SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2006
---------------------------------------------
FNB BANCORP
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
000-49693 92-2115369
(Commission File Number) (IRS Employer Identification No.)
975 El Camino Real, South San Francisco, California 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 588-6800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock as of May 10,
2006: 2,704,014 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
March 31, December 31,
2006 2005
------------ ------------
Cash and due from banks $ 21,123 $ 19,068
Federal funds sold 22,710 16,230
------------ ------------
Cash and cash equivalents 43,833 35,298
Securities available-for-sale 121,295 113,463
Loans, net 357,037 380,051
Bank premises, equipment, and leasehold improvements 12,361 12,028
Other real estate owned 2,600 2,600
Goodwill 1,841 1,841
Accrued interest receivable and other assets 23,906 23,860
------------ ------------
Total assets $ 562,873 $ 569,141
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand, noninterest bearing $ 120,960 $ 123,641
Demand, interest bearing 60,036 62,581
Savings and money market 177,601 180,489
Time 139,487 140,833
------------ ------------
Total deposits 498,084 507,544
Accrued expenses and other liabilities 7,853 6,354
------------ ------------
Total liabilities 505,937 513,898
------------ ------------
Stockholders' equity
Common stock, no par value, authorized 10,000,000 shares; issued and
outstanding 2,704,000 shares at March 31, 2006
and 2,700,000 shares at December 31, 2005 34,871 34,793
Additional paid-in capital 22 19
Retained earnings 22,469 20,832
Accumulated other comprehensive loss (426) (401)
------------ ------------
Total stockholders' equity 56,936 55,243
------------ ------------
Total liabilities and stockholders' equity $ 562,873 $ 569,141
============ ============
See accompanying notes to consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands, except share and per share amounts)
Three months ended
March 31,
----------------------------
2006 2005
------------ ------------
Interest income:
Interest and fees on loans $ 7,660 $ 5,694
Interest on securities 560 441
Interest on tax-exempt securities 445 329
Federal funds sold 172 51
------------ ------------
Total interest income 8,837 6,515
------------ ------------
Interest expense:
Interest on deposits 1,951 909
Other interest expense -- 56
------------ ------------
Total interest expense 1,951 965
------------ ------------
Net interest income 6,886 5,550
Provision for loan losses 150 120
------------ ------------
Net interest income after provision for loan losses 6,736 5,430
------------ ------------
Noninterest income:
Gain on sale of other equity securities 1,348 --
Service charges 603 567
Credit card fees 193 216
Other income 172 120
------------ ------------
Total noninterest income 2,316 903
------------ ------------
Noninterest expense:
Salaries and employee benefits 3,179 2,805
Occupancy expense 416 315
Equipment expense 433 370
Professional fees 273 250
Telephone, postage and supplies 249 194
Bankcard expenses 184 199
Other expense 795 769
------------ ------------
Total noninterest expense 5,529 4,902
------------ ------------
Earnings before income tax expense 3,523 1,431
Income tax expense 1,075 415
------------ ------------
NET EARNINGS $ 2,448 1,016
============ ============
Dividends declared per common share $ 0.15 $ 0.15
Earnings per share data:
Basic $ 0.86 $ 0.38
Diluted $ 0.84 $ 0.37
Weighted average shares outstanding:
Basic 2,834,000 2,706,000
Diluted 2,905,000 2,764,000
See accompanying notes to consolidated financial statements.
