctuation in noninterest expense. This included an increase
in Marketing and Promotion, which increased $58,000, mainly from greater
newspaper advertising, $49,000 related to ATM Network expense, and the remainder
in other small categories. Additionally, the Bank wrote down $66,000 as an
impaired value adjustment on Federal National Mortgage Corp. securities in the
quarter ended March 31, 2005, contributing to the overall increase in
noninterest expense .
The effective tax rate was 29.0% in the first quarter of 2005 compared
to 26.7% in the same quarter of 2004. The variance from period to period was due
to different volumes of investments in tax-free securities, Low Income Housing
Credits, loans in Enterprise Zones, and the effective state tax rate.
9
Basic and diluted earnings per share were $0.39 for the first quarter
of 2005 compared to $0.34 for the first quarter of 2004.
The following table presents an analysis of net interest income and
average earning assets and liabilities for the three-month period ended March
31, 2005 compared to the three-month period ended March 31, 2004.
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
- -------
(Dollars in thousands)
Three months ended March 31,
---------------------------------------------------------------------------
2005 2004
----------------------------------- -----------------------------------
Annualized Annualized
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
---------- ---------- -------- ---------- ---------- --------
Loans, gross $ 337,687 $ 5,694 6.84% $ 314,565 $ 5,191 6.69%
Taxable securities 58,804 441 3.04 26,933 223 3.36
Nontaxable securities 40,093 329 3.33 32,531 291 3.63
Federal funds sold 8,382 51 2.47 13,376 32 0.97
---------- ---------- ---------- ----------
Total interest earning assets $ 444,966 $ 6,515 5.94 $ 387,405 $ 5,737 6.01
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,026 $ 18,158
Premises and equipment 11,589 11,048
Other assets 14,616 12,762
---------- ----------
Total noninterest earning assets $ 45,231 $ 41,968
---------- ----------
TOTAL ASSETS $ 490,197 $ 429,373
========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 53,894 $ (36) (0.27) $ 57,486 $ (31) (0.22)
Money market 102,963 (355) (1.40) 67,080 (127) (0.77)
Savings 59,358 (39) (0.27) 58,313 (38) (0.26)
Time deposits 97,310 (479) (2.00) 92,229 (367) (1.61)
Federal funds purchased and other
borrowings 8,951 (56) (2.54) -- -- --
---------- ---------- ---------- ----------
Total interest bearing liabilities $ 322,476 $ (965) (1.21) $ 275,108 $ (563) (0.83)
---------- ---------- ---------- ----------
NONINTEREST BEARING LIABILITIES
Demand deposits 109,456 96,252
Other liabilities 5,618 5,663
---------- ----------
Total noninterest bearing liabilities $ 115,074 $ 101,915
---------- ----------
TOTAL LIABILITIES $ 437,550 $ 377,023
Stockholders' equity $ 52,647 $ 52,350
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 490,197 $ 429,373
========== ==========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 5,550 5.06% $ 5,174 5.42%
Interest income is reflected on an actual basis, not on a fully taxable basis
due to immaterial effect. Yield on gross loans was not adjusted for nonaccrual
loans, which were not considered material for this calculation.
10
Table 1, above, shows the various components that contributed to
changes in net interest income for the two quarterly periods of 2005 and 2004.
Average interest earning assets for the quarter ended March 31, 2005 increased
$57,561,000 or 14.9% over the same quarter the year before. The principal
interest earning assets are loans, from a volume perspective as well as from an
earnings rate. For the quarter ended March 31, 2005, average loans outstanding
represented 75.9% of average earning assets. For the quarter ended March 31,
2004, they represented 81.2% of average earning assets. Loan volume increased
$23,122,000 in the first quarter of 2005 compared to the same quarter in 2004,
an increase of 7.4%. Loan income increased $503,000 in the same period, or 9.7%.
The yield increased slightly by 15 basis points. Although the average volume of
taxable securities increased by $31,871,000, the yield decreased by 32 basis
points, partly as a result of a greater mix of shorter term investments in
anticipation of the return of rising interest rates.
