FNB BANCORP/CA/ - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - FNB BANCORP/CA/	ex32.htm
EX-31.2 - EXHIBIT 31.2 - FNB BANCORP/CA/	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - FNB BANCORP/CA/	ex31_1.htm

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 June 30, 2011

FNB BANCORP

(Exact name of registrant as specified in its charter)

California

(State or other jurisdiction of incorporation)

000-49693		92-2115369
(Commission File Number)		(IRS Employer Identification No.)

975 El Camino Real, South San Francisco, California		94080
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (650) 588-6800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large accelerated filer o		Accelerated filer o

	Non-accelerated filer x		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o 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 August 3, 2011: 3,341,994 shares.

FNB BANCORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page No
PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited):	3

	Consolidated Balance Sheets	3

	Consolidated Statement of Earnings	4

	Consolidated Statement of Comprehensive Earnings	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4T.	Controls and Procedures	40

PART II. OTHER INFORMATION		40

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 6.	Exhibits	42

SIGNATURES		42

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30,		December 31,
(Dollar amounts in thousands)	2011		2010

ASSETS

Cash and due from banks	$	68,654	$	60,874
Securities available-for-sale, at fair value		143,164		126,189
Loans, net of allowance for loan losses of $9,719 and $9,524 on June 30, 2011 and December 31, 2010		459,756		474,828
Bank premises, equipment, and leasehold improvements, net		13,647		13,535
Other real estate owned		2,438		6,680
Goodwill		1,841		1,841
Accrued interest receivable and other assets		28,948		30,692
Total assets	$	718,448	$	714,639

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Demand, noninterest bearing		138,249		137,237
Demand, interest bearing		62,901		60,413
Savings and money market		313,744		305,390
Time		113,614		125,400
Total deposits		628,508		628,440

Accrued expenses and other liabilities		6,010		5,275
Total liabilities		634,518		633,715

Stockholders’ equity
Preferred stock - series A - no par value, authorized and outstanding 12,000 shares (liquidation preference of $1,000 per share plus accrued dividends)		11,837		11,747
Preferred stock - series B - no par value, authorized and outstanding 600 shares (liquidation preference of $1,000 per share plus accrued dividends)		610		615
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 3,341,994 shares at June 30, 2011 and 3,341,049 shares at December 31, 2010		46,726		46,565
Retained earnings		23,165		21,760
Accumulated other comprehensive income		1,592		237
Total stockholders’ equity		83,930		80,924
Total liabilities and stockholders’ equity	$	718,448	$	714,639

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

(Dollar amounts and average shares are in thousands, except earnings per share amounts)

	Three months ended					Six months ended
	June 30,					June 30,
	2011		2010			2011			2010
Interest income:
Interest and fees on loans	$	7,407	$	7,954		$	14,845		$	15,936
Interest on taxable securities		462		504			866			941
Interest on tax-exempt securities		401		298			778			539
Total interest income		8,270		8,756			16,489			17,416
Interest expense:
Deposits		857		1,223			1,741			2,663
Federal Home Loan Bank advances		—		107			—			367
Total interest expense		857		1,330			1,741			3,030
Net interest income		7,413		7,426			14,748			14,386
Provision for loan losses		400		315			850			565
Net interest income after provision for loan losses		7,013		7,111			13,898			13,821
Noninterest income:
Service charges		811		674			1,508			1,359
Credit card fees		178		162			328			314
Gain on sale of securities		128		54			150			162
Bank owned life insurance earnings		84		81			165			159
Other income		188		54			251			107
Total noninterest income		1,389		1,025			2,402			2,101
Noninterest expense:
Salaries and employee benefits		3,423		3,478			6,909			6,980
Occupancy expense		585		505			1,141			1,017
Equipment expense		417		511			825			1,023
Professional fees		393		320			757			579
FDIC assessment		300		363			675			623
Telephone, postage and supplies		298		267			611			545
Operating losses		10		24			234			32
Bankcard expenses		165		150			301			289
Loss (gain) on sale of other real estate owned		25		(1	)		(66	)		(25	)
Loss on impairment of other real estate owned		230		486			230			647
Other real estate owned expense		73		414			261			612
Other expense		853		719			1,642			1,428
Total noninterest expense		6,772		7,236			13,520			13,750
Earnings before provision for income tax expense		1,630		900			2,780			2,172
Provision for income tax expense		450		161			797			429
Net earnings		1,180		739			1,983			1,743
Dividends and discount accretion on preferred stock		214		214			428			426
Net earnings available to common stockholders	$	966	$	525		$	1,555		$	1,317

Earnings per share data:
Basic	$	0.29	$	0.16		$	0.47		$	0.39
Diluted	$	0.29	$	0.16		$	0.46		$	0.39

Weighted average shares outstanding:
Basic		3,342		3,341			3,342			3,341
Diluted		3,368		3,341			3,363			3,350

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(UNAUDITED)

	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Net earnings	$	1,180		$	739		$	1,983		$	1,743
Unrealized holding gain on available-for-sale securities		1,147			698			1,444			717
Reclassification adjustment for gain on available-for-sale securities sold, net of tax		(76	)		(32	)		(89	)		(96	)
Total comprehensive earnings	$	2,251		$	1,405		$	3,338		$	2,364

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollar amounts in thousands)	Six months ended
	June 30
	2011			2010
Cash flow from operating activities:
Net earnings	$	1,983		$	1,743
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of securities available-for-sale		(150	)		(162	)
Depreciation, amortization and accretion		1,332			1,178
Gain on sale of other real estate owned		(66	)		(25	)
Stock-based compensation expense		154			84
Provision for loan losses		850			565
Decrease in accrued interest receivable and other assets		1,744			950
Valuation allowance on other real estate owned		230			647
(Decrease) increase in accrued expenses and other liabilities		(205	)		65
Net cash provided by operating activities		5,872			5,045

Cash flows from investing activities
Purchase of securities available-for-sale		(29,786	)		(65,519	)
Proceeds from matured/called/sold securities available-for-sale		14,655			37,500
Proceeds from sale of other real estate owned		4,078			1,672
Net investment in other real estate owned		—			(468	)
Net decrease in loans		14,222			9,949
Purchases of bank premises, equipment, leasehold improvements		(842	)		(713	)
Net cash provided by (used in) investing activities		2,327			(17,579	)

Cash flows from financing activities
Net increase in demand and savings deposits		11,854			28,356
Net decrease in time deposits		(11,786	)		(7,154	)
Net decrease in Federal Home Loan Bank advances	—				(10,000	)
Dividends paid on common stock		(167	)		(318	)
Exercise of stock options		7			—
Dividends paid on preferred stock series A and B		(327	)		(327	)
Net cash (used in) provided by financing activities		(419	)		10,557
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		7,780			(1,977	)
Cash and cash equivalents at beginning of period		60,874			62,853
Cash and cash equivalents at end of period	$	68,654		$	60,876

Additional cash flow information:
Interest paid	$	1,728		$	3,232
Income taxes paid		1,090			132
Non-cash investing and financing activities:
Accrued dividends	—				159
Change in unrealized gain (loss) in available for-sale securities, net of tax		1,355			621
Loans transferred to other real estate owned		—			3,183
Deemed dividends on preferred stock		101			99

See accompanying notes to consolidated financial statements.

FNB BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

(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, as required by Regulation S-X, Rule 10-01.

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, 2010.

Results of operations for interim periods are not necessarily indicative of results for the full year.

NOTE B – STOCK OPTION PLANS

Stock option expense is recorded based on the fair value of option contracts issued. The fair value is determined by the expected contract term, the risk free interest rate, the volatility of the Company’s stock price and the level of dividends the Company is expected to pay.

The expected term of options granted is derived from historical plan behavior and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S. Treasury yield curve in effect at the time of the grant.

The amount of compensation expense for options recorded in the quarters ended June 30, 2011 and June 30, 2010 was $81,000 and $42,000, respectively. There was no income tax benefit recognized in the statements of earnings for these amounts for the quarters ended June 30, 2011, and 2010, respectively. The amount of compensation expense for options recorded in the six months ended June 30, 2011 and 2010 was $154,000 and $84,000, respectively. There was no income tax benefit recognized in the statements of earnings for these amounts for the six months ended June 30, 2011 and 2010, respectively.

There was a $103,000 intrinsic value for options exercisable and a $6,000 intrinsic value for options exercised during the quarter and six month periods ended June 30, 2011.

The amount of total unrecognized compensation expense related to non-vested options at June 30, 2011 was $508,000, and the weighted average period over which it will be amortized is 2.6 years.

NOTE C – EARNINGS PER SHARE CALCULATION

Earnings per common share (EPS) is 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 available to common stockholders (after deducting dividends and related accretion on preferred stock) 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. All common stock equivalents are anti-dilutive when a net loss occurs.

