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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, 2014

 

FNB BANCORP

(Exact name of registrant as specified in its charter)

 

California

(State or other jurisdiction of incorporation)

 

000-49693   91-2115369
(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). x 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 4, 2014: 4,048,000 shares.

 
 

FNB BANCORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

      Page No
PART I. FINANCIAL INFORMATION    
       
Item 1. Consolidated Financial Statements (unaudited):    
       
  Consolidated Balance Sheets   3
       
  Consolidated Statements of Earnings   4
       
  Consolidated Statements of Comprehensive Earnings (Loss)   5
       
  Consolidated Statements of Cash Flows   6
       
  Notes to Consolidated Financial Statements   8
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    32
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   45
       
Item 4. Controls and Procedures   46
       
PART II OTHER INFORMATION   46
       
Item 1. Legal Proceedings   46
       
Item 1A. Risk Factors   46
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   47
       
Item 4. Mine Safety Disclosures   47
       
Item 6. Exhibits   47
       
SIGNATURES   48

2
 

 PART I—FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 

ASSETS

         
   June 30,   December 31, 
(Dollar amounts in thousands)  2014   2013 
           
Cash and due from banks  $21,682   $14,007 
Interest-bearing time deposits with financial institutions   4,461    5,543 
Securities available-for-sale, at fair value   267,795    263,988 
Loans, net of allowance for loan losses of $10,859 and $9,879 on June 30, 2014 and December 31, 2013   560,432    552,343 
Bank premises, equipment, and leasehold improvements, net   12,429    12,512 
Bank owned life insurance   12,337    12,151 
Other equity securities   5,576    5,300 
Accrued interest receivable   3,674    3,808 
Other real estate owned, net   754    5,318 
Goodwill   1,841    1,841 
Prepaid expenses   504    701 
Other assets   13,945    14,418 
Total assets  $905,430   $891,930 
           
Liabilities & Stockholders’ Equity          
           
Deposits          
Demand, noninterest bearing  $203,854   $198,523 
Demand, interest bearing   82,163    80,746 
Savings and money market   397,457    370,194 
Time   106,748    124,152 
Total deposits   790,222    773,615 
           
Federal Home Loan Bank advances   7,000    15,000 
Note payable   5,850     
Accrued expenses and other liabilities   11,215    9,066 
Total liabilities   814,287    797,681 
           
Stockholders’ equity          
Preferred stock - series C - no par value, authorized and outstanding 9,450 shares at December 31, 2013 (liquidation preference of $1,000 per share)       9,450 
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 4,045,970 shares at June 30, 2014 and 3,978,505 shares at December 31, 2013   60,717    59,317 
Retained earnings   29,183    26,738 
Accumulated other comprehensive earnings (loss), net of tax   1,243    (1,256)
Total stockholders’ equity   91,143    94,249 
Total liabilities and stockholders’ equity  $905,430   $891,930 

 

See accompanying notes to consolidated financial statements.

3
 

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

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

 

   Three months ended
June 30,
   Six months ended
June 30,
 
   2014   2013   2014   2013 
Interest income:                    
Interest and fees on loans  $7,897   $8,020   $15,524   $16,178 
Interest on taxable securities   851    794    1,694    1,478 
Interest on tax-exempt securities   492    503    980    1,009 
Interest on time dep w/other financial institutions   27    49    46    90 
Total interest income   9,267    9,366    18,244    18,755 
Interest expense:                    
On deposits   484    639    945    1,321 
Interest on FHLB advances   3        11     
Interest on note payable   68        68     
Total interest expense   555    639    1,024    1,321 
Net interest income   8,712    8,727    17,220    17,434 
Provision for loan losses       510    75    1,110 
Net interest income after provision for loan losses   8,712    8,217    17,145    16,324 
Noninterest income:                    
Service charges   647    676    1,284    1,335 
Credit card fees       3        10 
Net gain on sale of available-for-sale securities   28    73    39    115 
Bank owned life insurance earnings   90    94    186    189 
Other income   215    238    517    419 
Total noninterest income   980    1,084    2,026    2,068 
Noninterest expense:                    
Salaries and employee benefits   4,177    4,312    8,395    8,728 
Occupancy expense   694    846    1,374    1,808 
Equipment expense   406    386    797    784 
Professional fees   501    444    1,032    807 
FDIC assessment   180    180    360    360 
Telephone, postage and supplies   313    277    599    714 
Advertising   136    121    221    293 
Data processing expense   134    170    279    326 
Low income housing expense   110    109    220    219 
Surety insurance   67    67    134    121 
Directors expense   63    63    126    126 
Loss (gain) on other real estate owned, net   60        (220)    
Other real estate owned expense, net   11    28    88    78 
Other expense   358    382    647    760 
    Total noninterest expense   7,210    7,385    14,052    15,124 
Earnings before provision for income tax expense   2,482    1,916    5,119    3,268 
Provision for income tax expense   853    537    1,656    959 
Net earnings   1,629    1,379    3,463    2,309 
Dividends and discount accretion on preferred stock       172    170    330 
Net earnings available to common stockholders  $1,629   $1,207   $3,293   $1,979 
                     
Earnings per share data:                    
Basic  $0.40   $0.31   $0.82   $0.51 
Diluted  $0.39   $0.30   $0.80   $0.49 
Weighted average shares outstanding:                    
Basic   4,029    3,915    4,007    3,908 
Diluted   4,159    4,003    4,142    4,000 

 

See accompanying notes to consolidated financial statements.

4
 

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

(UNAUDITED)

         
(Dollar amounts in thousands)  Three months ended   Six months ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
Net earnings  $1,629   $1,379   $3,463   $2,309 
Unrealized holding gain (loss) on available-for-sale securities, net of tax expense of ($1,034) and ($1,754) for three and six months ended June 30, 2014, and net of tax benefit of $2,783 and $3,074 for three and six months ended June 30, 2013.   1,487    (4,005)   2,522    (4,423)
Reclassification adjustment for gain on available-for-sale securities sold, net of tax of $11 and $16 for three and six months ended June 30, 2014, and $30 and $47 for three and six months ended June 30, 2013, respectively   (17)   (43)   (23)   (68)
Other Comprehensive Income / (loss)   1,470    (4,048)   2,499    (4,491)
                     
   Total comprehensive earnings (loss)  $3,099   $(2,669)  $5,962   $(2,182)

  

See accompanying notes to consolidated financial statements.

5
 

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
(Dollar amounts in thousands)  Six months ended 
   June 30 
   2014   2013 
Cash flow from operating activities:          
Net earnings  $3,463   $2,309 
Adjustments to reconcile net earnings to net cash provided by operating activities:          
Net gain on sale of securities available-for-sale   (39)   (115)
Gain on sale of other real estate owned, net   (220)    
Depreciation, amortization and accretion   1,730    1,843 
Stock-based compensation expense   139    121 
Earnings on bank owned life insurance   (186)   (189)
Change in net deferred loan fees   (18)   130 
Provision for loan losses   75    1,110 
Decrease (increase) in accrued interest receivable   134    (126)
Decrease in prepaid expense   197    654 
Decrease in other assets   661    898 
(Increase) decrease in accrued expenses and other liabilities   (33)   431 
Net cash provided by operating activities   5,903    7,066 
           
Cash flows from investing activities          
Purchase of securities available-for-sale   (18,791)   (77,996)
Proceeds from matured/called/sold securities available-for-sale   18,138    22,803 
Investment, net of redemption, in other equity securities   (276)   164 
Redemption of time deposits of other banks   1,082    4,743 
Proceeds from sale of other real estate owned   1,461     
Net investment in other real estate owned   (77)   (25)
Net (Increase) decrease in loans   (4,746)   9,085 
Purchases of bank premises, equipment, leasehold improvements   (526)   (618)
Net cash used in investing activities   (3,735)   (41,844)
6
 

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

         
   Six months ended 
   June 30 
   2014   2013 
Cash flows from financing activities          
Net increase in demand and savings deposits   34,011    57,100 
Net decrease in time deposits   (17,404)   (22,652)
Decrease in FHLB advances   (8,000)   (719)
Proceeds from notes payable   6,000     
Payment on notes payable   (150)    
Dividends paid on common stock   (403)   (301)
Exercise of stock options   1,073    667 
Redemption of preferred stock series C   (9,450)   (3,150)
Dividends paid on preferred stock series C   (170)   (330)
Net cash provided by financing activities   5,507    30,615 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   7,675    (4,163)
Cash and cash equivalents at beginning of period   14,007    27,861 
Cash and cash equivalents at end of period  $21,682   $23,698 
           
Additional cash flow information:          
Interest paid   1,009    1,372 
Income taxes paid   1,537     
           
Non-cash investing and financing activities:          
Accrued dividends   445    376 
Change in unrealized gain in available-for-sale securities, net of tax   2,499    (4,491)
OREO sale funded by loan origination   3,400     

 

See accompanying notes to consolidated financial statements.