3
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in thousands)
Three months ended
March 31
---------------------------
2006 2005
------------ ------------
Net earnings $ 2,448 $ 1,016
Unrealized gain/(loss) on AFS securities (25) (563)
------------ ------------
Total comprehensive income $ 2,423 $ 453
============ ============
See accompanying notes to consolidated financial statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three months ended
March 31
---------------------------
2006 2005
------------ ------------
Cash flow from operating activities
Net earnings $ 2,448 $ 1,016
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation, amortization and accretion, net 373 379
Stock-based compensation expense 3 2
Provision for loan losses 150 120
Securities write-down -- 66
Gain on sale of other equity securities (1,348)
Changes in assets and liabilities:
Accrued interest receivable and other assets 1,302 (716)
Accrued expenses and other liabilities 1,112 626
------------ ------------
Net cash provided by operating activities 4,040 1,493
------------ ------------
Cash flows from investing activities
Purchase of securities available-for-sale (14,183) (3,746)
Proceeds from matured/called/securities available-for-sale 6,251 10,361
Net decrease in loans 22,864 8,447
Purchases of bank premises, equipment, leasehold improvements (650) (237)
------------ ------------
Net cash provided by investing activities 14,282 14,825
------------ ------------
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits (8,114) 5,289
Net increase (decrease) in time deposits (1,346) 6,080
Net decrease in federal funds purchased -- (19,172)
Dividends paid (405) (382)
Repurchase of common stock -- (765)
Issuance of common stock 78 28
------------ ------------
Net cash provided by financing activities (9,787) (8,922)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,535 7,396
Cash and cash equivalents at beginning of period 35,298 17,084
------------ ------------
Cash and cash equivalents at end of period $ 43,833 $ 24,480
============ ============
Additional cash flow information
Interest paid $ 1,799 $ 864
Income taxes paid $ 410 $ 337
Non-cash financial activity
Accrued dividends $ 405 $ 384
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
FNB Bancorp (the "Company") is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. The Company was incorporated
under the laws of the State of California on February 28, 2001. The consolidated
financial statements include the accounts of FNB Bancorp and its wholly owned
subsidiary, First National Bank of Northern California (the "Bank"). The Bank
provides traditional banking services in San Mateo and San Francisco counties.
All intercompany transactions and balances have been eliminated in
consolidation. The financial statements include all adjustments of a normal and
recurring nature, which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2005.
Results of operations for interim periods are not necessarily
indicative of results for the full year.
Sequoia National Bank was acquired and merged into the Bank effective
April 30, 2005. The estimated fair values of the assets acquired and liabilities
assumed by First National Bank of Northern California included Cash and
equivalents $20,583,000, Net loans $40,652,000, Core deposit intangibles and
goodwill $3,116,000, All other assets $2,837,000, Total deposits $56,025,000,
Other liabilities $274,000, or Total net assets of $10,889,000.
NOTE B - STOCK OPTION PLANS
In 1997, the Company adopted an incentive employee stock option plan,
known as the 1997 FNB Bancorp Plan. In 2002, the Company adopted an incentive
employee stock option plan known as the 2002 FNB Bancorp Plan. The Plans allow
the Company to grant options to employees of up to 348,997 shares, which
includes the effect of stock dividends of common stock.
At March 31, 2006, the Company has two stock-based employee
compensation plans. Prior to 2003, the Company accounted for the plans under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Effective January 1,
2003, the Company adopted the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, prospectively to all
employee awards granted, modified, or settled after January 1, 2003. Therefore,
the cost related to stock-based employee compensation included in the
determination of net income for 2005 is less than that which would have been
recognized if the fair value based method had been applied to all awards since
the original effective date of Statement No. 123. Incentive stock options are
5
granted to bank officers who have been employed for at least one year at the
time the options are granted. Non-qualified options are granted to non-employee
directors at the same time as the bank officers, but do not require a minimum of
one year service.
Awards under the Company's plan vest at a rate of 20 percent per year
over a period of five years for Incentive Options and vest immediately for
Nonstatutory Options. All Options are exercisable for a period of 10 years.
Options are granted at an exercise price equal to the market price of the
Company's stock at the date of grant. The expected life is the five-year vesting
period. The options granted are increased by the amount, if any, of stock
dividends granted annually.
There were no options granted in the first quarter of 2006.