Earnings per share have been computed based on the following :

(Dollar amounts in thousands)	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Net earnings	$	1,180	$	739	$	1,983	$	1,743
Dividends and discount accretion on preferred stock		214		214		428		426
Net earnings available to common shareholders	$	966	$	525	$	1,555	$	1,317

Average number of shares outstanding		3,342,000		3,341,000		3,342,000		3,341,000
Effect of dilutive options		26,000		—		21,000		9,000
Average number of shares outstanding used to calculate diluted earnings per share		3,368,000		3,341,000		3,363,000		3,350,000

Options for 334,997 and 322,797 shares were excluded for the quarterly and year to date earnings per share calculations as the effect would have been anti-dilutive.

NOTE D – SECURITIES AVAILABLE FOR SALE

The amortized cost and carrying values of securities available-for-sale are as follows:

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized			Carrying
	cost		gains		losses			value
June 30, 2011
U. S. Treasury securities	$	12,381	$	120	$	—		$	12,501
Obligations of U.S. Government agencies		46,704		557		(30	)		47,231
Mortgage backed securities		26,708		724		(8	)		27,424
Obligations of states and political subdivisions		47,549		1,295		(118	)		48,726
Corporate debt		7,124		168		(10	)		7,282
	$	140,466	$	2,864	$	(166	)	$	143,164

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized			Carrying
	cost		gains		losses			value
December 31, 2010:
U.S. Treasury securities	$	12,440	$	2	$	(97	)	$	12,345
Obligations of U.S. Government agencies		45,941		488		(315	)		46,114
Mortgage-backed securities		18,564		521		(17	)		19,068
Obligations of states and political subdivisions		42,738		582		(864	)		42,456
Corporate debt		6,105		109		(8	)		6,206
	$	125,788	$	1,702	$	(1,301	)	$	126,189

An analysis of gross unrealized losses within the available-for-sale investment securities portfolio as of June 30, 2011 and December 31, 2010 follows.

			Under 12					12 Months
	Total		Months			Total		or More		Total		Total
June 30, 2011:	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses		Value		Losses
Obligations of U.S. Government agencies	$	4,280	$	(30	)	$	—	$	—	$	4,280	$	(30	)
Mortgage backed securities		1,513		(8	)		—		—		1,513		(8	)
Obligations of states and political subdivisions		9,436		(118	)		—		—		9,436		(118	)
Corporate debt		1,441		(10	)		—		—		1,441		(10	)
Total	$	16,670	$	(166	)	$	—	$	—	$	16,670	$	(166	)

			Under 12					12 Months
	Total		Months			Total		or More		Total		Total
December 31, 2010:	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury securities	$	11,341	$	(97	)	$	—	$	—	$	11,341	$	(97	)
Obligations of U.S. Government agencies		19,983		(315	)		—		—		19,983		(315	)
Mortgage-backed securities		1,864		(17	)		—		—		1,864		(17	)
Obligations of states and political subdivisions		22,639		(864	)		—		—		22,639		(864	)
Corporate debt		1,437		(8	)		—		—		1,437		(8	)
Total	$	57,264	$	(1,301	)	$	—	$	—	$	57,264	$	(1,301	)

At June 30, 2011 and December 31, 2010, there were no securities in an unrealized loss position for greater than 12 consecutive months. Management periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. Management has determined that no investment security is other-than-temporarily impaired at June 30, 2011. The unrealized losses are due solely to interest rate changes and the Company does not intend to sell nor expects it will be required to sell investment securities identified with impairments prior to the earliest of forecasted recovery or the maturity of the underlying investment security.

The amortized cost and carrying value of debt securities as of June 30, 2011 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

At June 30, 2011:

(Dollar amounts in thousands)	Amortized		Carrying
	Cost		Value
Available-for-sale:
Due in one year or less	$	5,870	$	5,928
Due after one through five years		74,028		75,187
Due after five years through ten years		19,337		19,901
Due after ten years		41,231		42,148
	$	140,466	$	143,164

For the six months ended June 30, 2011, gross realized gains amounted to $150,000 on the sale of $10,185,000 in securities. For the six months ended June 30, 2010, gross realized gains amounted to $162,000 on the sale of $25,297,000 in securities.

At June 30, 2011, securities with an amortized cost of $77,787,000 and fair value of $79,389,000 were pledged as collateral for public deposits and for other purposes required by law.

At June 30, 2011 and December 31, 2010, the Bank had investments in Federal Reserve Bank stock classified as other assets in the accompanying balance sheet of $1,062,000. These investments in Federal Reserve Bank stock are carried at cost, and evaluated periodically for impairment. At June 30, 2011 and December 31, 2010, the Bank had investments in Federal Home Loan Bank stock classified as other assets in the accompanying balance sheet of $3,620,000 and $3,939,000, respectively. These investments in Federal Home Loan Bank stock are carried at cost, and evaluated periodically for impairment.

NOTE E – LOANS

Loans are summarized as follows at June 30, 2011 and December 31, 2010:

	June 30			December 31
(Dollar amounts in thousands)	2011			2010
Commercial real estate	$	275,527		$	278,866
Real estate construction		29,938			27,577
Real estate multi family		40,279			42,584
Real estate 1 to 4 family		77,992			71,463
Commercial & industrial		43,623			61,493
Consumer loans		2,321			2,689
Gross loans		469,680			484,672
Net deferred loan fees		(205	)		(320	)
Allowance for loan losses		(9,719	)		(9,524	)
Total	$	459,756		$	474,828

A summary of impaired loans, the related allowance for loan losses, average investment and income recognized on impaired loans follows.

	Impaired Loans
	At June 30, 2011
			Unpaid
(Dollar amounts in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance

With no related allowance recorded
Commercial & industrial	$	3,807	$	4,324	$	—
Commercial real estate		1,933		1,933		—
Residential - 1 to 4 family		1,036		1,141		—
Total		6,776		7,398		—

With an allowance recorded
Commercial	$	4,089		4,090	$	1,223
Commercial real estate construction		7,872		8,072		143
Commercial real estate		6,685		6,846		858
Residential- 1 to 4 family		2,255		2,262		176
Total		20,901		21,270		2,400

Total
Commercial & industrial	$	7,896	$	8,414	$	1,223
Commercial real estate construction		7,872		8,072		143
Commercial real estate		8,618		8,779		858
Residential - 1 to 4 family		3,291		3,403		176
Grand total	$	27,677	$	28,668	$	2,400

	Impaired Loans
	3 months ended				6 months ended
	June 30, 2011				June 30, 2011
	Average				Average
(Dollar amounts in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized

With no related allowance recorded
Commercial & industrial	$	5,566	$	41	$	4,962	$	45
Commercial real estate		1,933		30		1,934		27
Residential - 1 to 4 family		1,069		11		1,082		12
Total		8,568		82		7,978		84

With an allowance recorded
Commercial	$	4,102	$	8	$	4,125	$	8
Commercial real estate construction		8,400		37		8,402		65
Commercial real estate		6,710		11		6,746		9
Residential- 1 to 4 family		2,256		18		2,256		20
Total		21,467		74		21,529		102

Total
Commercial & industrial	$	9,668		49	$	9,087	$	53
Commercial real estate construction		8,400		37		8,402		65
Commercial real estate		8,643		41		8,680		36
Residential - 1 to 4 family		3,325		29		3,338		32
Grand total	$	30,035	$	156	$	29,507	$	186

	Impaired Loans
	At December 31, 2010
			Unpaid				Average
(Dollar amounts in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded
Commercial & industrial	$	4,743	$	4,841	$	—	$	4,801	$	74
Commercial real estate		4,206		4,206		—		4,323		131
Total		8,949		9,047		—		9,124		205

With an allowance recorded
Commercial & industrial	$	2,644		3,044	$	527	$	2,945	$	31
Commercial real estate construction		8,931		8,931		368		5,560		303
Commercial real estate		3,474		3,474		364		3,505		171
Residential- 1 to 4 family		3,304		3,349		210		3,347		100
Total		18,353		18,798		1,469		15,357		605

Total
Commercial & industrial	$	7,387	$	7,885	$	527	$	7,746	$	105
Commercial real estate construction		8,931		8,931		368		5,560		303
Commercial real estate		7,680		7,680		364		7,828		302
Residential - 1 to 4 family		3,304		3,349		210		3,347		100
Grand total	$	27,302	$	27,845	$	1,469	$	24,481	$	810

Nonaccrual loans totaled $15,844,000 and $16,712,000 as of June 30, 2011 and December 31, 2010. The difference between impaired loans and nonaccrual loans represents loans that are restructured, are performing under modified agreements, and interest is accrued.