7
 

FNB BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2014

 

(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 position and results of operations for the periods presented.

 

The accompanying unaudited consolidated 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 annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto for the year ended December 31, 2013. 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, 2014 and 2013 was $69,000 and $76,000, respectively. The amount of compensation expense recorded for the six months ended June 30, 2014 and 2013 was $139,000 and $122,000, respectively. There was an income tax benefit recognized from stock options exercised during the quarter and year to date ended June 30, 2014 of $245,000 and $121,000 for the quarter and year to date ended June 30, 2013.

8
 

The intrinsic value for options exercised during the six months ended June 30, 2014 was $259,000. The intrinsic value for options exercisable as of June 30, 2014 was $2,239,000. The intrinsic value for options exercised during the six months ended June 30, 2013 was $108,000. The intrinsic value of options exercisable at June 30, 2013 was $1,081,000. There were no options granted for the first six months ended June 30, 2014 and 60,785 options granted for the six month period ended June 30, 2013.

 

The amount of total unrecognized compensation expense related to non-vested options at June 30, 2014 was $764,000, and the weighted average period over which it will be amortized is 3.6 years.

 

NOTE C – EARNINGS PER SHARE CALCULATION

 

Earnings per common share (EPS) are computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings (loss) 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. The number of potential common shares included in the quarterly diluted EPS is computed using the average market price during the three months included in the reporting period under the treasury stock method. The number of potential common shares included in year-to-date diluted EPS is a year-to-date weighted average of potential shares included in each quarterly diluted EPS computation. All common stock equivalents are anti-dilutive when a net loss occurs. A 5% stock dividend was declared in the fourth quarter of 2013, and prior per share amounts have been adjusted to reflect the 5% stock dividend.

 

Earnings per share have been computed based on the following:

 

(All amounts in thousands)  Three months ended   Six months ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
Net earnings  $1,629   $1,379   $3,463   $2,309 
Dividends and discount accretion on preferred stock       172    170    330 
Net earnings available to common stockholders  $1,629   $1,207   $3,293   $1,979 
                     
Average number of shares outstanding   4,029    3,915    4,007    3,908 
Effect of dilutive options   130    88    135    92 
Average number of shares outstanding used to calculate diluted earnings per share   4,159    4,003    4,142    4,000 
                     
Anti-dilutive options not included   62,800    204,359    246,420    230,859 

  

Anti-dilutive options that were excluded from the calculation for the quarter end and year to date were 62,800 and 246,420 in 2014, and 204,359 and 230,859 in 2013, respectively.

9
 

NOTE D – SECURITIES AVAILABLE FOR SALE

 

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

 

(Dollar amounts in thousands)  Amortized   Unrealized   Unrealized   Fair 
   cost   gains   losses   value 
June 30, 2014:                    
U.S. Treasury securities  $3,973   $6   $(31)  $3,948 
Obligations of U.S. government agencies   70,482    437    (302)   70,617 
Mortgage-backed securities   85,360    881    (1,032)   85,209 
Obligations of states and political subdivisions   81,128    2,327    (438)   83,017 
Corporate debt   24,744    319    (59)   25,004 
   $265,687   $3,970   $(1,862)  $267,795 
December 31, 2013:                    
U.S. Treasury securities  $3,069   $12   $(54)  $3,027 
Obligations of U.S. government agencies   73,691    488    (860)   73,319 
Mortgage-backed securities   79,873    360    (2,373)   77,860 
Obligations of states and political subdivisions   82,526    1,467    (1,317)   82,676 
Corporate debt   26,958    330    (182)   27,106 
   $266,117   $2,657   $(4,786)  $263,988 

 

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of June 30, 2014 and December 31, 2013, respectively, is as follows:

 

(Dollar amounts in thousands)      Less than       12 Months         
   Total   12 Months   Total   or Longer   Total   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
June 30, 2014:                              
U. S. Treasury securities  $2,019   $(31)  $   $   $2,019   $(31)
Obligations of U.S. Government agencies   7,808    (10)   22,153    (292)   29,961   $(302)
Mortgage-backed securities   3,598    (11)   39,727    (1,021)   43,325    (1,032)
Obligations of states and political subdivisions   7,455    (65)   15,746    (373)   23,201    (438)
Corporate debt   1,182    (2)   6,907    (57)   8,089    (59)
Total  $22,062   $(119)  $84,533   $(1,743)  $106,595   $(1,862)
10
 
(Dollar amounts in thousands)      Less than       12 Months         
   Total   12 Months   Total   or Longer   Total   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
December 31, 2013:                              
U. S. Treasury securities  $2,002   $(54)  $         —                    —   $2,002    (54)
Obligations of U.S. Government agencies   40,108    (860)            —                     —    40,108    (860)
Mortgage-backed securities   51,419    (2,015)   5,664    (358)   57,083    (2,373)
Obligations of states and political subdivisions   33,265    (1,248)   1,083    (69)   34,348    (1,317)
Corporate debt   10,857    (180)   498    (2)   11,355    (182)
Total  $137,651   $(4,357)  $7,245   $(429)  $144,896   $(4,786)

 

At June 30, 2014, there were sixty eight securities in an unrealized loss position for twelve consecutive months or more. At December 31, 2013, there were five securities in an unrealized loss position for twelve consecutive months or more. Management periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. The unrealized losses are due solely to changes in interest rates 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. Management has determined that no investment security was other-than-temporarily impaired at June 30, 2014 and December 31, 2013.

 

The amortized cost and carrying value of available-for-sale debt securities as of June 30, 2014 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.

 

June 30, 2014:

 

(Dollar amounts in thousands)  Amortized   Fair 
   Cost   Value 
Available-for-sale:         
Due in one year or less  $13,240   $13,363 
Due after one through five years   98,770    99,508 
Due after five years through ten years   115,377    116,313 
Due after ten years   38,300    38,611 
   $265,687   $267,795 

 

For the six months ended June 30, 2014 and June 30, 2013, respectively, gross realized gains amounted to $39,000 and $115,000, on securities sold for $5,067,000 and $8,593,000, respectively. For the six months ended June 30, 2014, there were no gross realized losses. For the six months ended June 30, 2013, there were no gross realized losses. For the three months ended June 30, 2014 and June 30, 2013, respectively, gross realized gains amounted to $28,000 and $73,000 on securities sold for $4,044,000 and $4,871,000 respectively.

11
 

At June 30, 2014, securities with an amortized cost of $67,492,000 and fair value of $68,273,000 were pledged as collateral for public deposits and for other purposes required by law.

  

NOTE E - LOANS

 

Loans are summarized as follows at June 30, 2014 and December 31, 2013:

 

               Total 
(Dollar amounts in thousands)  FNB           Balance 
   Bancorp           June 30 
June 30, 2014:  Originated   PNCI   PCI   2014 
Commercial real estate  $282,646   $35,691   $1,324   $319,661 
Real estate construction   37,778    1,982        39,760 
Real estate multi-family   41,821    11,678        53,499 
Real estate 1 to 4 family   108,785    6,084        114,869 
Commercial & industrial   33,307    9,238        42,545 
Consumer loans   1,434            1,434 
Gross loans   505,771    64,673    1,324    571,768 
Net deferred loan fees   (477)           (477)
Allowance for loan losses   (10,859)            (10,859)
Net loans  $494,435   $64,673   $1,324   $560,432 
                 
               Total 
(Dollar amounts in thousands)  FNB           Balance 
   Bancorp           December 31 
December 31, 2013  Originated   PNCI   PCI   2013 
Commercial real estate  $285,938   $37,936   $1,325   $325,199 
Real estate construction   31,290    3,028        34,318 
Real estate multi-family   34,357    11,786        46,143 
Real estate 1 to 4 family   98,196    8,707        106,903 
Commercial & industrial   38,287    10,217        48,504 
Consumer loans   1,650            1,650 
Gross loans   489,718    71,674    1,325    562,717 
Net deferred loan fees   (495)           (495)
Allowance for loan losses   (9,869)   (10)       (9,879)
Net loans  $479,354   $71,664   $1,325   $552,343 

  

Note: PNCI means Purchased, Not Credit Impaired. PCI means Purchased, Credit Impaired.