The cost on total interest bearing liabilities increased from 0.83% to
1.21%, an increase of 38 basis points. Most of the change could be seen in money
market deposits, where rates paid in the first quarter of 2004 were 0.77%, and
rose to 1.40% in the first quarter of 2005. The higher rate, in turn, caused an
increase in money market deposits, which averaged $35,883,000 or 53.5% higher in
the first quarter of 2005. The increase of $57,561,000 in average interest
earning assets was funded mostly by the $35,883,000 in money market deposits,
and $8,951,000 in federal funds and other borrowed money.
For the three months ended March 31, 2005 the following table shows the
dollar amount of change in interest income and expense and the dollar amounts
attributable to: (a) changes in volume (changes in volume at the current year
rate), b) changes in rate (changes in rate times the prior year's volume) and
(c) changes in rate/volume (changes in rate times change in volume). In this
table, the dollar change in rate/volume is prorated to volume and rate
proportionately.
Table 2
- -------
RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended March 31,
(In thousands) 2005 Compared To 2004
----------------------------------------------------
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 503 $ 113 $ 390
Taxable securities 218 (21) 239
Nontaxable securities 38 (24) 62
Federal funds sold 19 (12) 31
------------ ------------ ------------
Total $ 778 $ 99 $ 679
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 5 $ 7 $ (2)
Money market 228 104 124
Savings deposits 1 -- 1
Time deposits 112 92 20
Federal funds and other borrowed money 56 -- 56
------------ ------------ ------------
Total $ 402 $ 203 $ 199
------------ ------------ ------------
NET INTEREST INCOME $ 376 $ (104) $ 480
============ ============ ============
11
Noninterest income
- ------------------
The following table shows the principal components of noninterest
income for the periods indicated.
Table 3 NONINTEREST INCOME
- -------
(In thousands) Three months ended March 31,
---------------------------
2005 2004
---------- ----------
Service charges $ 567 $ 661
Credit card fees 216 207
Other income 120 55
---------- ----------
Total noninterest income $ 903 $ 923
========== ==========
Noninterest income consists mainly of service charges on deposits,
credit card fees, and other miscellaneous types of income. Service charges
decreased $94,000 in the quarter ended March 31, 2005 from the same quarter in
2004. Most of this was from a $49,000 decrease in analysis charges and a
decrease of $31,000 in non sufficient fund charges on deposits. Other income
increased $65,000 in the first quarter of 2005 compared to the first quarter of
2004. The most significant item in this area was a $40,000 increase in tax free
income on officers' life insurance policies, due to an increase in investment in
this insurance.
Noninterest expense
- -------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
Table 4 NONINTEREST EXPENSE
- -------
(In thousands) Three months ended March 31,
---------------------------
2005 2004
---------- ----------
Salaries and employee benefits $ 2,805 $ 2,690
Occupancy expense 315 358
Equipment expense 370 422
Professional fees 250 250
Telephone, postage and supplies 194 313
Bankcard expenses 199 178
Securities write-down 66 --
Other expense 703 534
---------- ----------
Total noninterest expense $ 4,902 $ 4,745
========== ==========
Noninterest expense consists of salaries and employee benefits
representing more than half of the total, and various smaller categories.
Salaries and employee benefits increased by $115,000 or 4.3% in the quarter
ended March 31, 2005 compared to the same quarter of 2004. In the quarter ended
March 2005 compared to the same quarter in 2004, occupancy expense decreased by
$43,000. Most of this was from the relocation of the San Mateo Branch, and final
rent on the former location during the 2004 quarter. Equipment expense decreased
$52,000 quarter-to-quarter. The principal decrease was in service contracts on
equipment, which declined $36,000 in the quarter ended March 31, 2005 compared
12
to the same quarter in 2004. Telephone, postage and supplies decreased by
$119,000 for the first quarter of 2005 compared to the first quarter of 2004.