The following aggregate information is provided at June 30, 2011 and December 31, 2010, about the contractual provisions of these loans:

	June 30			December 31
(Dollar amounts in thousands)	2011			2010
Outstanding balance	$	15,844		$	16,712
Weighted average rate		5.91	%		5.99	%
Weighted average term to maturity	75 months			69 months

	Loans on Nonaccrual Status as of
(Dollar amounts in thousands)	June 30,		December 31,
	2011		2010
Commercial & industrial	$	2,823	$	5,415
Real estate - construction		642		3,518
Commercial real estate		11,070		6,662
Real estate 1 to 4 family		1,309		1,117
Consumer		0	—
Total	$	15,844	$	16,712

Interest income on impaired loans of $156,000 and $186,000 was recognized for the three and six months ended June 30, 2011, and $810,000 was recognized for cash payments received during the year ended December 31, 2010. The amount of interest on impaired loans not collected for the three and six months ended June 30, 2011 was $150,000 and $390,000, and the year ended December 31, 2010 was $290,000. The cumulative amount of unpaid interest on impaired loans was $150,000 and $390,000 for the three and six months ended June 30, 2011, and $1,095,000 for the year ended December 31, 2010.

A summary of the number, principal amounts outstanding for troubled debt restructurings were as follows as of June 30, 2011 and December 31, 2010.

	Modifications
	As of June 30, 2011
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
(Dollar amounts in thousands)
Commercial & industrial		4	$	3,068	$	3,068
Real estate 1 to 4 family		2		1,026		1,026
Commercial real estate		3		1,690		1,690
Real estate multi family		1		3,368		3,368
Total		10		9,152		9,152

	Modifications
	As of December 31, 2010
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
(Dollar amounts in thousands)
Commercial & industrial		3	$	2,416	$	2,416
Real estate 1 to 4 family		4		2,621		2,621
Commercial real estate		4		4,598		4,598
Real estate multi family		2		9,774		9,774
Total		13		19,409		19,409

	Age Analysis of Past Due Loans
	As of June 30, 2011
(Dollar amounts in thousands)
	30-59		60-89		Greater								Recorded
	Days		Days		Than		Total						Investment >
	Past		Past		90		Past				Total		90 Days and
	Due		Due		Days		Due		Current		Loans		Accruing
Commercial & industrial	$	90	$	807	$	2,823	$	3,720	$	39,903	$	43,623	$	—
Commercial real estate		523		—		11,070		11,593		304,213		315,806		—
Commercial real estate-construction		343		—		642		985		28,953		29,938		—
Residential		—		200		1,309		1,509		76,483		77,992		—
Consumer		—		10		—		10		2,311		2,321		—
Total	$	956	$	1,017	$	15,844	$	17,817	$	451,863	$	469,680	$	—

	Age Analysis of Past Due Loans
	As of December 31, 2010
(Dollar amounts in thousands)
	30-59		60-89										Recorded
	Days		Days		Greater		Total						Investment >
	Past		Past		Than		Past				Total		90 Days and
	Due		Due		90 Days		Due		Current		Loans		Accruing
Commercial & industrial	$	1,216	$	250	$	1,251	$	2,717	$	58,776	$	61,493	$	—
Commercial real estate		4,138		1,705		6,051		11,894		309,556		321,450		—
Commercial real estate -construction		—		—		1,556		1,556		26,021		27,577		—
Residential		2,830		99		70		2,999		68,464		71,463		—
Consumer		2		—		—		2		2,687		2,689		—

Total	$	8,186	$	2,054	$	8,928	$	19,168	$	465,504	$	484,672	$	—

Credit Quality Indicators
As of June 30, 2011
(Dollar amounts in thousands)
			Special		Sub-				Total
	Pass		mention		standard		Doubtful		loans
Commercial & industrial	$	34,414	$	—	$	8,933	$	276	$	43,623
Real estate construction		20,701		—		9,237		—		29,938
Commercial real estate		303,593		—		11,860		353		315,806
Real estate 1 to 4 family		73,649		—		3,877		466		77,992
Consumer loans		2,321		—		—		—		2,321
Totals	$	434,678	$	—	$	33,907	$	1,095	$	469,680

Credit Quality Indicators
As of December 31, 2010
(Dollar amounts in thousands)
			Special		Sub-				Total
	Pass		mention		standard		Doubtful		loans
Commercial & industrial	$	54,726	$	175	$	6,327	$	265	$	61,493
Real estate construction		15,464		—		12,113		—		27,577
Commercial real estate		304,869		3,913		12,668		—		321,450
Real estate 1 to 4 family		66,460		—		4,734		269		71,463
Consumer loans		2,689		—		—		—		2,689
Totals	$	444,208	$	4,088	$	35,842	$	534	$	484,672

	Allowance for Credit Losses and Recorded Investment in Loans
	For the Quarter Ended June 30, 2011
(Dollar amounts in thousands)
		Commercial		Commercial			Real estate			Real estate
		& industrial		real estate			construction			1 to 4 family			Consumer			Total
Allowance for credit losses

Beginning balance		$	1,605	$	4,360		$	2,105		$	1,605		$	109		$	9,784
Charge-offs			100		(525	)		—			—			(50	)		(475	)
Recoveries			1		—			9			—			—			10
Provision			583		530			(578	)		(145	)		10			400
Ending balance		$	2,289	$	4,365		$	1,536		$	1,460		$	69		$	9,719

Ending balance: individually evaluated for impairment		$	1,223	$	858		$	143		$	176		$	0		$	2,400

Ending balance: collectively evaluated for impairment		$	1,066	$	3,507		$	1,393		$	1,284		$	69		$	7,319

Loans:
Ending balance		$	43,623	$	315,806		$	29,938		$	77,992		$	2,321		$	469,680

Ending balance: individually evaluated for impairment		$	6,328	$	9,017		$	8,696		$	3,636		$	—		$	27,677

Ending balance: collectively evaluated for impairment		$	37,295	$	306,789		$	21,242		$	74,356		$	2,321		$	442,003

	Allowance for Credit Losses and Recorded Investment in Loans
	For the Quarter Ended June 30, 2010
(Dollar amounts in thousands)
		Commercial			Commercial			Real estate			Real estate
		& industrial			Real Estate			Construction			1 to 4 family			Consumer			Total
Allowance for credit losses

Beginning balance		$	1,542		$	4,343		$	1,945		$	1,223		$	43		$	9,096
Charge-offs			(31	)		(88	)		—			(217	)		(10	)		(346	)
Recoveries			2			—			9			—			—			11
Provision			1,237			(695	)		(496	)		230			39			315
Ending balance		$	2,750		$	3,560		$	1,458		$	1,236		$	72			9,076

Ending balance: individually evaluated for impairment		$	778		$	—		$	98		$	92		$	—			968

Ending balance: collectively evaluated for impairment		$	1,972		$	3,560		$	1,360		$	1,144		$	72			8,108

Loans:
Ending balance		$	68,547		$	334,634		$	28,181		$	56,095		$	2,462			489,919

Ending balance: individually evaluated for impairment		$	6,983		$	6,269		$	7,380		$	1,194		$	—			21,826

Ending balance: collectively evaluated for impairment		$	61,564		$	328,365		$	20,801		$	54,901		$	2,462			468,093

	Allowance for Credit Losses and Recorded Investment in Loans
	For the Six Months Ended June 30, 2011
(Dollar amounts in thousands)
		Commercial			Commercial			Real estate			Real estate
		& industrial			real estate			construction			1 to 4 family		Consumer			Total
Allowance for credit losses

Beginning balance		$	2,102		$	4,103		$	1,999		$	1,233	$	87		$	9,524
Charge-offs			(100	)		(525	)		—			—		(53	)		(678	)
Recoveries			5			—			18			—		—			23
Provision			282			787			(481	)		227		35			850
Ending balance		$	2,289		$	4,365		$	1,536		$	1,460	$	69		$	9,719

Ending balance: individually evaluated for impairment		$	1,223		$	858		$	143		$	176	$	0		$	2,400

Ending balance: collectively evaluated for impairment		$	1,066		$	3,507		$	1,393		$	1,284	$	69		$	7,319

Loans:
Ending balance		$	43,623		$	315,806		$	29,938		$	77,992	$	2,321		$	469,680

Ending balance: individually evaluated for impairment		$	6,328		$	9,017		$	8,696		$	3,636	$	—		$	27,677

Ending balance: collectively evaluated for impairment		$	37,295		$	306,789		$	21,242		$	74,356	$	2,321		$	442,003

	Allowance for Credit Losses and Recorded Investment in Loans
	Six months Ended June 30, 2010
(Dollar amounts in thousands)
	Commercial			Commercial			Real estate			Real estate
	& industrial			real estate			construction			1 to 4 family			Consumer			Total
Allowance for credit losses

Beginning balance	$	809		$	5,177		$	3,110		$	704		$	29		$	9,829
Charge-offs		(31	)		(88	)		(1,003	)		(217	)		(16	)		(1,355	)
Recoveries		3			—			18			14			2			37
Provision		1,969			(1,529	)		(667	)		735			57			565
Ending balance	$	2,750		$	3,560		$	1,458		$	1,236		$	72		$	9,076

Ending balance: individually evaluated for impairment	$	778		$	—		$	98		$	92		$	—		$	968

Ending balance: collectively evaluated for impairment	$	1,972		$	3,560		$	1,360		$	1,144		$	72		$	8,108

Loans:
Ending balance	$	68,547		$	334,634		$	28,181		$	56,095		$	2,462		$	489,919

Ending balance: individually evaluated for impairment	$	6,983		$	6,269		$	7,380		$	1,194		$	—		$	21,826

Ending balance: collectively evaluated for impairment	$	61,564		$	328,365		$	20,801		$	54,901		$	2,462		$	468,093

Risk rating system

Loans to borrowers graded as pass or pooled loans represent loans to borrowers of acceptable or better credit quality. They demonstrate sound financial positions, repayment capacity and credit history. They have an identifiable and stable source of repayment.