12
 
   Allowance for Credit Losses 
   For the Three Months Ended June 30, 2014 
(Dollar amounts in thousands)                        
               Real   Real         
               Estate   Estate         
   Commercial   Commercial   Real Estate   Multi   1 to         
   & industrial   Real estate   Construction   family   4 family   Consumer   Total 
Allowance for credit losses                                    
                                    
Beginning balance  $1,268   $5,624   $735   $369   $1,835   $66   $9,897 
   Charge-offs           (183)           (20)   (203)
   Recoveries   110    1,051            1    3    1,165 
   Provision   (212)   (460)   165    96    414    (3)   0 
Ending balance  $1,166   $6,215   $717   $465   $2,250   $46   $10,859 
                                   
Ending balance: individually evaluated for impairment  $151   $128   $   $   $481   $   $760 
Ending balance: collectively evaluated for impairment  $1,015   $6,087   $717   $465   $1,769   $46   $10,099 

 

    Allowance for Credit Losses 
    For the Six Months Ended June 30, 2014 
(Dollar amounts in thousands)                        
               Real   Real         
               Estate   Estate         
   Commercial   Commercial   Real Estate   Multi   1 to         
   & industrial   Real estate   Construction   family   4 family   Consumer   Total 
Allowance for credit losses                                    
                                    
Beginning balance  $1,237   $5,763   $734   $293   $1,788   $64   $9,879 
   Charge-offs           (183)       (62)   (31)   (276)
   Recoveries   124    1,052            2    3    1,181 
   Provision   (195)   (600)   166    172    522    10    75 
Ending balance  $1,166   $6,215   $717   $465   $2,250   $46   $10,859 
                                   
Ending balance: individually evaluated for impairment  $151   $128   $   $   $481   $   $760 
Ending balance: collectively evaluated for impairment  $1,015   $6,087   $717   $465   $1,769   $46   $10,099 
13
 
    Recorded Investment in Loans at June 30, 2014
                             
(Dollar amounts in thousands)                        
               Real   Real         
               Estate   Estate         
   Commercial   Commercial   Real Estate   Multi   1 to         
   & industrial   Real Estate   Construction   family   4 family   Consumer   Total 
                             
Loans:                                   
Ending balance  $42,545   $319,661   $39,760   $53,499   $114,869   $1,434   $571,768 
Ending balance: individually evaluated for impairment  $4,133   $9,043   $2,382   $   $3,847   $9   $19,414 
Ending balance: collectively evaluated for  impairment  $38,412   $310,618   $37,378   $53,499   $111,022   $1,425   $552,354 

 

   Recorded Investment in Loans at December 31, 2013 
                             
(Dollar amounts in thousands)                        
               Real   Real         
               Estate   Estate         
   Commercial   Commercial   Real Estate   Multi   1 to         
   & industrial   Real Estate   Construction   family   4 family   Consumer   Total 
                             
Loans:                                   
Ending balance  $48,504   $325,199   $34,318   $46,143   $106,903   $1,650   $562,717 
Ending balance: individually evaluated for impairment  $2,497   $17,974   $189   $375   $4,077   $   $25,112 
Ending balance: collectively evaluated for impairment  $46,007   $307,225   $34,129   $45,768   $102,826   $1,650   $537,605 
14
 

    Allowance for Credit Losses
    For the Three Months Ended June 30, 2013 
(Dollar amounts in thousands)                        
                             
               Real   Real         
               Estate   Estate         
   Commercial   Real Estate   Real Estate   Multi   1 to         
   & industrial   Commercial   Construction   family   4 family   Consumer   Total 
Allowance for credit losses                                    
                                    
Beginning balance  $1,577   $4,930   $653   $281   $1,862   $54   $9,357 
   Charge-offs                   (125)       (125)
   Recoveries       2                1    3 
   Provision   (86)   379    72    48    91    6    510 
Ending balance  $1,491   $5,311   $725   $329   $1,828   $61   $9,745 
                                   
Ending balance: individually evaluated for impairment  $254   $189   $   $   $237   $1   $681 
Ending balance: collectively evaluated for impairment  $1,237   $5,122   $725   $329   $1,591   $60   $9,064 

 

    Allowance for Credit Losses 
    For the Six Months Ended June 30, 2013 
(Dollar amounts in thousands)                        
               Real   Real         
               Estate   Estate         
   Commercial   Commercial   Real Estate   Multi   1 to         
   & industrial   Real estate   Construction   family   4 family   Consumer   Total 
Allowance for credit losses                                    
                                    
Beginning balance  $1,875   $4,812   $857   $     —   $1,516   $64   $9,124 
   Charge-offs       (239)   (81)        —    (244)   (1)   (565)
   Recoveries   70    4             —    1    1    76 
   Provision   (454)   754    (34)   329    518    (3)   1,110 
Ending balance  $1,491   $5,331   $742   $329   $1,791   $61   $9,745 
                                    
Ending balance: individually evaluated for impairment  $254   $210   $17   $   $237   $1   $719 
Ending balance: collectively evaluated for impairment  $1,237   $5,121   $725   $329   $1,554   $60   $9,026 
15
 
    Recorded Investment in Loans at June 30, 2013
                             
(Dollar amounts in thousands)                    
               Real   Real         
               Estate   Estate         
   Commercial   Commercial   Real Estate   Multi   1 to         
   & industrial   Real Estate   Construction   family   4 family   Consumer   Total 
                             
Loans:                                   
Ending balance  $47,739   $304,819   $25,974   $56,002   $105,094   $1,725   $541,353 
                                    
Ending balance: individually evaluated for impairment  $3,795   $19,244   $591   $1,192   $3,395   $1   $28,218 
                                   
Ending balance: collectively evaluated for impairment  $43,944   $285,575   $25,383   $54,810   $101,699   $1,724   $513,135 

  

   Impaired Loans 
   As of and for the six months ended June 30, 2014 
                     
       Unpaid       Average     
(Dollar amounts in thousands)  Recorded   Principal   Related   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 
                     
With no related allowance recorded                         
   Commercial and industrial  $2,796   $3,858   $   $2,885   $127 
   Commercial real estate construction   2,382    2,565        1,851    71 
   Commercial real estate   3,524    3,799        3,510    48 
   Residential- 1 to 4 family   629    629        632    6 
   Consumer   9    9        9     
     Total   9,340    10,860        8,887    252 
                          
With an allowance recorded                         
   Commercial and industrial  $1,337   $1,740   $151   $1,418   $4 
   Commercial real estate construction                    
   Commercial real estate   5,506    5,507    128    5,575    134 
   Residential- 1 to 4 family   3,218    3,365    481    3,331    65 
     Total   10,061    10,612    760    10,324    203 
                          
Total                         
   Commercial and industrial  $4,133   $5,598   $151   $4,303   $131 
   Commercial real estate construction   2,382    2,565        1,851    71 
   Commercial real estate   9,030    9,306    128    9,085    182 
   Residential - 1 to 4 family   3,847    3,994    481    3,963    71 
   Consumer   9    9        9     
     Grand total  $19,401   $21,472   $760   $19,211   $455 
16
 
   Impaired Loans
As of and for the year ended December 31, 2013
 
                     
       Unpaid       Average     
(Dollar amounts in thousands)  Recorded   Principal   Related   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 
                     
With no related allowance recorded                         
   Commercial and industrial  $1,059   $1,232   $   $1,204   $66 
   Commercial real estate construction                    
   Commercial real estate   12,397    13,535        11,445    565 
   Real estate multi family   375    375        384    25 
   Residential- 1 to 4 family   1,163    1,284        1,009    37 
     Total   14,994    16,426        14,042    693 
                          
With an allowance recorded                         
   Commercial and industrial  $1,438   $1,871   $166   $1,710   $15 
   Commercial real estate construction   189    196    10    198    18 
   Commercial real estate   5,577    5,588    165    4,972    254 
   Residential- 1 to 4 family   2,914    2,923    254    2,989    115 
     Total   10,118    10,578    595    9,869    402 
                          
Total                         
   Commercial and industrial  $2,497   $3,103   $166   $2,914   $81 
   Commercial real estate construction   189    196    10    198    18 
   Commercial real estate   17,974    19,123    165    16,417    819 
   Real estate multi family   375    375        384    25 
   Residential - 1 to 4 family   4,077    4,207    254    3,998    152 
     Grand total  $25,112   $27,004   $595   $23,911   $1,095 

 

Average recorded investment on impaired loans was $20,805,000 for six months ended June 30, 2013; $21,969,000 for 3 months ended June 30, 2014, and $29,399,000 for 3 months ended June 30, 2013. Income recognized on impaired loans was $452,000 for six months ended June 30, 2013; $194,000 for three months ended June 30, 2014, and $394,000 for three months ended June 30, 2013.