The amount of compensation expense for options recorded in the quarters
ended March 31, 2006 and March 31, 2005 was $5,000 and $3,000, respectively. The
income tax benefit recognized in the income statements for these amounts was
$2,000 and $1,000, respectively for the same two periods.
The total intrinsic value of option exercised during the quarter ended
March 31, 2006 was $19,000 under the 2002 Plan and $26,000 under the 1997 Plan.
The amount of total unrecognized compensation expense related to
non-vested options at March 31, 2006 was $56,000, and the weighted average
period it will be amortized over is 3.1 years.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based
Payment", on a modified prospective basis.
A summary of option activity under the 2002 FNB Bancorp Plan as of March 31,
2006 and changes during the quarter then ended is presented below:
Weighted-
Average
2002 FNB Bancorp Plan Weighted- Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Shares Price (in years) (000)
------------------------------ ------------ ------------ ------------ ------------
Outstanding at January 1, 2006 154,899 $ 25.83
Granted -- --
Exercised 1,827 24.85
Forfeited or expired -- --
Outstanding at march 31, 2006 153,072 25.84 7.8 $ 1,479
Exercisable at March 31, 2006 47,290 23.96 7.1 $ 546
6
A summary of option activity under the 1997 FNB Bancorp Plan as of March 31,
2006, and changes during the quarter then ended is presented below:
Weighted-
Average
1997 FNB Bancorp Plan Weighted- Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Shares Price (in years) (000)
------------------------------ ------------ ------------ ------------ ------------
Outstanding at January 1, 2006 68,739 $ 19.84
Granted -- --
Exercised 1,659 19.66
Forfeited or expired -- --
Outstanding at March 31, 2006 67,080 $ 19.84 3.9 $ 1,505
Exercisable at March 31, 2006 62,347 $ 19.86 3.9 $ 975
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards at March 31, 2005
Three months ended
March 31,
------------
2005
------------
Net earnings as reported $ 1,016
Add: stock-based employee compensation
expense included in reported net earnings,
net of related tax effects 2
Deduct: total stock-based employee
compensation expense determined
under fair value method for all awards, net
of related tax effect (3)
Pro forma net earnings $ 1,015
Earnings per share:
Basic - as reported $ 0.38
Basic - pro forma $ 0.38
Diluted - as reported $ 0.37
Diluted - pro forma $ 0.37
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 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.
7
(In thousands, except number of shares)
Three months ended
March 31,
----------------------------
2006 2005
------------ ------------
Net earnings $ 2,448 $ 1,016
Weighted average basic shares outstanding 2,834,000 2,706,000
Effect of dilutive options 71,000 58,000
------------ ------------
Weighted average number of shares outstanding
used to calculate diluted earnings per share 2,905,000 2,764,000
============ ============
All outstanding options were included in the 2006 and 2005
computations.
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income consists of net unrealized losses
on investment securities available for sale. Comprehensive income for the three
months ended March 31, 2006 was $2,422,000 compared to $453,000 for the three
months ended March 31, 2005.
NOTE E - OTHER REAL ESTATE OWNED
Loans that have become delinquent through non payment of scheduled
principal and/or interest for 90 days are placed in nonaccrual and interest is
no longer accrued. If a favorable restructuring can not be made for the loan
(provided the market value of the collateral is sufficient), or, if
insufficient, the borrower is unable to make further payments, foreclosure
procedures are initiated. If there are no bidders, or if bids are made and are
insufficient to cover the debt, the Bank will acquire the property at sale under
judgments, decrees, or mortgages where the property was originally security for
debts previously contracted. On April 1, 2005, the Bank foreclosed on a loan
previously held in non accrual with a balance of $2,600,000, its appraised value
at February 2005, less estimated costs to sell and is currently in Other Real
Estate Owned. The property securing the loan is a research and development
19,000 square foot office building in Mountain View, California.
NOTE F - SALE OF SHARES OF PACIFIC COAST BANKERS' BANCSHARES.