Special mention loans have potential weaknesses that deserve management’s attention. If left uncorrected these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. These assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard loans are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans are normally classified as Substandard when there are unsatisfactory characteristics causing more than acceptable levels of risk. A substandard loan normally has one or more well-defined weakness that could jeopardize the repayment of the debt. For example, a) cash flow deficiency, which may jeopardize future payments; b) sale of non-collateral assets has become primary source of repayment; c) the borrower is bankrupt; or d) for any other reason, future repayment is dependent on court action.

Doubtful loans represent credits with weakness inherent in the Substandard classification and where collection or liquidation in full is highly questionable. To be classified Doubtful, there must be specific pending factors which prevent the Loan Review Officer from determining the amount of loss contained in the credit. When the amount of loss can be reasonably estimated, that amount is classified as “loss” and the remainder is classified as Substandard.

Commercial Real Estate Loans

Our commercial real estate loans are made primarily to investors or small businesses where our primary source of repayment is from cash flows generated by the properties, either through rent collection or business profits. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have multiple sources of income, so if cash flow generated from the property declines, at least in the short term, the borrowers can normally cover these short term cash flow deficiencies from their available cash reserves. Risk of loss to the Bank is increased when there are cash flow decreases sufficiently large and for such a prolonged period of time that loan payments can no longer be made by the borrowers.

Our real estate construction loans are generally made to borrowers who are rehabilitating a building, converting a building use from one type of use to another, or developing land and building residential or commercial structures for sale or lease. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have sufficient resources to make the required construction loan payments during the construction and absorption or lease-up period. After construction is complete, the loans are normally paid off from proceeds from the sale of the building or through a refinance to a commercial real estate loan. Risk of loss to the Bank is increased when there are material construction cost overruns, significant delays in the time to complete the project and/or there has been a material drop in the value of the projects in the marketplace since the inception of the loan.

Commercial and Industrial Loans

Our commercial and industrial loans are generally made to small businesses to provide them with at least some of the working capital necessary to fund their daily business operations. These loans are generally either unsecured or secured by fixed assets, accounts receivable and/or inventory. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when our small business customers experience a significant business downturn, incur significant financial losses, or file for relief from creditors through bankruptcy proceedings.

Residential Real Estate Loans

Our residential real estate loans are generally made to borrowers who are buying or refinancing their primary personal residence or a rental property of 1-4 singe family residential units. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers loose their primary source of income and/or property values decline significantly.

Consumer and installment Loans

Our consumer and installment loans generally consist of personal loans, credit card loans, automobile loans or other loans secured by personal property. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers loose their primary source of income, or file for relief from creditors through bankruptcy proceedings.

NOTE F – FAIR VALUE MEASUREMENT

The following tables present information about the Company’s assets and liabilities measured at fair value as of June 30, 2011 and December 31, 2010, and indicate the fair value techniques used by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following tables present the recorded amounts of assets measured at fair value on a recurring basis:

			Fair Value Measurements
(Dollar amounts in thousands)			at June 30, 2011, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	6/30/2011		(Level 1)		(Level 2)		(Level 3)
U. S. Treasury securities	$	12,501	$	12,501	$	—	$	—
Obligations of U.S. Government agencies		47,231		—		47,231		—
Mortgage-backed securities		27,424		—		27,424		—
Obligations of states and political subdivisions		48,726		—		48,726	—
Corporate debt		7,282		—		7,282		—
Total assets measured at fair value	$	143,164	$	12,501	$	130,663	$	—

			Fair Value Measurements
(Dollar amounts in thousands)			at December 31, 2010, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	12/31/2010		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. Treasury securities	$	12,345	$	12,345	$	—	$	—
Obligations of U.S. Government agencies		46,114		—		46,114		—
Mortgage-backed securities		19,068		—		19,068		—
Obligations of states and political subdivisions		42,456		—		42,456		—
Corporate debt		6,206		—		6,206		—
Total assets measured at fair value	$	126,189	$	12,345	$	113,844	$	—

The following tables present the recorded amount of assets measured at fair value on a non-recurring basis:

			Fair Value Measurements
(Dollar amounts in thousands)			at June 30, 2011, Using
			Quoted Prices in
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs		Total
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)		losses
Impaired loans *	$	10,218	$	—	$	—	$	10,218	$	(894	)
Total impaired assets measured at fair value	$	10,218	$	—	$	—	$	10,218	$	(894	)

The following tables present the recorded amount of assets measured at fair value on a non-recurring basis:

			Fair Value Measurements
(Dollar amounts in thousands)			at December 31, 2010, Using
			Quoted Prices in
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs		Total
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)		losses
Impaired loans *	$	10,471	$	—	$	—	$	10,471	$	(1,069	)
Other real estate owned		6,680		—		—		6,680		—
Total impaired assets measured at fair value	$	17,151	$	—	$	—	$	17,151	$	(1,069	)

* Represents impaired loans for which a change in the valuation occurred during the six months period ended June 30, 2011 and the year ended December 31, 2010.

The Bank does not record loans at fair value. However, from time to time, if a loan is considered impaired, a specific allocation within the allowance for loan losses may be required. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and cash flows. Those impaired loans not requiring an allowance represent loans for which the value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral or when the impaired loan has been written down to fair value require classification in the fair value hierarchy. If the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loans as nonrecurring Level 3. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank also records the impaired loans as nonrecurring Level 3.

Other real estate owned is carried at the lower of historical cost or fair market value. An appraisal (a Level 3 valuation) is obtained at the time the Company acquires property through the foreclosure process. Any loan balance outstanding that exceeds the appraised value of the property is charged off against the allowance for loan loss at the time the property is acquired. Subsequent to acquisition, the Bank updates the property’s appraised value on at least an annual basis. If the value of the property has declined during the year, a loss due to valuation impairment charge is recorded along with a corresponding reduction in the book carrying value of the property.

Fair Values of Financial Instruments.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments:

Cash and Cash Equivalents.

The carrying amounts reported in the balance sheet for cash and short-term instruments are a reasonable estimate of fair value, which will approximate their historical cost.

Securities Available-for-Sale.

Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Federal Home Loan Bank and Federal Reserve Bank stock.

Federal Home Loan Bank and Federal Reserve Bank stock can only be issued and redeemed at par by these entities. These securities cannot be sdold in open market transactions. Fair value is estimated to be their carrying value.

Loans Receivable.

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values and credit risk factors. For fixed rate loans, fair values are based on discounted cash flows, credit risk factors, and liquidity factors.

Bank Owned Life Insurance.

The fair value of bank owned life insurance is the cash surrender value of the policies.

Deposit liabilities.

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are based on discounted cash flows.

Federal Home Loan Bank Advances.

The fair values of Federal Home Loan Bank Advances are based on discounted cash flows. The discount rate is equal to the market rate currently offered by similar products.

Undisbursed loan commitments, lines of credit, Mastercard line and standby letters of credit.

The fair value of these off-balance sheet items are based on discounted cash flows of expected fundings.