 

Nonaccrual loans totaled $5,463,000 and $7,351,000 as of June 30, 2014 and December 31, 2013. The majority of the difference between impaired loans and nonaccrual loans represents loans that are restructured and performing under modified loan agreements, and where principal and interest is considered to be collectible.

 

   Loans on Nonaccrual Status as of 
(Dollar amounts in thousands)  June 30   December 31, 
   2014   2013 
Commercial & industrial  $1,928   $2,046 
Real estate - construction       189 
Commercial real estate   2,852    4,290 
Real estate - 1 to 4 family   674    826 
Consumer   9     
Total  $5,463   $7,351 
17
 

Interest income on impaired loans of $455,000 was recognized for cash payments received during the six months ended June 30, 2014, and $1,095,000 was recognized for cash payments received during the year ended December 31, 2013, respectively. Interest income on impaired loans for cash payments received during the six month period ended June 30, 2013 was $452,000; for the three months ended June 30, 2014 it was $194,000, and for the three months ended June 30, 2013 it was $394,000. The amount of interest on impaired loans not collected for the six months ended June 30, 2014 was $214,000 and for the year ended December 31, 2013 was $656,000. For the six months ended June 30, 2013, it was $388,000; for three months ended June 30, 2014, it was $64,000; for the three months ended June 30, 2013 it was $190,000. The cumulative amount of unpaid interest on impaired loans was $3,644,000 at June 30, 2014, and $3,430,000 at the year ended December 31, 2013. Total outstanding principal of troubled debt restructured loans as of June 30, 2014 was $17,353,000, of which $2,165,000 was commercial and industrial loans, $3,689,000 was residential loans, and $11,499,000 was commercial real estate loans. Total outstanding principal of troubled debt restructured loans at December 31, 2013 was $13,706,000, of which $2,412,000 was commercial loans, $189,000 was real estate construction loans, $2,121,000 was real estate one to four family, and $8,455,000 was commercial real estate loans.

 

Troubled Debt Restructurings

 

   Total troubled debt restructured loans outstanding at 
(dollars in thousands)  June 30, 2014   December 31, 2013 
       Non-           Non-     
   Accrual   accrual   Total   Accrual   accrual   Total 
   status   status   modifications   status   status   modifications 
                         
Commercial & industrial  $297   $1,868   $2,165   $461   $1,951   $2,412 
Real Estate construction                   189    189 
Real estate 1 to 4 family   3,173    516    3,689    2,121    529    2,650 
Commercial real estate   9,398    2,101    11,499    6,315    2,140    8,455 
   Total  $12,868   $4,485   $17,353   $8,897   $4,809   $13,706 

 

Modification Categories

 

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories.

 

Rate Modification – A modification in which the interest rate is changed.

 

Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

 

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

 

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

18
 

As of June 30, 2014, there were no commitments for additional funding of troubled debt restructurings.

 

   Modifications 
   For the six months ended June 30, 2014 
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
(Dollar amounts in thousands)            
Real estate 1 to 4 family   1    572    572 
Commercial real estate   3    1,454    1,454 
Total   4    2,026   $2,026 

 

As of June 30, 2014, no loans defaulted within twelve months following the date of restructure. All restructurings were a modification of interest rate and as a result payment. There were no principal reductions granted.

 

   Modifications 
   For the six months ended June 30, 2013 
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
(Dollar amounts in thousands)            
Real Estate Construction   1   $196   $196 
Real estate 1 to 4 family   2    739    739 
Real estate multi-family   1    544    544 
Commercial real estate   4    3,737    3,737 
Total   8   $5,216   $5,216 

  

As of June 30, 2014, no loans defaulted within twelve months following the date of restructure. All restructurings were a modification of interest rate and as a result payment. There were no principal reductions granted.

 

   Modifications 
   For the three months ended June 30, 2014 
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
(Dollar amounts in thousands)            
Commercial real estate   3    1,454    1,454 
Total   3   $1,454   $1,454 
19
 

As of June 30, 2014, no loans defaulted within twelve months following the date of restructure. All restructurings were a modification of interest rate and as a result payment. There were no principal reductions granted.

 

   Modifications 
   For the three months ended June 30, 2013 
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
(Dollar amounts in thousands)            
Real estate 1 to 4 family   1    440    440 
Commercial real estate   2    1,503    1,503 
Total   3   $1,943   $1,943 

 

As of June 30, 2014, no loans defaulted within twelve months following the date of restructure. All restructurings were a modification of interest rate and as a result payment. There were no principal reductions granted.

 

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. These well-defined weaknesses may include 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.

20
 

Real Estate – Multi-Family

 

Our multi-family commercial real estate loans are secured by multi-family properties located primarily in San Mateo and San Francisco counties. These loans are made to investors where our primary source of repayment is from cash flows generated by the properties, through rent collections. The borrowers’ promissory notes are secured with recorded liens on the underlying properties. The borrowers would normally also be required to personally guarantee repayment of the loans. 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.

 

Commercial Real Estate Loans

 

Other commercial real estate loans consist of loans secured by non-farm, non-residential properties, including, but not limited to industrial, hotel, assisted care, retail, office and mixed use buildings.

 

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.

 

Real Estate Construction Loans

 

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.

21
 

Real Estate-1 to 4 family 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 single family residential units. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers lose their primary source of income and/or property values decline significantly. 

 

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.

 

Consumer 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 lose their primary source of income, or file for relief from creditors through bankruptcy proceedings.

22
 

   Age Analysis of Past Due Loans 
   As of June 30, 2014 
(Dollar amounts in thousands)                        
   30-59   60-89                 
   Days   Days   Over   Total         
   Past   Past   90   Past       Total 
Originated  Due   Due   Days   Due   Current   Loans 
Commercial real estate  $   $590   $727   $1,317   $281,329   $282,646 
Real estate construction                   37,778    37,778 
Real estate multi family                   41,821    41,821 
Real estate 1 to 4 family   88        159    247    108,538    108,785 
Commercial and industrial   33        1,907    1,940    31,367    33,307 
Consumer   9            9    1,425    1,434 
Total  $130   $590   $2,793   $3,513   $502,258   $505,771 
                               
Purchased                              
Not credit impaired                              
Commercial real estate  $   $   $   $   $35,691   $35,691 
Real estate construction                   1,982    1,982 
Real estate multi-family                   11,678    11,678 
Real estate 1 to 4 family                   6,084    6,084 
Commercial and industrial                   9,238    9,238 
Total  $   $   $   $   $64,673   $64,673 
                               
Credit impaired                              
Commercial real estate  $   $   $   $   $1,324   $1,324 
Real estate construction                        
Real estate multi-family                        
Real estate 1 to 4 family                        
Commercial and industrial                        
Consumer                        
Total  $   $   $   $   $1,324   $1,324 

 

At June 30, 2014 there were no loans that were 90 days or more past due where interest was still accruing.

 

The over 90 days column includes nonaccruals that were over 90 days, but does not include loans that are in nonaccrual status for reasons other than past due.

23
 
   Age Analysis of Past Due Loans 
   As of December 31, 2013 
(Dollar amounts in thousands)                    
   30-59   60-89                 
   Days   Days   Over   Total         
   Past   Past   90   Past       Total 
Originated  Due   Due   Days   Due   Current   Loans 
Commercial real estate  $1,403   $   $2,349   $3,752   $282,186   $285,938 
Real estate construction                   31,290    31,290 
Real estate multi family                   34,357    34,357 
Real estate 1 to 4 family   161    75    826    1,062    97,134    98,196 
Commercial & industrial   563    210    2,046    2,819    35,468    38,287 
Consumer   116    19        135    1,515    1,650 
Total  $2,243   $304   $5,221   $7,768   $481,950   $489,718 
                               
Purchased                              
Not credit impaired                              
Commercial real estate  $   $   $616   $616   $37,320   $37,936 
Real estate construction           189    189    2,839    3,028 
Real estate multi-family                   11,786    11,786 
Real estate 1 to 4 family                   8,707    8,707 
Commercial & industrial                   10,217    10,217 
Total  $   $   $805   $805   $70,869   $71,674 
                               
Purchased                              
Credit impaired                              
Commercial real estate  $   $   $1,325   $1,325   $   $1,325 
Real estate construction                        
Real estate multi-family                        
Real estate 1 to 4 family                        
Commercial & industrial                        
Total  $   $   $1,325   $1,325   $   $1,325 

 

At December 31, 2013 there were no loans that were 90 days or more past due where interest was still accruing.