A sale of 3,950 shares of Pacific Coast Bankers' Bancshares was
arranged by Pacific Coast Bankers' Bancshares (PCBB) as part of its desire to
expand the number of PCBB shareholders. The Bank continues to hold a remaining
1,450 shares. The sale resulted in a gain on sale of equity securities, of
$1,348,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies And Estimates
------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
8
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following policies require significant judgments and estimates.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is periodically evaluated for adequacy by
management. Factors considered include the Company's loan loss experience, known
and inherent risks in the portfolio, current economic conditions, known adverse
situations that may affect the borrower's ability to repay, regulatory policies,
and the estimated value of underlying collateral. The evaluation of the adequacy
of the allowance is based on the above factors along with prevailing and
anticipated economic conditions that may impact borrowers' ability to repay
loans. Determination of the allowance is in part objective and in part a
subjective judgment by management based on the information it currently has in
its possession. Adverse changes in any of these factors or the discovery of new
adverse information could result in higher than expected charge-offs and loan
loss provisions.
EARNINGS ANALYSIS
-----------------
Net earnings for the quarter ended March 31, 2006 were $2,448,000,
compared to net earnings of $1,016,000 for the quarter ended March 31, 2005.
Gross earnings before income tax expense for the quarter ended March 31, 2006
were $3,523,000, compared to $1,431,000 for the quarter ended March 31, 2005.
The $1,432,000 improvement in net earnings was largely attributable to the
$1,348,000 gain on sale of other equity securities and the changes in prime rate
and cost of funds, as mentioned below. The $1,336,000 increase in net interest
income was partly offset by a $627,000 increase in noninterest expense.
Net interest income for the quarter ended March 31, 2006 was
$6,886,000, compared to $5,550,000 for the quarter ended March 31, 2005. The
prime lending rate was 5.25% at the beginning of 2005, and rose to 5.50% on
February 2, 2005 and 5.75% on March 22, 2005. This compares with 7.25% on
January 1, 2006, 7.50% on January 31, 2006 and 7.75% on March 28, 2006. The
Federal Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds Index,
based on the months when it is announced, averaged 3.42% for the quarter ended
March 31, 2006 compared with 2.21% for the quarter ended March 31, 2005. This,
coupled with a net increase in average earning assets over interest bearing
liabilities of $4,041,000 in the quarter ended March 31, 2006 compared to the
quarter ended March 31, 2005, resulted in a $1,336,000 increase in net interest
for the quarter ended March 31, 2006 compared to March 31, 2005. The volume of
loans affected by the prime lending rate compared to the volume of
interest-bearing deposits, and the size of the rate changes, as well as the
timing of when they took effect all contributed to the improvement of net
interest income. Net interest income is the difference between interest yield
generated by earning assets and the interest expense associated with the funding
of those assets.
Noninterest income was $2,316,000 and $903,000 for the quarters ended
March 31, 2006 and 2005, respectively. The principal item was the $1,348,000
gain on sale of other equity securities, mentioned above. Service charges rose
$36,000. Other income increased $52,000, and Credit card fees decreased $23,000.
Noninterest expense increased $627,000 in the quarter ended March 31,
2006 compared to the same quarter in 2005. Salaries and employee benefits
increased $374,000, while the remaining categories increased by $253,000.
9
The effective tax rate was 30.5% in the first quarter of 2006 compared
to 29.0% in the same quarter of 2005. The variance from period to period was due
to different volumes of investments in tax-free securities, Low Income Housing
Credits, loans in Enterprise Zones, and the effective state tax rate.
Basic earnings per share were $0.86 for the first quarter of 2006
compared to $0.38 for the first quarter of 2005. Diluted earnings per share were
$0.84 for the first quarter of 2006, compared to $0.37 for the first quarter of
2005.