The following table provides summary information on the estimated fair value of financial instruments at June 30, 2011:

(Dollar amounts in thousands)	Carrying		Fair
	amount		value
Financial assets:
Cash and cash equivalents	$	68,654	$	68,654
Securities available for sale		143,164		143,164
Loans, net		459,756		467,120
Bank owned life insurance, net		9,361		9,361

Financial liabilities:
Deposits		628,508		629,028

Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit	—			3,477

The carrying amount of loans include $15,844,000 of nonaccrual loans (loans that are not accruing interest) as of June 30, 2011. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

The following table provides summary information on the estimated fair value of financial instruments at December 31, 2010:

(Dollar amounts in thousands)	Carrying		Fair
	amount		value
Financial assets:
Cash and cash equivalents	$	60,874	$	60,874
Securities available for sale		126,189		126,189
Loans, net		474,828		466,007
Bank owned life insurance, net		9,195		9,195

Financial liabilities:
Deposits		628,440		628,983

Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit	—			3,603

The carrying amount of loans include $16,712,000 of nonaccrual loans (loans that are not accruing interest) as of December 31, 2010. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

NOTE G – PREFERRED STOCK

Preferred Stock was issued to the U. S. Treasury as part of the Treasury’s Capital Purchase Program. The Preferred Stock consists of two issues, Series A and Series B. The Series A and Series B Preferred Stock are both carried at liquidation value less discounts received plus premiums paid that are amortized over the expected timeframe that the Preferred Shares will be outstanding using the level yield method. The Series A and Series B Preferred Stock must be redeemed after ten years.

The Series A Preferred Stock carries a dividend yield of 5% for the first five years. Beginning in year six, the dividend increases to 9% and continues at this rate until repaid. The Series B Preferred Stock pays a 9% dividend until repaid. Allocation of proceeds between the two issues was done in such a manner that the blended level yield of both issues would be 6.83% to the expected repayment date, which is currently anticipated to be three years from the date of issue. Operating restrictions related to the preferred stock are documented on the U. S. Department of the Treasury’s website and include restrictions on dividend payments and executive compensation, the establishment of the requirement that the Preferred Stock be repaid first with the proceeds from any future capital offering before any other use of the proceeds is allowed, establishment of additional reporting requirements related to lending activity of the Bank during the time the Preferred Stock is outstanding, and the execution of documents that allow the U. S. Department of the Treasury to add or change the conditions related to the issuance of the Preferred Stock unilaterally, at their discretion. In addition, beginning in the second quarter of 2010, the Company must obtain regulatory approval from the OCC before TARP dividends can be paid. As of June 30, 2011, all dividend payments on our Preferred Stock have been paid in accordance with the Treasury’s Capital Purchase Program.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information and Uncertainties Regarding Future Financial Performance.

This report, including management’s discussion below, concerning earnings and financial condition, contains “forward-looking statements.” Forward-looking statements are estimates of or statements about expectations or beliefs regarding the Company’s future financial performance or anticipated future financial condition that are based on current information and that are subject to a number of risks and uncertainties that could cause actual operating results in the future to differ significantly from those expected at the current time. Those risks and uncertainties include, although they are not limited to, the following:

Increased Competition. Increased competition from other banks and financial service businesses, mutual funds and securities brokerage and investment banking firms that offer competitive loan and investment products and competitive market pricing, which 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. These factors could reduce our ability to attract new deposits and loans and leases.

Liquidity Risk. The stability of funding sources and continued availability of borrowings; our ability to raise capital or incur debt on reasonable terms.

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 loan losses, thereby adversely affecting operating results; and (iii) lead to reductions in real property values that, due to the Company’s reliance on real property to secure many of its loans, could make it more difficult to prevent losses from being incurred on non-performing loans through the sale of such real properties.

Possible Adverse Changes in National Economic Conditions and Federal Reserve Board Monetary Policies. Changes in national economic policies, such as increases in inflation or declines in economic output often prompt changes in Federal Open Market Committee (“FOMC”) monetary policies that could reduce interest income or increase the cost of funds to the Company, either of which could result in reduced earnings. In addition deterioration in economic conditions that could result in increased loan and lease losses.

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, liquidity requirements, and the risks associated with concentration in real estate related loans could adversely affect earnings by reducing yields on earning assets or increasing operating costs.

Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the date of this report, or to make predictions based solely on historical financial performance. The Company also disclaims any obligation to update forward-looking statements contained in this report.

Critical Accounting Policies And Estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to its loans and allowance for loan losses. The Company bases its estimates on current market conditions, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01. The Company believes the following critical accounting policy requires significant judgments and estimates used in the preparation of the consolidated financial statements.

Allowance for Loan Losses

The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company’s historical 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 their loans. Determination of the allowance is based upon objective and subjective judgments by management based on the information currently available. Adverse changes in information could result in higher than expected charge-offs and loan loss provisions.

Goodwill

Goodwill arises from the Company’s purchase price exceeding the fair value of the net assets of an acquired business. Goodwill represents the value attributable to intangible elements acquired. The value of goodwill is supported ultimately by profit from the acquired business. A decline in earnings could lead to impairment, which would be recorded as a write-down in the Company’s consolidated statements of income. Events that may indicate goodwill impairment include significant or adverse changes in results of operations of the acquired business or asset, economic or political climate; an adverse action or assessment by a regulator; unanticipated competition; and a more-likely-than-not expectation that a reporting unit will be sold or disposed of at a loss.

Other Than Temporary Impairment

Other than temporary impairment (“OTTI”) is triggered if the Company has the intent to sell the security, it is likely that it will be required to sell the security before recovery, or if the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security or it is likely it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that the Company will be required to sell the security but the Company does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI. The credit loss is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected of a security. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, would be recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are to be presented as a separate category within OCI.

For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is re-evaluated accordingly based on the procedures described above.

Provision for and Deferred Income Taxes

The Company is subject to income tax laws of the United States, its states, and the municipalities in which it operates. The Company considers its income tax provision methodology to be critical, as the determination of current and deferred taxes is based on complex analyses of many factors including interpretation of federal and state laws, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), estimates of amounts due or owed, the timing of reversals of temporary differences and current financial standards. Actual results could differ significantly from the estimates due to tax law interpretations used in determining the current and deferred income tax liabilities. Additionally, there can be no assurances that estimates and interpretations used in determining income tax liabilities may not be challenged by federal and state taxing authorities.

Recent Accounting Pronouncements

In April, 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. Given the recent economic downturn, the volume of debt restructured (modified) by creditors has increased. Several stakeholders raised concerns about whether additional guidance or clarification is needed to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. Diversity in practice could adversely affect the comparability of information for users about restructurings of receivables. The amendments in this Update apply to all creditors, both public and nonpublic, that restructure receivables that fall within the scope of Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors.

In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist:

The restructuring constitutes a concession.

The debtor is experiencing financial difficulties.

For public entities, the amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied restrospectively to the beginning of the annual period of adoption. As this ASU is disclosure-related only, the adoption of this ASU will not impact the Bank’s financial condition or results of operations.

In April, 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion.

In May, 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the rquirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.

Some of the amendments clarify the Board’s intent about the application of existing fair value measurements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. As this ASU is disclosure-related only, the adoption of this ASU will not impact the Bank’s financial condition or results of operations.

In June, 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220). Under the amendments to Topic 220, Comprehensive Income, in this Update an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total of other comprehensive income, along with a total for comprehensive income.

Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented.

Earnings Analysis

Net earnings for the quarter ended June 30, 2011 were $1,180,000, compared to net earnings of $739,000 for the quarter ended June 30, 2010, an increase of $441,000, or 60%. Cash dividend payments on the preferred shares outstanding were made as scheduled during the six months ended June 30, 2011 and 2010, respectively. Net earnings for the six months ended June 30, 2011 were $1,983,000 compared to net earnings of $1,743,000 for the six months ended June 30, 2010, an improvement of $240,000. Net earnings before income tax expense for the quarter ended June 30, 2011 were $1,630,000, compared to net earnings before income tax expense of $900,000 for the quarter ended June 30, 2010, an increase of $730,000. Net earnings available to common stockholders for the quarter ended June 30, 2011, were $966,000, compared to net earnings available to common stockholders of $525,000 for the quarter ended June 30, 2010. Earnings before income tax expense were $2,780,000 for the six months ended June 30, 2011 compared to net earnings before income tax expense of $2,172,000 for the six months ended June 30, 2010, an improvement of $608,000. The principal items contributing to this change were: a) a reduction of $1,091,000 in interest and fees on loans, caused by a decrease in volume and lower rates; a reduction of $922,000 in interest expense on deposits, and a decrease in rates from 1.18% to 0.73%; a $367,000 decrease in interest on Federal Home Loan Bank borrowings, as there were none in 2011; a $149,000 increase in service charge income, and a $230,000 decrease in noninterest expense. Net earnings available to common stockholders were $1,555,000 for the six months ended June 30, 2011, compared to net earnings available to common stockholders of $1,317,000 for the six months ended June 30, 2010. Earnings during the six months ended June 30, 2011 were positively affected by an increase in our net interest margin that was offset by an increase in our provision for loan losses during this same time period.