Within this total, telephone declined $54,000, postage declined $25,000, and
supplies declined $38,000, while courier expense rose by about $2,000.
Conversion to a new telephone system increased expenses in 2004, but has been
absorbed by the first quarter of 2005. The sub caption Other Expense includes a
$66,000 write-down representing the impaired value of the Bank's investment in
Federal National Mortgage Corporation securities in 2005.
Income Taxes
- ------------
The effective tax rate for the quarter ended March 31, 2005 was 29.0%
compared to 26.7% for the quarter ended March 31, 2004. This is affected by
changing amounts invested in tax-free securities, by available Low Income
Housing Credits, by amounts of interest income on qualifying loans in Enterprise
zones, and by the effective state tax rate.
Asset and Liability Management
- ------------------------------
Ongoing management of the Company's interest rate sensitivity, limits
interest rate risk through monitoring the mix and maturity of loans, investments
and deposits. Management regularly reviews the Company's position and evaluates
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth
and deposit withdrawals, as well as to provide for general needs, the Company
must maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
comes from Company's customer base, which provides core deposit growth. The
overall liquidity position of the Company is closely monitored and evaluated
regularly. Management believes the Company's liquidity sources at March 31, 2005
are adequate to meet its operating needs in 2005 and going forward into the
foreseeable future.
The Company's asset/liability gap is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. Alternatively, if
more liabilities than assets will reprice, the institution is in a
liability-sensitive position. Accordingly, net interest income would decline
when rates rose and increase when rates fell.
The following table sets forth information concerning interest rate
sensitive assets and liabilities as of March 31, 2005. The assets and
liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms. Since all interest rates and yields do
not adjust at the same speed or magnitude, and since volatility is subject to
change, the gap is only a general indicator of interest rate sensitivity.
13
Table 5
- ------- RATE SENSITIVE ASSETS/LIABILITIES
As of March 31, 2005
(Dollars in thousands) ---------------------------------------------------------------------------
Over
Three Three To Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
--------- --------- --------- --------- --------- ---------
Interest earning assets:
Federal funds sold $ 7,370 $ -- $ -- $ -- $ -- $ 7,370
Securities available for sale 6,430 16,693 61,626 10,335 -- 95,084
Loans 279,272 12,408 12,034 29,294 2,725 335,733
--------- --------- --------- --------- --------- ---------
Total interest earning assets 293,072 29,101 73,660 39,629 2,725 438,187
Cash and due from banks -- -- -- -- 17,110 17,110
Allowance for loan losses -- -- -- -- (3,394) (3,394)
Other assets -- -- -- -- 29,919 29,919
--------- --------- --------- --------- --------- ---------
Total assets $ 293,072 $ 29,101 $ 73,660 $ 39,629 $ 46,360 $ 481,822
========= ========= ========= ========= ========= =========
Interest bearing liabilities:
Demand, interest bearing $ 53,128 $ -- $ -- $ -- $ -- $ 53,128
Savings and money market 164,956 -- -- -- -- 164,956
Time deposits 33,865 44,380 19,450 -- -- 97,695
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities 251,949 44,380 19,450 -- -- 315,779
--------- --------- --------- --------- --------- ---------
Noninterest demand deposits -- -- -- -- 108,843 108,843
Other liabilities -- -- -- -- 5,619 5,619
Stockholders' equity -- -- -- -- 51,581 51,581
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 251,949 $ 44,380 $ 19,450 $ -- $ 166,043 $ 481,822
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $ 41,123 $ (15,279) $ 54,210 $ 39,629 ($119,683) $ --
========= ========= ========= ========= ========= =========
Cumulative interest rate sensitivity gap $ 41,123 $ 25,844 $ 80,054 $ 119,683 $ -- $ --
Cumulative interest rate sensitivity gap ratio 14.03% 8.02% 20.22% 27.48% -- --
Financial Condition
- -------------------
Assets. Total assets decreased to $481,822,000 at March 31, 2005 from
$490,054,000 at December 31, 2004, a decrease of $8,232,000. Most of this
decrease was in securities, which decreased $7,739,000, and net loans, which
decreased $8,567,000, offset by an increase of $7,370,000 in federal funds sold.