The following table presents an analysis of net interest income and
average earning assets and liabilities for the three-month period ended March
31, 2006 compared to the three-month period ended March 31, 2005.
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
-------
(Dollars in thousands)
Three months ended March 31,
---------------------------------------------------------------------------------------
2006 2005
------------------------------------------ ------------------------------------------
Annualized Annualized
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
------------ ------------ ------------ ------------ ------------ ------------
Loans, gross $ 378,617 $ 7,660 8.21% $ 337,687 $ 5,694 6.84%
Taxable securities 60,514 560 3.75 58,804 441 3.04
Nontaxable securities 51,892 445 3.48 40,093 329 3.33
Federal funds sold 15,583 172 4.48 8,382 51 2.47
------------ ------------ ------------ ------------
Total interest earning assets $ 506,606 $ 8,837 7.07 $ 444,966 $ 6,515 5.94
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,320 $ 19,026
Premises and equipment 12,152 11,589
Other assets 23,477 14,616
------------ ------------
Total noninterest earning assets $ 54,949 $ 45,231
------------ ------------
TOTAL ASSETS $ 561,555 $ 490,197
============ ============
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 60,535 $ (60) (0.40) $ 53,894 $ (36) (0.27)
Money market 122,284 (713) (2.36) 102,963 (355) (1.40)
Savings 57,162 (57) (0.40) 59,358 (39) (0.27)
Time deposits 140,094 (1,121) (3.25) 97,310 (479) (2.00)
Federal funds purchased and other
borrowings -- -- -- 8,951 (56) (2.54)
------------ ------------ ------------ ------------
Total interest bearing liabilities $ 380,075 (1,951) (2.08) $ 322,476 $ (965) (1.21)
------------ ------------ ------------ ------------
NONINTEREST BEARING LIABILITIES
Demand deposits 117,480 109,456
Other liabilities 7,417 5,618
------------ ------------
Total noninterest bearing liabilities $ 124,897 $ 115,074
------------ ------------
TOTAL LIABILITIES $ 504,972 $ 437,550
Stockholders' equity $ 56,583 $ 52,647
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 561,555 $ 490,197
============ ============
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 6,886 5.51% $ 5,550 5.06%
Interest income is reflected on an actual basis, not on a fully taxable basis
due to immaterial effect. Yield on gross loans was not adjusted for nonaccrual
loans, which were not considered material for this calculation.
10
Table 1, above, shows the various components that contributed to
changes in net interest income for the two quarterly periods of 2006 and 2005.
Average interest earning assets for the quarter ended March 31, 2006 increased
$61,640,000 or 13.9% over the same quarter the year before. The principal
interest earning assets are loans, from a volume perspective as well as from an
earnings rate perspective. For the quarter ended March 31, 2006, average loans
outstanding represented 74.7% of average earning assets. For the quarter ended
March 31, 2005, they represented 75.9% of average earning assets. Average loan
volume increased $40,930,000 in the first quarter of 2006 compared to the same
quarter in 2005, an increase of 12.1%. Loan income increased $1,966,000 in the
same period, or 34.5%. The yield increased by 137 basis points. The average
volume of taxable securities increased by $1,710,000, and the yield increased by
71 basis points, as a result of the return of rising interest rates.
The cost on total interest bearing liabilities increased from 1.21% to
2.08%, an increase of 87 basis points. Most of the change could be seen in time
deposits, where rates paid in the first quarter of 2005 were 2.00%, and rose to
3.25% in the first quarter of 2006. Higher interest rates paid on money market
deposits, caused an increase in money market deposits, which averaged
$19,321,000 or 18.8% higher in the first quarter of 2006. Average time deposits
increased by $42,784,000 from the first quarter of 2005 compared to the first
quarter in 2006. Interest paid increased 125 basis points the same quarter to
quarter .