Net interest income for the quarter ended June 30, 2011 was $7,413,000, compared to $7,426,000 for the quarter ended June 30, 2010, a decrease of $13,000, or 0.2%. Net interest income for the six months ended June 30, 2011 was $14,748,000 compared to $14,386,000 for the six months ended June 30, 2010, an increase of $362,000, or 2.5%.

Basic and diluted earnings per share were $0.29 for the second quarter of 2011 compared to basic and diluted earnings of $0.16 for the second quarter of 2010. Basic earnings per per share were $0.47 and diluted earnings per share were $0.46 for the six months ended June 30, 2011, compared to basic and diluted earnings per share of $0.39 for the six months ended June 30, 2010.

The following table presents an analysis of net interest income and average earning assets and liabilities for the three-and six-month periods ended June 30, 2011 compared to the three-and six-month periods ended June 30, 2010.

TABLE 1	NET INTEREST INCOME AND AVERAGE BALANCES
	FNB BANCORP AND SUBSIDIARY

	Three months ended June 30,
	2011							2010
(Dollar amounts in thousands)					Annualized							Annualized
	Average				Average			Average				Average
	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	470,490	$	7,407		6.31	%	$	494,126	$	7,954		6.46	%
Taxable securities		90,094		462		2.06	%		88,625		504		2.28	%
Nontaxable securities (3)		46,934		537		4.59	%		33,776		395		4.69	%
Fed funds sold		29		—		n/a			—		—		n/a
Total interest earning assets		607,547		8,406		5.55	%		616,527		8,853		5.76	%

NONINTEREST EARNING ASSETS:
Cash and due from banks		62,897							65,182
Premises		13,601							11,772
Other assets		29,071							34,756
Total noninterest earning assets		105,569							111,710
TOTAL ASSETS	$	713,116						$	728,237

INTEREST BEARING LIABILITIES:
Demand, int bearing	$	62,201		36		0.23	%	$	61,552		46		0.30	%
Money market		263,796		538		0.82	%		273,536		769		1.13	%
Savings		46,110		29		0.25	%		43,317		27		0.25	%
Time deposits		113,695		254		0.90	%		121,876		381		1.25	%
Federal Home Loan Bank advances		—		—		—			15,000		107		2.86	%
Total interest bearing liabilities		485,802		857		0.71	%		515,281		1,330		1.04	%

NONINTEREST BEARING LIABILITIES:
Demand deposits		136,831							125,539
Other liabilities		7,845							7,514
Total noninterest bearing liabilities		144,676							133,053

TOTAL LIABILITIES		630,478							648,334
Stockholders’ equity		82,638							79,903

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	713,116						$	728,237

NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	7,549		4.98	%			$	7,523		4.89	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis if the loan has demonstrated performance and full collection is considered probable.

(2) Amounts of interest earned include loan fees of $273,000 and $237,000 for the quarters ended June 30, 2011 and 2010, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $136,000 and $97,000 for the quarters ended June 30, 2011 and 2010, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

(4) The annualized net interest margin is computed by dividing net interest income by total average interest earning assets and multiplied by an annualization factor.

TABLE 2	NET INTEREST INCOME AND AVERAGE BALANCES
	FNB BANCORP AND SUBSIDIARY

	Six months ended June 30,
	2011							2010
(Dollar amounts in thousands)					Annualized							Annualized
	Average				Average			Average				Average
	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	476,279	$	14,845		6.29	%	$	497,773	$	15,936		6.46	%
Taxable securities		87,750		866		1.99	%		84,252		941		2.25	%
Nontaxable securities (3)		45,272		1,035		4.61	%		30,641		714		4.70	%
Fed funds sold		14		—		n/a			—		—		n/a
Tot interest earning assets		609,315		16,746		5.54	%		612,666		17,591		5.79	%

NONINTEREST EARNING ASSETS:
Cash and due from banks		59,140							68,590
Premises		13,546							11,804
Other assets		29,993							34,622
Tot noninterest earning assets		102,679							115,016
TOTAL ASSETS	$	711,994						$	727,682

Demand, int bearing	$	61,449		70		0.23	%	$	60,009		97		0.33	%
Money market		260,875		1,081		0.84	%		269,549		1,679		1.26	%
Savings		45,991		57		0.25	%		42,704		53		0.25	%
Time deposits		115,883		533		0.93	%		124,254		834		1.35	%
FHLB advances		—		—		n/a			19,917		367		3.72	%
Fed funds purchased		—		—		n/a			6		—		n/a
Tot interest bearing liabilities		484,198		1,741		0.73	%		516,439		3,030		1.18	%

NONINTEREST BEARING LIABILITIES:
Demand deposits		138,226							124,093
Other liabilities		7,563							7,487
Tot noninterest bearing liabilities		145,789							131,580

TOTAL LIABILITIES		629,987							648,019
Stockholders’ equity		82,007							79,663

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	711,994						$	727,682

NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	15,005		4.97	%			$	14,561		4.79	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis if the loan has demonstrated performance and full collection is considered probable.

(2) Amounts of interest earned included loan fees of $519,000 and $540,000 for the six months ended June 30, 2011 and 2010, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $257,000 and $175,000 for the six months ended June 30, 2011 and 2010, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

(4) The annualized net interest margin is computed by dividing net interest income by total average interest earning assets and multiplied by an annualization factor.

Tables 1 and 2, above, show the various components that contributed to changes in net interest income for the three and six months ended June 30, 2011 and 2010. The principal interest earning assets are loans, from a volume as well as from a rate or yield perspective. For the quarter ended June 30, 2011, average loans outstanding represented 77.4% of average earning assets. For the quarter ended June 30, 2010, they represented 80.1% of average earning assets. For the six months ended June 30, 2011 and 2010, average loans outstanding represented 78.2% and 81.2%, respectively, of average earning assets.

The taxable equivalent yield on average interest earning assets for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010 decreased from 5.76% to 5.55%, or 21 basis points. Average loans decreased by $23,636,000, quarter to quarter, while their yield decreased from 6.46% to 6.31%, or 15 basis points. Interest income on total interest earning assets decreased $447,000 or 5.0% on a fully-taxable equivalent basis.

For the three months ended June 30, 2011 compared to the three months ended June 30, 2010, the cost on total interest bearing liabilities decreased from 1.04% to 0.71%, a decrease of 33 basis points. The most expensive source of interest bearing liabilities comes from Federal Home Loan Bank advances. There were no advances during the quarter ended June 30, 2011. Time deposit interest cost decreased from 1.25% to 0.90%. Their average balance outstanding decreased by $8,181,000, or 6.7%, while their expense decreased $127,000. Money market deposits average volume decreased $9,740,000, or 3.6%, while their cost decreased 31 basis points, or 27.4%.

For the six months ended June 30, 2011 compared to the six months ended June 30, 2010, interest income on interest earning assets decreased $845,000 or 4.8% on a fully-taxable equivalent basis, while average earning assets decreased $3,351,000, or 0.5%. Average loans decreased by $21,494,000, or 4.3%. Interest on loans decreased $1,091,000 or 6.8%, while yield decreased 17 basis points, or 2.6%. The cost on total interest bearing liabilities decreased from 1.18% to 0.73%. There were no Federal Home Loan Bank advances during the six months of 2011. Time deposit averages decreased $8,371,000 or 6.7%. Their yield decreased 42 basis points, or 31.1%. Money market deposit average balances decreased $8,674,000, or 3.2%, and their cost decreased $598,000, or 35.6%.

For the three and six month periods ended June 30, 2011 and June 30, 2010, respectively, the following tables show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), and b) changes in rate (changes in rate times the prior year’s volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.

Table 3	FNB BANCORP AND SUBSIDIARY
	RATE/VOLUME VARIANCE ANALYSIS
	Three Months Ended June 30,
(Dollar amounts in thousands)	2011 Compared to 2010
				Variance
	Interest			Attributable to
	Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(547	)	$	(175	)	$	(372	)
Taxable securities		(42	)		(49	)		7
Nontaxable securities (1)		142			(8	)		150
Total	$	(447	)	$	(232	)	$	(215	)


INTEREST BEARING LIABILITIES
Demand deposits	$	10		$	11		$	(1	)
Money market		231			211			20
Savings deposits		(2	)		—			(2	)
Time deposits		127			101			26
Federal Home Loan Bank advances		107			—			107
Total	$	473		$	323		$	150
NET INTEREST INCOME	$	26		$	91		$	(65	)

(1)

Includes tax equivalent adjustment of $136,000 and $97,000 in the three months ended June 30, 2011 and June 30, 2010, respectively.