The decrease in assets, plus an increase in deposits of $11,369,000, paid off
the $19,172,000 in federal funds purchased.
Loans. Net loans at March 31, 2005 were $332,339,000, a decrease of
$8,567,000 or 2.5% from December 31, 2004. Commercial loans decreased
$7,534,000, representing most of the decrease, while real estate and
construction loans increased by $700,000, and consumer loans decreased $401,000.
The portfolio mix was as follows.
Table 6 LOAN PORTFOLIO
- ------- ---------------------------------------------------
March 31, December 31,
(Dollars in thousands) 2005 Percent 2004 Percent
--------- --------- --------- ----------
Real Estate $ 257,348 76.3% $ 255,433 73.9%
Construction 26,382 7.8 28,997 8.4
Commercial 51,315 15.2 58,849 17.0
Consumer 2,188 0.7 2,589 0.7
--------- --------- --------- ----------
Gross loans 337,233 100.0% 345,868 100.0%
========= =========
Net deferred loan fees (1,500) (1,628)
Allowance for loan losses (3,394) (3,334)
--------- ---------
Net loans $ 332,339 $ 340,906
========= ==========
14
Allowance for loan losses. The Company has the responsibility of
assessing the overall risks in its portfolio, assessing the specific loss
expectancy, and determining the adequacy of the allowance for loan losses. The
level of the allowance is determined by internally generating credit quality
ratings, reviewing economic conditions in the Company's market area, and
considering the Company's historical loan loss experience. The Company is
committed to maintaining an adequate allowance, identifying credit weaknesses by
consistent review of loans, and maintaining the ratings and changing those
ratings in a timely manner as circumstances change.
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2005 and the year ended December 31, 2004 is as
follows:
Table 7 ALLOWANCE FOR LOAN LOSSES
- -------
Three months ended Three months ended
(In thousands) March 31, 2005 March 31, 2004
--------------- ---------------
Balance, beginning of period $ 3,334 $ 3,284
Provision for loan losses 120 120
Recoveries 13 --
Amounts charged off (73) (385)
--------------- ---------------
Balance, end of period $ 3,394 $ 3,019
=============== ===============
In management's judgment, the allowance was adequate to absorb
losses currently inherent in the loan portfolio at March 31, 2005. However,
changes in prevailing economic conditions in the Company's markets or in the
financial condition of its customers could result in changes in the level of
nonperforming assets and charge-offs in the future and, accordingly, changes in
the allowance.
Nonperforming assets. Nonperforming assets consist of nonaccrual
loans, foreclosed assets, and loans that are 90 days or more past due but are
still accruing interest. At March 31, 2005, there was $2,725,000 in non-accrual
loans, compared to $2,798,000 at December 31, 2004. The March total consisted of
three adequately secured loans, of which two were also outstanding on December
2004. A smaller loan with a $5,000 remaining balance was added in March, and has
since been sold. The principal loan was $2,670,000 at December, and was written
down to its current appraised value of $2,600,000 at March 2005, and
subsequently foreclosed on April 1, 2005.
Deposits. Total deposits at March 31, 2005 were $424,622,000
compared to $413,253,000 on December 31, 2004. Of these totals,
noninterest-bearing demand deposits were $108,843,000 or 25.6% of the total on
March 31, 2005 and $109,758,000 or 26.6% on December 31, 2004. Time deposits
were $97,695,000 on March 31, 2005 and $91,615,000 on December 31, 2004.
The following table sets forth the maturity schedule of the time certificates of
deposit on March 31, 2005:
Table 8
- -------
(In thousands) Under $100,000
Maturities: $100,000 or more Total
---------- ---------- ----------
Three months or less $ 16,161 $ 17,704 $ 33,865
Over three to six months 11,250 14,383 25,633
Over six through twelve months 8,847 9,900 18,747
Over twelve months 12,794 6,656 19,450
---------- ---------- ----------
Total $ 49,052 $ 48,643 $ 97,695
========== ========== ==========
15
The following table shows the consolidated risk-based capital ratios
and leverage ratios at March 31, 2005 and December 31, 2004.