For the three months ended March 31, 2006 the following table shows the
dollar amount of change in interest income and expense and the dollar amounts
attributable to: (a) changes in volume (changes in volume at the current year
rate), b) changes in rate (changes in rate times the prior year's volume) and
(c) changes in rate/volume (changes in rate times change in volume). In this
table, the dollar change in rate/volume is prorated to volume and rate
proportionately.
Table 2
-------
RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended March 31,
(In thousands) 2006 Compared To 2005
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 1,966 $ 1,138 $ 828
Taxable securities 119 103 16
Nontaxable securities 116 15 101
Federal funds sold 121 77 44
------------ ------------ ------------
Total $ 2,322 $ 1,333 $ 989
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 24 $ 20 $ 4
Money market 358 245 113
Savings deposits 18 20 (2)
Time deposits 642 431 211
Federal funds and other borrowed money (56) -- (56)
------------ ------------ ------------
Total $ 986 $ 716 $ 270
------------ ------------ ------------
NET INTEREST INCOME $ 1,336 $ 617 $ 719
============ ============ ============
11
Noninterest income
------------------
The following table shows the principal components of noninterest
income for the periods indicated.
Table 3
-------
NONINTEREST INCOME
(In thousands) Three months ended March 31,
2006 2005
------------ ------------
Gain on sale of other equity securities $ 1,348 $ --
Service charges 603 567
Credit card fees 193 216
Other income 172 120
------------ ------------
Total noninterest income $ 2,316 $ 903
============ ============
Noninterest income consists mainly of service charges on deposits,
credit card fees, and other miscellaneous types of income. The principal
increase was proceeds from the sale of shares of common stock in Pacific Coast
Bancshares (see Note F, above). Service charges increased slightly by $36,000 in
the quarter ended March 31, 2006 from the same quarter in 2005. Credit card fees
decreased by $23,000. Other income increased $52,000 in the first quarter of
2006 compared to the first quarter of 2005. This represents a number of small
accounts each with variances under $15,000. The only larger increase was $16,000
in earnings from an outside service which reconciles official checks, and pays
interest on the balances maintained until checks are collected. The increased
earnings are influenced by the increased interest rates quarter over quarter.
Noninterest expense
-------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
Table 4
-------
NONINTEREST EXPENSE
(In thousands) Three months ended March 31,
2006 2005
------------ ------------
Salaries and employee benefits $ 3,179 $ 2,805
Occupancy expense 416 315
Equipment expense 433 370
Professional fees 273 250
Telephone, postage and supplies 249 194
Bankcard expenses 184 199
Other expense 795 769
------------ ------------
Total noninterest expense $ 5,529 $ 4,902
============ ============
Noninterest expense consists of salaries and employee benefits
representing more than half of the total, and various smaller categories.
Salaries and employee benefits increased by $374,000 or 13.3% in the quarter
ended March 31, 2006 compared to the same quarter of 2005. Occupancy,
12
equipment,, telephone, postage and supplies expense, as well as salaries and
benefits increased due to the acquisition of the two branches of Sequoia
National Bank in the second quarter of 2005, which affected the first quarter
expenses of 2006, but not 2005.
Income Taxes
------------
The effective tax rate for the quarter ended March 31, 2006 was 30.5%
compared to 29.0% for the quarter ended March 31, 2005. This is affected by
changing amounts invested in tax-free securities, by available Low Income
Housing Credits, by amounts of interest income on qualifying loans in Enterprise
zones, and by the effective state tax rate.
Asset and Liability Management
------------------------------
Ongoing management of the Company's interest rate sensitivity limits
interest rate risk through monitoring the mix and maturity of loans, investments
and deposits. Management regularly reviews the Company's position and evaluates
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth
and deposit withdrawals, as well as to provide for general needs, the Company
must maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
comes from Company's customer base, which provides core deposit growth. The
overall liquidity position of the Company is closely monitored and evaluated
regularly. Management believes the Company's liquidity sources at March 31, 2006
are adequate to meet its operating needs in 2006 and going forward into the
foreseeable future.