Table 4	FNB BANCORP AND SUBSIDIARY
	RATE/VOLUME VARIANCE ANALYSIS
	Six Months Ended June 30,
(Dollar amounts in thousands)	2011 Compared to 2010
					Variance
		Interest			Attributable to
		Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans		$	(1,091	)	$	(403	)	$	(688	)
Taxable securities			(75	)		(114	)		39
Nontaxable securities (1)			321			(14	)		335
Total		$	(845	)	$	(531	)	$	(314	)

INTEREST BEARING LIABILITIES
Demand deposits		$	27		$	29		$	(2	)
Money market			598			544			54
Savings deposits			(4	)		—			(4	)
Time deposits			301			245			56
Federal Home Loan Bank advances			367			—			367
Total		$	1,289		$	818		$	471
NET INTEREST INCOME		$	444		$	287		$	157

(1)

Includes tax equivalent adjustment of $257,000 and $175,000 in the six months ended June 30, 2011 and June 30, 2010, respectively.

Noninterest income

The following table shows the principal components of noninterest income for the periods indicated.

Table 5	NONINTEREST INCOME
	Three months
	ended Jun 30,				Variance
(Dollar amounts in thousands)	2011		2010		Amount			Percent
Service charges	$	811	$	674	$	137		20.3	%
Credit card fees		178		162		16		9.9	%
Gain on available-for-sale of securities		128		54		74		137.0	%
Bank owned life insurance policy earnings		84		81		3		3.7	%
Other income		188		54		134		248.1	%
Total noninterest income	$	1,389	$	1,025	$	364		35.5	%

		Six months
		ended June 30,			Variance
(Dollars in thousands)		2011		2010	Amount			Percent
Service charges	$	1,508	$	1,359	$	149		11.0	%
Credit card fees		328		314		14		4.5	%
Gain on sale of available-for-securities		150		162		(12	)	-7.4	%
Bank owned life insurance policy earnings		165		159		6		3.8	%
Other income		251		107		144		134.6	%
Total noninterest income	$	2,402	$	2,101	$	301		14.3	%

Noninterest income consists mainly of service charges on deposits, credit card fees and several other types of miscellaneous income. The increase in service charges is related primarily to an increase in the amount of nonsufficient funds and returned item service charges that were instituted during the first quarter of 2011.

Noninterest expense

The following table shows the principal components of noninterest expense for the periods indicated.

Table 6	NONINTEREST EXPENSE
	Three months
	ended June 30,					Variance
(Dollar amounts in thousands)	2011		2010			Amount			Percent
Salaries and employee benefits	$	3,423	$	3,478		$	(55	)	-1.6	%
Occupancy expense		585		505			80		15.8	%
Equipment expense		417		511			(94	)	-18.4	%
Professional fees		393		320			73		22.8	%
FDIC assessment		300		363			(63	)	-17.4	%
Telephone, postage & supplies		298		267			31		11.6	%
Operating losses		10		24			(14	)	-58.3	%
Other real estate owned expense		73		414			(341	)	-82.4	%
Bankcard expenses		165		150			15		10.0	%
Loss (gain) on sale of other real estate owned		25		(1	)		26		-2600.0	%
Loss on impairment of other real estate owned		230		486			(256	)	-52.7	%
Other expense		853		719			134		18.6	%
Total noninterest expense	$	6,772	$	7,236		$	(464	)	-6.4	%

	NONINTEREST EXPENSE
	Six months
	ended June 30,						Variance
(Dollars in thousands)	2011			2010			Amount			Percent

Salaries and employee benefits	$	6,909		$	6,980		$	(71	)	-1.0	%
Occupancy expense		1,141			1,017			124		12.2	%
Equipment expense		825			1,023			(198	)	-19.4	%
Professional fees		757			579			178		30.7	%
FDIC assessment		675			623			52		8.3	%
Telephone, postage & supplies		611			545			66		12.1	%
Operating losses		234			32			202		631.3	%
Other real estate owned expense		261			612			(351	)	-57.4	%
Bankcard expenses		301			289			12		4.2	%
Gain on sale of other real estate owned		(66	)		(25	)		(41	)	164.0	%
Loss on impairment of other real estate owned		230			647			(417	)	-64.5	%
Other expense		1,642			1,428			214		15.0	%
Total noninterest expense	$	13,520		$	13,750		$	(230	)	-1.7	%

Noninterest expense consists mainly of salaries and employee benefits. For the three months ended June 30, 2011 compared to three months ended June 30, 2010, it represented 50.5% and 48.1% of total noninterest expenses. For the six months ended June 30, 2011 and 2010, it was 51.1% and 50.8% respectively of total noninterest expenses. During the first quarter of 2011, the Bank experienced an operational loss of approximately $200,000 related to an unauthorized foreign wire transfer. The operational loss is net of an expected $300,000 insurance reimbursement claim that has been filed with the Bank’s insurance carrier. The reduction in other real estate owned (“OREO”) expenses was driven primarily by lower OREO holdings year over year.

Provision for Loan Losses.

There was a provision for loan losses of $850,000 and $565,000 for the six months ended June 30, 2011 and 2010, respectively. There was a provision of $400,000 and $315,000 for the three months ended June 30, 2011 and 2010, respectively. The allowance for loan losses was approximately $9,719,000 or 2.07% of total gross loans at June 30, 2011, compared to $9,524,000 or 2.01% of total gross loans at December 31, 2010. The allowance for loan losses is maintained at a level considered adequate for management to provide for probable loan losses inherent in the loan portfolio. Loans charged off during the six months ended June 30, 2011 were significantly lower than during the same period during 2010, reflecting the improvement in the level of problem loans within our loan portfolio on a year over year basis.

Income Taxes

The effective tax rate for the quarter ended June 30, 2011 was a 27.6% tax expense compared to a 17.9% tax expense for the quarter ended June 30, 2010. The effective tax rate for the six months ended June 30, 2011 and June 30, 2010, respectively was a tax expense of 28.7% compared to a tax expense of 19.8%. Tax preference items which affect our effective tax rate include changing amounts invested in tax-advantaged securities, available Low Income Housing Credits, and amounts of interest income on qualifying loans in Enterprise Zones. Another significant cause of change in the effective tax rate provision is the change in the relative proportion of tax advantaged income in comparison to fully taxable income period over period. The increase in the effective rate for the current year was primarily due to increased fully taxable income levels experienced during 2011 when compared to the same period in 2010.

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 June 30, 2011 are adequate to meet its operating needs in 2011 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

Financial Condition

Assets. Total assets increased to $718,448,000 at June 30, 2011 from $714,639,000 at December 31, 2010, an increase of $3,809,000. The principal source of this increase was $16,975,000 in securities available-for-sale and $7,780,000 in cash and due from banks, partially offset by a decrease of $15,072,000 in net loans, a decrease in $4,242,000 in other real estate owned, and a decrease of $1,744,000 in accrued interest receivable and other assets. Total stockholders’ equity increased $3,006,000.

Loans. Gross loans before loan fees at June 30, 2011 were $469,680,000, a decrease of $14,992,000 or 3.1% from December 31, 2010. Commercial real estate loans decreased $3,339,000, construction loans increased $2,361,000, real estate multi family decreased $2,305,000, real estate one to four family increased $6,529,000, and the largest decrease was in commercial loans, which decreased $17,870,000. Consumer loans decreased by a modest $368,000. Consumers are paying down on their credit instead of increasing their debt. The portfolio breakdown was as follows:

TABLE 7	LOAN PORTFOLIO
	June 30					December 31
(Dollar amounts in thousands)	2011			Percent		2010			Percent
Commercial real estate	$	275,527		59	%	$	278,866		57	%
Real estate construction		29,938		6	%		27,577		6	%
Real estate multi family		40,279		9	%		42,584		9	%
Real estate 1 to 4 family		77,992		17	%		71,463		15	%
Commercial & industrial		43,623		9	%		61,493		13	%
Consumer loans		2,321		0	%		2,689		0	%
Gross loans		469,680		100	%		484,672		100	%
Net deferred loan fees		(205	)	0	%		(320	)	0	%
Total	$	469,475		100	%	$	484,352		100	%

Allowance for loan losses. Management of the Company is responsible for assessing the overall risks within the Bank’s loan 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, historical loss experience, a review of economic conditions in the Company’s market area, and a variety of general economic factors that could affect the amount of expected losses within the Bank’s portfolio. The Company’s management considers changes in national and local economic conditions, as well as the condition of various market segments. It also reviews any changes in the nature and volume of the portfolio. Management watches for the existence and effect of any concentrations of credit, and changes in the level of such concentrations. It also reviews the effect of external factors, such as competition and legal and regulatory requirements. Finally, the Company is committed to maintaining an adequate allowance, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change.

A summary of activity in the allowance for loan losses for the six months ended June 30, 2011 and the six months ended June 30, 2010 is as follows.