24
 
   Credit Quality Indicators 
   As of June 30, 2014  
                     
(Dollar amounts in thousands)                    
       Special   Sub-       Total 
   Pass   mention   standard   Doubtful   loans 
Commercial real estate  $277,913   $1,933   $2,800   $   $282,646 
Real estate construction   36,709        1,069        37,778 
Real estate multi-family   41,821                41,821 
Real estate 1 to 4 family   108,110        529    146    108,785 
Commercial and industrial   32,302        988    17    33,307 
Consumer loans   1,434                1,434 
Totals  $498,289   $1,933   $5,386   $163   $505,771 
                          
Purchased                         
Not credit impaired                         
Commercial real estate  $29,824   $   $5,867   $   $35,691 
Real estate construction   1,982                1,982 
Real estate multi-family   11,678                11,678 
Real estate 1 to 4 family   5,681        403        6,084 
Commercial and industrial   9,238                9,238 
Total  $58,403   $   $6,270   $   $64,673 
                          
Credit impaired                         
Commercial real estate                      $1,324 
Total                      $1,324 
25
 

   Credit Quality Indicators 
   As of December 31, 2013 
                     
(Dollar amounts in thousands)                    
       Special   Sub-       Total 
Originated  Pass   mention   standard   Doubtful   loans 
Commercial real estate  $280,356   $2,330   $3,252   $   $285,938 
Real estate construction   29,673    573    1,044        31,290 
Real estate multi-family   34,357                34,357 
Real estate 1 to 4 family   97,514        429    253    98,196 
Commercial & industrial   36,837        1,439    11    38,287 
Consumer loans   1,631        19        1,650 
Totals  $480,368   $2,903   $6,183   $264   $489,718 
                          
Purchased                         
Not credit impaired                         
Commercial real estate  $28,342   $4,951   $4,643   $   $37,936 
Real estate construction   1,520        1,508        3,028 
Real estate multi-family   11,786                11,786 
Real estate 1 to 4 family   8,299        408        8,707 
Commercial & industrial   10,217                10,217 
Total  $60,164   $4,951   $6,559   $   $71,674 
                          
Purchased                         
Credit impaired                         
Commercial real estate                      $1,325 
Total                      $1,325 

 

NOTE F - BORROWINGS

 

Federal home Loan Bank advances

 

There is an overnight advance dated June 30, 2014 in the amount of $7,000,000 at 0.18% which matured on July 1, 2014 and was paid off.

 

Corporate loan

 

On March 27, 2014, FNB Bancorp received funding under a $6,000,000 term loan credit facility. This loan carries a variable rate of interest that fluctuates on a monthly basis. The interest rate is based on the 3 month LIBOR rate plus 4%. Payments of $50,000 in principal plus accrued interest are payable monthly. The first loan payment was due May 1st, 2014. The maturity date on this credit facility is March 26, 2019. On the maturity date, all outstanding principal plus accrued interest shall become due and payable. FNB Bancorp has pledged its stock ownership in First National Bank of Northern California as collateral subject to the terms and conditions contained in the Loan Agreement and the Pledge and Security Agreement. FNB Bancorp retains the right to prepay this debt at any time upon not less than 7 days’ prior written notice to Lender. The proceeds from this loan were contributed to the Bank as an additional capital contribution. This capital contribution qualified as Tier 1 capital for the Bank under regulatory capital guidelines.

26
 

NOTE G – FAIR VALUE MEASUREMENT

 

The following table presents information about the Company’s assets and liabilities measured at fair value as of June 30, 2014 and December 31, 2013, and indicates 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, 2014, Using 
       Quoted Prices         
       in Active         
       Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair Value   Assets   Inputs   Inputs 
Description  6/30/2014   (Level 1)   (Level 2)   (Level 3) 
U. S. Treasury securities  $3,948   $3,948   $            —   $            — 
Obligations of U.S. Government agencies   70,617                    —    70,617                — 
Mortgage-backed securities   85,209                    —    85,209                — 
Obligations of states and political subdivisions   83,017                    —    83,017                — 
Corporate debt   25,004                    —    25,004                — 
   Total assets measured at fair value  $267,795   $3,948   $263,847   $            — 

 

       Fair Value Measurements 
(Dollar amounts in thousands)      at December 31, 2013, Using 
       Quoted Prices         
       in Active         
       Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair Value   Assets   Inputs   Inputs 
Description  12/31/2013   (Level 1)   (Level 2)   (Level 3) 
U. S. Treasury securities  $3,027   $3,027   $            —   $            — 
Obligations of U.S. Government agencies   73,319                    —    73,319                — 
Mortgage-backed securities   77,860                    —    77,860                — 
Obligations of states and political subdivisions   82,676                    —    82,676                — 
Corporate debt   27,106                    —    27,106                — 
   Total assets measured at fair value  $263,988   $3,027   $260,961   $            — 
27
 

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

 

           Fair Value Measurements 
(Dollar amounts in thousands)           at June 30, 2014, Using 
       Quoted Prices in         
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair Value   Assets   Inputs   Inputs 
Description  6/30/2014   (Level 1)   (Level 2)   (Level 3) 
Impaired loans:                
Commercial and industrial  $1,110   $   $   $1,110 
Residential- 1 to 4 family   64            64 
Commercial real estate   373            373 
Total impaired assets measured at fair value  $1,547   $   $   $1,547 
         
       Fair Value Measurements 
(Dollar amounts in thousands)  at December 31, 2013, Using 
       Quoted Prices in         
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair Value   Assets   Inputs   Inputs 
Description  12/31/2013   (Level 1)   (Level 2)   (Level 3) 
Impaired loans::                    
Commercial and industrial  $1,908   $   $   $1,908 
Residential- 1 to 4 family   411            411 
Commercial real estate   2,491            2,491 
Other real estate owned   1,771            1,771 
Total impaired assets measured at fair value  $6,581   $   $   $6,581 

  

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 a non-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 less costs to sell. An appraisal (a Level 3 valuation) is obtained at the time the Bank 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 is recorded along with a corresponding reduction in the book carrying value of the property.

28
 

The Company obtains third party appraisals on its impaired loans held-for-investment and foreclosed assets to determine fair value. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for selling costs which is applied to all properties, regardless of size. Generally, the third party appraisals apply the “market approach,” which is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. Adjustments are then made based on the type of property, age of appraisal, current status of property and other related factors to estimate the current value of collateral. The value of OREO is determined based on independent appraisals, similar to the process used for impaired loans, discussed above, and is generally classified as Level 3.

 

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 including Interest Bearing Time Deposits with Financial Institutions.

 

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.

 

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.

 

Other equity securities.

 

These are mostly Federal Reserve Bank stock and Federal Home Loan Bank stock, carried in Other Assets. They are not traded, and not available for sale, and have no fair market value.

 

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.

29
 

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 on similar products.

 

Notes payable.

 

Fair value is equal to the current balance. They represent a corporate loan with a monthly variable rate, based on the 3-month LIBOR rate plus 4%.

 

Accrued Interest Receivable and Payable

 

The interest receivable and payable balances approximate their fair value due to the short-term nature of their settlement dates.

 

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 Bank has excluded non-financial assets and non-financial liabilities defined by the Codification (ASC 820-10-15-A), such as Bank premises and equipment, deferred taxes and other liabilities. In addition, the Bank has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of the Financial Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.