Table 9
- ------- Minimum "Well
March 31, December 31, Capitalized"
Risk-Based Capital Ratios 2005 2004 Requirements
- -------------------------- ---------- ---------- ------------
Tier 1 Capital 12.40% 12.69% > 6.00%
-
Total Capital 13.22% 13.50% > 10.00%
-
Leverage Ratios 10.54% 10.72% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimum loss. As of March 31, 2005, Liquid Assets were
$119,564,000, or 24.8% of total assets. As of December 31, 2004, Liquid Assets
were $119,907,000, or 24.5% of total assets. Liquidity consists of cash and due
from other banks accounts, federal funds sold, and securities
available-for-sale. The Company's primary uses of funds are loans, and the
primary sources of funds are deposits. The relationship between total net loans
and total deposits is a useful additional measure of liquidity. The Company also
has federal fund borrowing facilities for a total of $50,000,000, a Federal Home
Loan Bank line of up to 25% of total assets, and a Federal Reserve Bank
facility. As of March 31, 2005, there were no amounts outstanding.
A higher loan to deposit ratio means that assets will be less liquid.
This has to be balanced against the fact that loans represent the highest
interest earning assets A lower loan to deposit ratio means lower potential
income. On March 31, 2005 net loans were at 78.3% of deposits. On December 31,
2004 net loans were at 82.5%.
Forward-Looking Information and Uncertainties Regarding Future
Financial Performance.
--------------------------------------------------------------
This report, including management's discussion above, concerning
earnings and financial condition, contains "forward-looking statements".
Forward-looking statements are estimates of or statements about expectations or
beliefs regarding the Company's future financial performance or anticipated
future financial condition that are based on current information and that are
subject to a number of risks and uncertainties that could cause actual operating
results in the future to differ significantly from those expected at the current
time. Those risks and uncertainties include, although they are not limited to,
the following components.
Increased competition. Increased competition from other banks and
financial service businesses, mutual funds and securities brokerage and
investment banking firms that offer competitive loan and investment products
could require us to reduce interest rates and loan fees to attract new loans or
to increase interest rates that we offer on time deposits, either or both of
which could, in turn, reduce interest income and net interest margins.
Possible adverse changes in economic conditions. Adverse changes in
national or local economic conditions could (i) reduce loan demand which could,
in turn, reduce interest income and net interest margins; (ii) adversely affect
the financial capability of borrowers to meet their loan obligations, which, in
turn, could result in increases in loan losses and require increases in
provisions for possible loan losses, thereby adversely affecting operating
results; and (iii) lead to reductions in real property values that, due to the
Company's reliance on real property to secure many of its loans, could make it
more difficult to prevent losses from being incurred on non-performing loans
through the sale of such real properties.
16
Possible adverse changes in national economic conditions and Federal
Reserve Board monetary policies. Changes in national economic policies, such as
increases in inflation or declines in economic output often prompt changes in
Federal Reserve Board monetary policies that could reduce interest income or
increase the cost of funds to the Company, either of which could result in
reduced earnings.
Changes in regulatory policies. Changes in federal and national bank
regulatory policies, such as increases in capital requirements or in loan loss
reserve or asset/liability ratio requirements, could adversely affect earnings
by reducing yields on earning assets or increasing operating costs.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this report, which speak only as of the date of this report, or to
make predictions based solely on historical financial performance. The Company
also disclaims any obligation to update forward-looking statements contained in
this report.
Other Matters
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. As of March 31,
2005 and December 31, 2004, commitments to extend credit and letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and letters of
credit were $89,014,000 and $83,078,000 at March 31, 2005 and December 31, 2004,
respectively. As a percentage of net loans, these off-balance sheet items
represent 26.8% and 24.4% respectively.