TABLE 8	ALLOWANCE FOR LOAN LOSSES
	Six months ended
(Dollar amounts in thousands)	June 30, 2011			June 30, 2010
Balance, beginning of period	$	9,524		$	9,829
Provision for loan losses		850			565
Recoveries		23			37
Amounts charged off		(678	)		(1,355	)
Balance, end of period	$	9,719		$	9,076

During the six months ended June 30, 2011, there was a provision for loan losses of $850,000, compared to $565,000 for the same period in 2010. The increase in the provision was considered necessary given the existing risk levels within the Bank’s loan portfolio. Loan charge-off levels have declined year over year, yet remain above historic norms.

In management’s judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at June 30, 2011. 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.

The allowance is affected by a number of factors, and does not necessarily move in tandem with the level of gross loans outstanding. Management continues to monitor the factors that affect the allowance, and is prepared to make adjustments as they become necessary.

Nonperforming assets. Nonperforming assets consist of nonaccrual loans, loans that are 90 days or more past due but are still accruing interest and other real estate owned. At June 30, 2011, there was $18,282,000 in nonperforming assets, compared to $23,392,000 at December 31, 2010. Nonaccrual loans were $15,844,000 at June 30, 2011, compared to $16,712,000 at December 31, 2010. There were no loans past due 90 days and still accruing at either date.

There was $2,438,000 in Other Real Estate Owned at June 30, 2011 which consisted of two separate properties and $6,680,000 at December 31, 2010. During the first six months of 2011, the Bank sold three properties and did not foreclose on any new loans. Management intends to aggressively market the two remaining properties. While management believes these properties will sell, there can be no assurance that these properties will sell quickly given the current real estate market, nor can the expected sales price be accurately predicted.

Deposits. Total deposits at June 30, 2011 were $628,508,000 compared to $628,440,000 on December 31, 2010. Of these totals, noninterest-bearing demand deposits were $138,249,000 or 22.0% of the total on June 30, 2011 and $137,237,000 or 21.8% on December 31, 2010. Time deposits were $113,614,000 on June 30, 2011 and $125,400,000 on December 31, 2010.

The following table sets forth the maturity schedule of the time certificates of deposit on June 30, 2011:

TABLE 9

(Dollar amounts in thousands)	Under		$100,000
Maturities	$100,000		or more		Total
Three months or less	$	12,145	$	35,107	$	47,252
Over three through six months		8,105		13,184		21,289
Over six through twelve months		9,413		13,277		22,690
Over twelve months		10,859		11,524		22,383
Total	$	40,522	$	73,092	$	113,614

Regulatory Capital. The following table shows the regulatory capital ratios and leverage ratios at June 30, 2011 and December 31, 2010 for the Bank:

TABLE 10				Minimum “Well
	June 30,	December 31,		Capitalized”
Regulatory Capital Ratios	2011	2010		Requirements
Total Regulatory Capital Ratio	15.81%	14.85%	≥	10.00%
Tier 1 Capital	14.55%	13.60%	≥	6.00%
Leverage Ratios	11.08%	10.46%	≥	5.00%

As a result of a regularly scheduled Office of the Comptroller of the Currency (“OCC”) examination during 2010, management and the Board of Directors have informally agreed with the OCC to take actions to further strengthen and improve asset quality and capital adequacy, including, among other things, to: maintain a minimum leverage capital ratio of 9% and total risk-based capital ratio of 12%; seek OCC approval and concurrence before declaring any dividends on common or preferred shares; to reduce the level of risk in the commercial real estate (“CRE”) segment of our loan portfolio; and strengthen the documentation of our analysis and review of the adequacy of our allowance for loan losses.

Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of June 30, 2011, liquid assets (cash, cash equivalents and securities available for sale) were $211,818,000, or 29.5% of total assets. As of December 31, 2010, liquid assets were $187,063,000, or 26.2% of total assets. Liquidity consists of cash and due from banks, federal funds sold, and securities available-for-sale. The Company’s primary uses of funds are loans, and the primary sources of funds are deposits. The relationship between total net loans and total deposits is a useful additional measure of liquidity. The Company also has federal funds borrowing facilities totaling $45,000,000, a Federal Home Loan Bank line up to 30% of total assets, and a Federal Reserve Bank borrowing facility.

The relationship between total net loans and total deposits is a useful additional measure of liquidity. A higher loan to deposit ratio may lead to a loss of liquid assets in the future. This must be balanced against the fact that loans represent the highest interest earning assets. A lower loan to deposit ratio means lower potential income. On June 30, 2011, net loans were at 73.2% of deposits. On December 31, 2010, net loans were at 75.6% of deposits.

Off-Balance Sheet Items

The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results. As of June 30, 2011 and December 31, 2010, 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 $92,708,000 and $96,083,000 at June 30, 2011 and December 31, 2010, respectively. As a percentage of net loans, these off-balance sheet items represent 20.2% and 20.2% respectively.

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.

Item 4T. 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 June 30, 2011. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

(b) Internal Control Over Financial Reporting: An evaluation of any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company’s six months ended June 30, 2011, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There are no material legal proceedings adverse to the Company or First National Bank to which any director, officer, affiliate of the Company, or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or First National Bank.

From time to time, the Company and/or First National Bank are a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any material pending legal proceedings to which either it or First National Bank may be a party or has recently been a party, which will have a material adverse effect on the financial condition or results of operations of the Company and First National Bank, taken as a whole.

Item 1A. Risk Factors

During the course of normal operations, the Bank and the Company manage a variety of risks including, but not limited to, credit risk, operational risk, interest rate risk and regulatory compliance risk. For a more complete discussion of the risk factors facing the Bank and the Company, please refer to the section entitled “Item 1A – Risk Factors” in the Company’s December 31, 2010 Form 10K.

On May 10, 2010, in connection with a regularly scheduled examination of the Bank by the OCC, the Bank entered into an informal Memorandum of Agreement (“Bank MOU”) with the OCC, covering actions to be taken by the Board of Directors and management to (i) reduce a high level of problem and non-performing assets, (ii) to enhance procedures for managing the risks associated with a concentration of credit in commercial real estate loans, and (iii) to maintain an adequate allowance for loan and lease losses. The Bank MOU also restricts the ability of the Bank to declare dividends and requires the formation of a Compliance Committee to monitor compliance with the MOU and submit quarterly progress reports to the OCC. Also, by letter dated June 9, 2010, the OCC notified the Board of Directors of its determination that the Bank must maintain, on an ongoing basis, a minimum ratio of Tier 1 capital to adjusted total assets of 9% and a minimum ratio of total risk-based capital to risk-weighted assets of 12%.

On June 23, 2010, the Company entered into a Memorandum of Understanding (“Company MOU”) with the Federal Reserve Bank of San Francisco (the “Reserve Bank”), agreeing that, without prior approval of the Reserve Bank, the Company would not (a) receive dividends or any other reduction of capital from the Bank; (b) pay any dividends (including TARP dividends) or make any other capital distributions; (c) incur, renew, increase or guarantee any debt; (d) issue any trust preferred securities; (e) purchase, redeem or otherwise acquire any of its stock; (f) appoint any new director or senior executive officer; or (g) make or agree to make any indemnification or severance payments in the nature of a “golden parachute.”

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was signed into law. The purpose of this legislation was to bring about regulatory changes and oversight that would help stop past abuses from recurring in the future. This legislation gives new powers to the FDIC and the Federal Reserve Bank that they may use in the execution of their duties as regulators and overseers of the banking industry. It also created a new federal consumer protection agency named the Consumer Financial Protection Bureau (“CFPB”). All existing consumer laws and regulations will be transferred to the CFPB. This Act is expected to enable regulators to issue numerous new banking regulations and requirements that have not yet been fully developed or promulgated. The ultimate effect the Act has on the Company’s operations will ultimately be determined by the significance of the new banking regulations that are issued as a result of the Act.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

c) ISSUER PURCHASES OF EQUITY SECURITIES

On August 24, 2007, 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 2,863,635 shares of Common Stock, or 143,182 shares. There were no repurchases during the quarter ended June 30, 2011. There were 10,457 shares remaining that may be purchased under this Plan as of June 30, 2011. Effective February 27, 2009, based on the Purchase Agreement with the U. S. Treasury, the Company may not repurchase Company common stock so long as the Treasury’s Preferred Stock investment is outstanding.

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:
August 11, 2011	By:	/s/ Thomas C. McGraw
		Thomas C. McGraw
		Chief Executive Officer
		(Authorized Officer)

	By:	/s/ David A. Curtis
		David A. Curtis
		Senior Vice President
		Chief Financial Officer
		(Principal Financial Officer)

FNB BANCORP/CA/ - FORM 10-Q - August 11, 2011

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FNB BANCORP/CA/ Reports