 

The following table provides summary information on the estimated fair value of financial instruments at June 30, 2014:

 

June 30, 2014  Carrying   Fair   Fair value measurements 
(Dollar amounts in thousands)  amount   value   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $21,682   $21,682   $21,682           
Interest-bearing time deposits with financial institutions   4,461    4,461         4,461      
Securities available for sale   267,795    267,795    3,948    263,847      
Loans   571,291    583,474              583,474 
Other equity securities   5,576    5,576              5,576 
Accrued interest receivable   3,674    3,674         3,674      
                          
Financial liabilities:                         
                          
Deposits   790,222    790,222         790,222      
Federal Home Loan Bank advances   7,000    7,000         7,000      
Note payable   5,850    5,850         5,850      
Accrued interest payable   239    239         239      
                          
Off-balance-sheet liabilities:                         
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit           —    1,391              1,391 
30
 

The carrying amount of loans include $5,463,000 of nonaccrual loans (loans that are not accruing interest) as of June 30, 2014. 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, 2013: 

 

December 31, 2013  Carrying   Fair   Fair value measurements 
(Dollar amounts in thousands)  amount   value   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $14,007   $14,007   $14,007           
Interest-bearing time deposits with financial institutions   5,543    5,543         5,543      
Securities available for sale   263,988    263,988    3,027    260,961      
Loans   562,717    563,325              563,325 
Other equity securities   5,300    5,300              5,300 
Accrued interest receivable   3,808    3,808         3,808      
                          
Financial liabilities:                         
Deposits   773,615    774,012         774,012      
Federal Home Loan Bank advances   15,000    15,000         15,000      
Accrued interest payable   224    224         224      
                          
Off-balance-sheet liabilities:                         
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit           —    1,297              1,297 

  

The carrying amount of loans include $7,351,000 of nonaccrual loans (loans that are not accruing interest) as of December 31, 2013. 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 H – PREFERRED STOCK

 

On September 15, 2011, Preferred Stock was issued to the U. S. Treasury as part of the Treasury’s Small Business Lending Fund (“SBLF”), as Preferred Stock – Series C – Non-Cumulative. The initial dividend rate was 5%. Depending on the volume of our small business lending, the dividend rate can be reduced to as low as one percent. If lending does not increase in the first two years, the dividend rate will increase to seven percent. Effective January 1, 2014, the effective dividend rate increased from 5% to 9%.

 

On May 6, 2013, 25% or $3,150,000 of the original $12,600,000 was redeemed. On January 24, 2014, FNB Bancorp (the “Company”) redeemed all the remaining outstanding preferred shares that had been issued to the United States Treasury Department through the Small Business Lending Fund (“SBLF”) in a cash redemption transaction. Subsequent to this redemption, the United States Treasury Department no longer has any equity interest in the Company of any kind.

31
 

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 over an extended period of time could (i) reduce loan demand which could, in turn, reduce interest income and net interest margins; (ii) adversely affect the financial capability of borrowers to meet their loan obligations, which, in turn, could result in increases in loan losses and require increases in provisions for possible loan losses, thereby adversely affecting operating results; and (iii) lead to reductions in real property values that, due to the Company’s reliance on real property to secure many of its loans, could make it more difficult to prevent losses from being incurred on non-performing loans through the sale of such real properties.

 

Possible Adverse Changes in National Economic Conditions and Federal Reserve Board Monetary Policies. Changes in national economic policies and conditions, 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.

32
 

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 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 our borrowers’ ability to repay their loans. Determination of the allowance is based upon objective and subjective judgments by management from the information currently available. Adverse changes in information could result in higher than expected charge-offs and loan loss provisions.

 

Goodwill

 

Goodwill arises when the Company’s purchase price exceeds 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 earnings. 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.

33
 

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 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 tax authorities.

 

Recent Accounting Pronouncements

 

In April 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740). This ASU requires an entity to present in the financial statements an unrecognized tax benefit as a liability and the unrecognized tax benefit should not be combined with deferred tax assets to the extent that a net operating loss carry-forward, tax loss or credit carry-forward is also not available at the reporting date. The amendment is to be applied prospectively to all unrecognized tax benefits and are effective for annual and interim reporting periods beginning after December 15, 2013. This ASU did not have a material impact on the Company’s consolidated financial statements.

34
 

In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reports beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU 2014-04 is not expected to have a material impact on the Company’s consolidated financial statement.

 

Earnings Analysis

 

Net earnings for the quarter ended June 30, 2014 were $1,629,000, compared to net earnings of $1,379,000 for the quarter ended June 30, 2013, an increase of 18%. Net earnings for the six months ended June 30, 2014 were $3,463,000, an increase of $1,154,000 from the same period in 2013. Net earnings during the three months and six months ended June 30, 2014 compared to the same period during 2013 benefitted from favorable expense comparisons due partly to the closure of our island of Guam office during the 2nd quarter of 2013 and reductions in the provision for loan losses. Net earnings for the first quarter of 2014 were $1,834,000, and for the fourth quarter of 2013 were $1,999,000.

 

Net interest income for the quarter ended June 30, 2014 was $8,712,000, compared to $8,727,000 for the quarter ended June 30, 2013, a decrease of $15,000, or 0.2%. Net interest income for the six months ended June 30, 2014 was $17,220,000, compared to $17,434,000 for the six months ended June 30, 2013. Declines in net interest during 2014 compared to 2013 were due primarily to the decline in interest rates on earning assets. Short term market interest rates are currently being held to low levels due to accommodating policy decisions made by the Federal Open Market Committee of the Federal Reserve Bank.

35
 

The following tables present an analysis of net interest income and average earning assets and liabilities for the three-and six-month periods ended June 30, 2014 compared to the three-and six-month periods ended June 30, 2013. 

                         
TABLE 1 

NET INTEREST INCOME AND AVERAGE BALANCES

FNB BANCORP AND SUBSIDIARY

 

 Three months ended June 30,

 
   2014   2013 
(Dollar amounts in thousands)          Annualized           Annualized 
   Average       Average   Average       Average 
   Balance   Interest   Yield   Balance   Interest   Yield 
INTEREST EARNING ASSETS                              
Loans, gross (1) (2)  $568,329   $7,897    5.64%  $553,031   $8,020    5.88%
Taxable securities   188,807    851    1.83%   185,715    794    1.73%
Nontaxable securities (3)   73,331    657    3.63%   74,548    671    3.65%
Fed funds sold   5                   —                n/a    59                   —                n/a 
Int time depos-other fin institutions   4,569    27    2.40%   8,890    49    2.24%
Total interest earning assets   835,041    9,432    4.58%   822,243    9,534    4.70%
                               
NONINTEREST EARNING ASSETS:                              
Cash and due from banks   22,815              34,875           
Premises   12,544              12,757           
Other assets   28,417              34,546           
Total noninterest earning assets   63,776              82,178           
TOTAL ASSETS  $898,817             $904,421           
                               
INTEREST BEARING LIABILITIES:                              
Demand, int bearing  $81,566    18    0.09%  $78,809    25    0.13%
Money market   331,460    314    0.38%   315,519    359    0.46%
Savings   66,658    17    0.10%   63,503    25    0.16%
Time deposits   109,113    135    0.50%   157,111    230    0.59%
FHLB advances   7,846    3    0.16%   523                   —    n/a 
Note payable   5,939    68    4.64%                  —                   —    n/a 
Fed funds purchased                  —                   —    n/a    17                   —    n/a 
Total interest bearing liabilities   602,582    555    0.37%   615,482    639    0.42%
                               
NONINTEREST BEARING LIABILITIES:                              
Demand deposits   197,312              184,289           
Other liabilities   9,860              10,712           
Total noninterest bearing liabilities   207,172              195,001           
                               
TOTAL LIABILITIES   809,754              810,483           
Stockholders’ equity   89,063              93,938           
                              
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $898,817             $904,421           
                              
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)       $8,877    4.31%   206,761   $8,895    4.39%

 

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 $362,000 and $337,000 for the quarters ended June 30, 2014 and 2013, respectively.
  