Corporate Reform Legislation
President George W. Bush signed the "Sarbanes-Oxley Act of 2002" (the
"Act") on July 30, 2002, which responds to the recent corporate accounting
scandals. Among other matters, the Act increases the penalties for securities
fraud, establishes new rules for financial analysts to prevent conflicts of
interest, creates a new independent oversight board for the accounting
profession, imposes restrictions on the consulting activities of accounting
firms that audit company records and requires certification of financial reports
by corporate executives. The SEC has adopted a number of rule changes to
implement the provisions of the Act.. The SEC has also approved new rules
proposed and adopted by the New York Stock Exchange and the Nasdaq Stock Market
to strengthen corporate governance standards for listed companies. The Company
does not currently anticipate that compliance with the Act (including the rules
adopted pursuant to the Act) will have a material effect upon its financial
position or results of its operations or its cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may change
as a result of changes in interest rates and other market conditions. Market
risk is attributed to all market risk sensitive financial instruments, including
loans, investment securities, deposits and borrowings. The Company does not
engage in trading activities or participate in foreign currency transactions for
its own account. Accordingly, exposure to market risk is primarily a function of
asset and liability management activities and of changes in market rates of
interest. Changes in rates can cause or require increases in the rates paid on
deposits that may take effect more rapidly or may be greater than the increases
in the interest rates that the Company is able to charge on loans and the yields
that it can realize on its investments. The extent of that market risk depends
on a number of variables including the sensitivity to changes in market interest
rates and the maturities of the Company's interest earning assets and deposits.
For the quarter ended March 31, 2004, the prime lending rate held steady at
17
4.00%. At the beginning of 2005, the prime rate was at 5.25% and rose to 5.50%
on February 2, 2005 and finally to 5.75% on March 22, 2005. The changes did not
have a material effect on earnings.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
and other members of the Company's senior management as of the end of the
Company's fiscal quarter ended March 31, 2005. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
(b) Internal Control Over Financial Reporting: Management has
responsibility for establishing and maintaining adequate internal control over
financial reporting for the Company. An evaluation of any changes in the
Company's internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)), that occurred during the Company's fiscal
quarter ended March 31, 2005, was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
and other members of the Company's senior management. The Company's Chief
Executive Officer and Chief Financial Officer concluded that no change
identified in connection with such evaluation has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
18
PART II--OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 (or Unit) Announced Plans or May Yet Be Purchased
Programs Under the Plans or
Programs
- ------------------- -------------- ------------ --------------------- ----------------------------
Month #1
January 1 5,300 $36.61 5,300 17,667
through
January 31, 2005
- ------------------- -------------- ------------ --------------------- ----------------------------
Month #2
February 1 6,400 $36.41 6,400 11,267
through
February 28, 2005
- ------------------- -------------- ------------ --------------------- ----------------------------
Month #3
March 1 9,500 $35.56 9,500 1,767
through
March 25, 2005
- ------------------- -------------- ------------ --------------------- ----------------------------
Total 21,200 21,200
- ------------------- -------------- ------------ --------------------- ----------------------------
* 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. The program was
extended on January 23, 2004, and then terminated by action of the Board of
Directors on March 25, 2005. A total of 127,631 shares (adjusted for stock
dividends paid in 2003 and 2004) were repurchased under the program, from
inception of the program in 2003. All repurchased shares were made in open
market transactions, in compliance with Commission Rule 10b-18, and then
retired. At March 25, 2005, 1,767 shares remained.
19
Item 6. Exhibits
Exhibits
31: Rule 13a-14(a)/15d-14(a) Certifications
32: Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FNB BANCORP
(Registrant)
Dated: May 9, 2005. By: /s/ THOMAS C. MCGRAW
-------------------------------------
Thomas C. McGraw
Chief Executive Officer
(Authorized Officer)
By: /s/ JAMES B. RAMSEY
-------------------------------------
James B. Ramsey
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
20