3)Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $165,000 and $168,000 for the quarters ended June 30, 2014 and 2013, respectively, and 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.
36
 

TABLE 2  NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY
 
     
   Six months ended June 30, 
   2014   2013 
(Dollar amounts in thousands)          Annualized           Annualized 
   Average       Average   Average       Average 
   Balance   Interest   Yield   Balance   Interest   Yield 
INTEREST EARNING ASSETS                              
Loans, gross (1) (2)  $565,898   $15,524    5.53%  $552,493   $16,178    5.90%
Taxable securities   188,552    1,694    1.81%   175,963    1,478    1.69%
Nontaxable securities (3)   72,903    1,308    3.62%   74,354    1,348    3.66%
Fed funds sold   16                   —             n/a    36                   —             n/a 
Int time depos-other fin institutions   4,937    46    1.88%   10,511    90    1.73%
Tot interest earning assets   832,306    18,572    4.50%   813,357    19,094    4.73%
                               
NONINTEREST EARNING ASSETS:                              
Cash and due from banks   19,238              38,544           
Premises   12,533              12,733           
Other assets   30,134              34,597           
Tot noninterest earning assets   61,905              85,874           
TOTAL ASSETS  $894,211             $899,231           
                               
Demand, int bearing  $78,936    34    0.09%  $77,346    50    0.13%
Money market   321,913    599    0.38%   304,347    724    0.48%
Savings   65,884    33    0.10%   65,023    57    0.18%
Time deposits   114,575    278    0.49%   162,110    490    0.61%
FHLB advances   15,033    11    0.15%   610                  —             n/a 
Note payable   3,152    68    4.35%                 —                  —             n/a 
Fed funds purchased                 —                  —             n/a    14                  —             n/a 
Tot interest bearing liabilities   599,493    1,023    0.34%   609,450    1,321    0.44%
                               
NONINTEREST BEARING LIABILITIES:                             
Demand deposits   196,324              184,576           
Other liabilities   9,531              10,551           
Tot noninterest bearing liabilities   205,855              195,127           
                               
TOTAL LIABILITIES   805,348              804,577           
Stockholders’ equity   88,863              94,654           
                               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $894,211             $899,231           
                               
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)       $17,549    4.25%       $17,773    4.41%

 

(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 $658,000 and $591,000 for the six months ended June 30, 2014 and 2013, respectively.
  
(3)Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $328,000 and $339,000 for the six months ended June 30, 2014 and 2013, 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, 2014 and 2013. 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, 2014, average loans outstanding represented 68.1% of average earning assets. For the quarter ended June 30, 2013, they represented 67.3% of average earning assets. For the six months ended June 30, 2014 and 2013, average loans outstanding represented 68.0% and 67.9%, respectively, of average earning assets.

37
 

The taxable equivalent yield on average interest earning assets for the quarter ended June 30, 2014 compared to the quarter ended June 30, 2013 decreased from 4.70% to 4.58%, or 12 basis points. Average loans increased by $15,298,000, year over year, while their yield decreased from 5.88% to 5.35%, or 53 basis points. Interest income on total interest earning assets for the quarter decreased $518,000 or 5.43% on a fully-taxable equivalent basis.

 

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013, the cost on total interest bearing liabilities decreased from 0.42% to 0.37%, a decrease of 5 basis points. Time deposit interest cost decreased from 0.59% to 0.50%. Their average balance outstanding decreased by $47,998,000, or 30.6%, while their expense decreased $95,000.

 

Customer deposits have been migrating out of time deposits and into money market accounts during both 2013 and 2014. The low rates being offered on term deposits coupled with the possible increase in short term rates by the FOMC are, in part, the explanation for this migration.

 

For the six months ended June 30, 2014 compared to the six months ended June 30, 2013, interest income on interest earning assets decreased $523,000 or 2.7% on a fully-taxable equivalent basis, and average earning assets increased $18,949,000, or 2.3%. Average loans increased by $13,405,000, or 2.4%. Interest on loans decreased $654,000 or 4.0%, while the yield decreased 37 basis points, or 6.3%. The cost on total interest bearing liabilities decreased from 0.44% to 0.34%. Time deposit averages decreased $47,535,000 or 29.3%. Their yield decreased 12 basis points, or 19.7%. Money market deposit average balances increased $17,566,000, or 5.8%, and their cost decreased $125,000, or 17.3%.

 

For the three and six month periods ended June 30, 2014 and June 30, 2013, 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.

38
 

Table 3  FNB BANCORP AND SUBSIDIARY 
   RATE/VOLUME VARIANCE ANALYSIS 
             
   Three Months Ended June 30, 
(Dollar amounts in thousands)  2014 Compared to 2013 
       Variance 
   Interest   Attributable to 
   Income/Expense   Rate   Volume 
INTEREST EARNING ASSETS               
Loans  $(123)  $(335)  $212 
Taxable securities   57    43    14 
Nontaxable securities (1)   (14)   (3)   (11)
Interest on time deposits with other financial institutions   (22)   2    (24)
   Total  $(102)  $(293)  $191 
                
INTEREST BEARING LIABILITIES               
Demand deposits  $7   $8   $(1)
Money market   45    60    (15)
Savings deposits   8    9    (1)
Time deposits   95    25    70 
FHLB advances   (3)       (3)
Note payable   (68)       (68)
   Total  $84   $102   $(18)
NET INTEREST INCOME  $(18)  $(191)  $173 

 

(1)Includes tax equivalent adjustment of $165,000 and $168,000 in the three months ended June 30, 2014 and June 30, 2013, respectively.
   

Table 4  FNB BANCORP AND SUBSIDIARY 
   RATE/VOLUME VARIANCE ANALYSIS 
             
   Six Months Ended June 30, 
(Dollar amounts in thousands)  2014 Compared to 2013 
       Variance 
   Interest   Attributable to 
   Income/Expense   Rate   Volume 
INTEREST EARNING ASSETS               
Loans  $(654)  $(1,047)  $393 
Taxable securities   216    110    106 
Nontaxable securities (1)   (40)   (14)   (26)
Interest on time deposits with other financial institutions   (44)   8    (52)
   Total  $(522)  $(943)  $421 
                
INTEREST BEARING LIABILITIES               
Demand deposits  $16   $17   $(1)
Money market   125    167    (42)
Savings deposits   24    25    (1)
Time deposits   212    68    144 
FHLB advances   (11)       (11)
Note payable   (68)       (68)
   Total  $298   $277   $21 
NET INTEREST INCOME  $(224)  $(666)  $442 

 

(1)Includes tax equivalent adjustment of $328,000 and $339,000 in the six months ended June 30, 2014 and June 30, 2013, respectively.
39
 

Noninterest income

 

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

 

Table 5  NONINTEREST INCOME         
   Three months         
   ended June 30,   Variance 
(Dollar amounts in thousands)  2014   2013   Amount   Percent 
Service charges  $647   $676   $(29)   -4.3%
Credit card fees       3    (3)   -100.0%
Net gain on available-for-sale of securities   28    73    (45)   -61.6%
Bank owned life insurance policy earnings   90    94    (4)   -4.3%
Other income   215    238    (23)   -9.7%
Total noninterest income  $980   $1,084   $(104)   -9.6%
                     
   Six months
ended June 30,
    Variance 
(Dollars in thousands)  2014   2013   Amount   Percent 
Service charges  $1,284   $1,335   $(51)   -3.8%
Credit card fees       10    (10)   -100.0%
Gain on sale of available-for-securities   39    115    (76)   -66.1%
Bank owned life insurance policy earnings   186    189    (3)   -1.6%
Other income   517    419    98    23.4%
Total noninterest income  $2,026   $2,068   $(42)   -2.0%

 

Noninterest income consists mainly of service charges on deposits, credit card fees, and several other miscellaneous types of income. The Bank service charges were down during the second quarter and year to date of June 30, 2014 when compared to the same period during 2013 due primarily to a decrease in our overdraft fees. The decrease in credit card fees for the three and six months ended June 30, 2014 was related to the sale of our merchant credit card portfolio that was completed in the fourth quarter of 2012. During the first six months of 2014, the Bank sold $5,029,000 in investment securities for a pre-tax gain of $39,000. During the first six months of 2013, the Company sold approximately $8,593,000 in investment securities at a pre-tax net gain of $115,000. The sale proceeds were reinvested in a variety of investment securities during the same period.

40
 

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)  2014   2013   Amount   Percent 
Salaries and employee benefits  $4,177   $4,312   $(135)   -3.1%
Occupancy expense   694    846    (152)   -18.0%
Equipment expense   406    386    20    5.2%
Professional fees   501    444    57    12.8%
FDIC assessment   180    180        n/a 
Telephone, postage & supplies   313    277    36    13.0%
Advertising expense   136    121    15    12.4%
Data processing expense   134    170    (36)   -21.2%
Low income housing expense   110    109    1    0.9%
Surety insurance   67    67        n/a 
Directors expense   63    63        n/a 
Other real estate owned expense   11    28    (17)   -60.7%
Loss on sale of other real estate owned   60        60    100.0%
Other expense   358    382    (24)   -6.3%
Total noninterest expense  $7,210   $7,385   $(175)   -2.4%
             
   NONINTEREST EXPENSE         
   Six months         
   ended June 30,   Variance 
(Dollars in thousands)  2014   2013   Amount   Percent 
Salaries and employee benefits  $8,395   $8,728   $(333)   -3.8%
Occupancy expense   1,374    1,808    (434)   -24.0%
Equipment expense   797    784    13    1.7%
Professional fees   1,032    807    225    27.9%
FDIC assessment   360    360        n/a 
Telephone, postage & supplies   599    714    (115)   -16.1%
Advertising expense   221    293    (72)   -24.6%
Data processing expense   279    326    (47)   -14.4%
Low income housing expense   220    219    1    0.5%
Surety insurance   134    121    13    10.7%
Directors expense   126    126        n/a 
Other real estate owned expense   88    78    10    12.8%
Gain on sale of other real estate owned   (220)       (220)   100.0%
Other expense   647    760    (113)   -14.9%
Total noninterest expense  $14,052   $15,124   $(1,072)   -7.1%

 

Noninterest expense consists mainly of salaries and employee benefits. For the three months ended June 30, 2014 compared to three months ended June 30, 2013, salaries and benefits represented 58% and 58% of total noninterest expenses. During the six months ended June 30, 2014 compared to the six months ended June 30, 2013, salaries and benefits represented 60% and 58%. During the first six months of 2013, the Bank’s occupancy expense increase was due to the acquired Oceanic Bank branches, and a Company rebranding effort and the related signage changes. During the first quarter of 2013, the Bank recorded a one-time expense accrual related to the closure of our island of Guam office, which was effective June 14, 2013. In connection with this office closure, the Bank accrued $76,000 in anticipated severance payments and $176,000 in estimated future lease payments.

41
 

Provision for Loan Losses

 

During the six months ended June 30, 2014, there was a provision for loan losses of $75,000 compared to $1,110,000 for the same period in 2013. The allowance for loan losses was $10,859,000 or 1.90% of total gross loans at June 30, 2014, compared to $9,879,000 or 1.76% of total gross loans at December 31, 2013. During the six months ended June 30, 2014, $276,000 in loans were charged off, compared to $565,000 in the same period in 2013. The overall quality of the remaining portfolio did not warrant a provision for loan losses during the three month period ended June 30, 2014. 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 as of June 30, 2014. Loans charged-off during the first six months of 2014 were significantly lower than during the same time period during 2013, 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, 2014 was 34.4% compared to 28.0% for the quarter ended June 30, 2013. The effective tax rate for the six months ended June 30, 2014 and June 30, 2013 was an effective tax rate of 32.4% and 29.3%, respectively. Tax preference items which have a significant effect on our effective tax rate are changing amounts invested in tax-advantaged securities, available Low Income Housing Credits, and amounts of interest income on tax advantaged municipal debt securities.

 

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 interest 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 the 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, 2014, are adequate to meet its operating needs in 2014 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

 

Financial Condition

 

Assets. Total assets increased to $905,430,000 at June 30, 2014 from $891,930,000 at December 31, 2013, an increase of $13,500,000. The principal source of this increase was an increase of $8,089,000 in net loans, an increase of $7,675,000 in cash and due from banks, an increase of $3,807,000 in securities available for sale, and a decrease of $4,564,000 in other real estate owned. Asset growth occurs primarily from the retention of net earnings and increases in the deposit portfolio or our borrowing positions.

42
 

Loans. Gross loans (before net loan fees) at June 30, 2014 were $571,768,000, an increase of $9,051,000 or 1.61% from December 31, 2013. Gross commercial real estate loans decreased $5,538,000, real estate construction loans increased $5,442,000, real estate multi- family loans increased $7,356,000, real estate loans secured by 1 to 4 family residences increased $7,966,000, commercial and industrial loans decreased $5,959,000, and consumer loans decreased by $216,000. The loan portfolio breakdown was as follows:

 

TABLE 7  LOAN PORTFOLIO 
                 
   June 30   Percent   December 31   Percent 
(Dollar amounts in thousands)  2014       2013     
Commercial real estate  $319,661    56%  $325,199    58%
Real estate construction   39,760    7%   34,318    6%
Real estate multi family   53,499    9%   46,143    8%
Real estate 1 to 4 family   114,869    20%   106,903    19%
Commercial and industrial   42,545    8%   48,504    9%
Consumer loans   1,434     -   1,650     -
   Gross loans   571,768    100%   562,717    100%
Net deferred loan fees   (477)    -%   (495)    -%
   Total  $571,291    100%  $562,222    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, reviewing economic conditions in the Company’s market area, and considering the Company’s historical loan loss experience. 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 transactions in the allowance for loan losses for the six months ended June 30, 2014, and June 30, 2013, respectively is as follows:

 

TABLE 8  ALLOWANCE FOR LOAN LOSSES 
     
   Six months ended   Six months ended 
(Dollar amounts in thousands)  June 30, 2014   June 30, 2013 
Balance, beginning of period  $9,879   $9,124 
Provision for loan losses   75    1,110 
Recoveries   1,181    76 
Amounts charged off   (276)   (565)
Balance, end of period  $10,859   $9,745 

 

During the six months ended June 30, 2014, there was a provision of $75,000, compared to $1,110,000 for the same period in 2013. Loan charge-off levels have declined significantly year over year, and remain close to historic norms.

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In management’s judgment, the allowance is adequate to absorb probable losses currently inherent in the loan portfolio at June 30, 2014. 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, 2014, there was $6,217,000 in nonperforming assets, compared to $12,669,000 at December 31, 2013. Nonaccrual loans were $5,463,000 at June 30, 2014, compared to $7,351,000 at December 31, 2013. There were no loans past due 90 days and still accruing at either date.

 

There was one property value at $754,000 in Other Real Estate Owned at June 30, 2014, and four properties valued at $5,318,000 at December 31, 2013. Three of these were sold in the first six months of 2014, for a net gain of $220,000. Management intends to aggressively market our Other Real Estate Owned. 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. At June 30, 2014 the Other Real Estate Owned consisted of one commercial real estate building located in South San Francisco that is currently leased.

 

Deposits. Total deposits at June 30, 2014, were $790,222,000 compared to $773,615,000 on December 31, 2013. Of these totals, noninterest-bearing demand deposits were $203,854,000 or 25.8% of the total on June 30, 2014, and $198,523,000 or 25.7% on December 31, 2013. Time deposits were $106,748,000 on June 30, 2014, and $124,152,000 on December 31, 2013.

 

The following table sets forth the maturity schedule of the time certificates of deposit on June 30, 2014:

 

TABLE 9            
             
(Dollar amounts in thousands)  Under   $100,000     
Maturities  $100,000   or more   Total 
Three months or less  $8,783   $25,803   $34,586 
Over three through six months   7,431    17,527    24,958 
Over six through twelve months   9,486    14,818    24,304 
Over twelve months   9,984    12,916    22,900 
Total  $35,684   $71,064   $106,748 

 

Regulatory Capital. The following table shows the risk-based capital ratios and leverage ratios at June 30, 2014 and December 31, 2013 for the Bank:

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TABLE 10          Minimum “Well 
   June 30,   December 31,   Capitalized” 
Regulatory Capital Ratios  2014   2013   Requirements 
Total Regulatory Capital Ratio   14.35%   14.12%  10.00%
Tier 1 Capital Ratio   13.09%   12.86%  6.00%
Leverage Ratios   10.06%   9.67%  5.00%

 

Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of June 30, 2014, liquid assets were $293,938,000, or 32.5% of total assets. As of December 31, 2013, liquid assets were $283,538,000, or 31.8% 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 Company also has federal funds borrowing facilities totaling $30,000,000, a Federal Home Loan Bank line up to 30% of total eligible assets, and a Federal Reserve Bank borrowing facility. Also please see the Company’s consolidated statements of cash flows for further information, given that the cash flow statement is the primary statement disclosing the company’s cash transactions.

 

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, 2014, and December 31, 2013, respectively, net loans were at 70.9% and 71.4% 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, 2014 and December 31, 2013, 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 $139,097,000 and $132,041,000 at June 30, 2014 and December 31, 2013, respectively. As a percentage of net loans, these off-balance sheet items represent 24.81% and 23.91% respectively. The Company does not expect all commitments to be funded.

 

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.

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Item 4.Controls and Procedures.

 

(a)Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management as of the end of the Company’s fiscal quarter ended June 30, 2014. 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 fiscal quarter ended June 30, 2014, 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% stockholder of the Company, or any associate of any such director, officer, affiliate or 5% stockholder 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, 2013 Form 10K.

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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

 

None.

 

Item 4.Mine Safety Disclosures

 

Not Applicable.

 

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 12, 2014. 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)
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