The Company's asset/liability gap is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. Alternatively, if
more liabilities than assets will reprice, the institution is in a
liability-sensitive position. Accordingly, net interest income would decline
when rates rose and increase when rates fell.
The following table sets forth information concerning interest rate
sensitive assets and liabilities as of March 31, 2006. The assets and
liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms. Since all interest rates and yields do
not adjust at the same speed or magnitude, and since volatility is subject to
change, the gap is only a general indicator of interest rate sensitivity.
13
Table 5
-------
RATE SENSITIVE ASSETS/LIABILITIES
As of March 31, 2006
(Dollars in thousands)
Over
Three Three To Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
---------- ---------- ---------- ---------- ---------- ----------
Interest earning assets:
Federal funds sold $ 22,710 $ -- $ -- $ -- $ -- $ 22,710
Securities available for sale 5,660 42,518 43,801 29,316 -- 121,295
Loans 262,657 8,600 40,736 49,592 144 361,729
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 291,027 51,118 84,537 78,908 144 505,734
---------- ---------- ---------- ---------- ---------- ----------
Cash and due from banks -- -- -- -- 21,123 21,123
Allowance for loan losses -- -- -- -- (4,692) (4,692)
Other assets -- -- -- -- 40,708 40,708
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 291,027 $ 51,118 $ 84,537 $ 78,908 $ 57,283 $ 562,873
========== ========== ========== ========== ========== ==========
Interest bearing liabilities:
Demand, interest bearing $ 60,036 $ -- $ -- $ -- $ -- $ 60,036
Savings and money market 177,601 -- -- -- -- 177,601
Time deposits 58,144 62,804 18,539 -- -- 139,487
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 295,781 62,804 18,539 -- -- 377,124
---------- ---------- ---------- ---------- ---------- ----------
Noninterest demand deposits -- -- -- -- 120,960 120,960
Other liabilities -- -- -- -- 7,853 7,853
Stockholders' equity -- -- -- -- 56,936 56,936
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity $ 295,781 $ 62,804 $ 18,539 $ -- $ 185,749 $ 562,873
========== ========== ========== ========== ========== ==========
Interest rate sensitivity gap $ (4,754) $ (11,686) $ 65,998 $ 78,908 $ (128,466) $ --
========== ========== ========== ========== ========== ==========
Cumulative interest rate sensitivity gap $ (4,754) $ (16,440) $ 49,558 $ 128,466 $ -- $ --
Cumulative interest rate sensitivity
gap ratio (1.63%) (4.80%) 11.61% 25.41% -- --
Financial Condition
-------------------
Assets. Total assets decreased to $562,873,000 at March 31, 2006 from
$569,141,000 at December 31, 2005, a decrease of $6,268,000. Most of this
decrease was in net loans, which decreased $23,014,000, offset by an increase of
$8,535,000 in cash and equivalents, $7,832,000 in securities available for sale,
and an increase of $379,000 in remaining categories. Total liabilities decreased
$7,961,000. All deposit categories decreased slightly, with total deposits
decreasing $9,460,000, offset by an increase of $1,499,000 in accrued expenses
and other liabilities.
Loans. Gross loans at March 31, 2006 were $362,505,000, a decrease of
$23,041,000 or 6.0% from December 31, 2005. Real estate and construction loans
decreased $22,475,000, representing most of the decrease..The principal reason
for the runoff represents Real Estate payoffs due to refinancing at other
institutions at rates with which we presently do not choose to compete.
Commercial and consumer loans decreased a total of $566,000. The portfolio mix
was as follows.
Table 6
-------
LOAN PORTFOLIO
March 31, December 31,
(Dollars in thousands) 2006 Percent 2005 Percent
---------- ---------- ---------- ----------
Real Estate $ 281,880 77.8% $ 302,813 78.5%
Construction 24,701 6.8 26,243 6.8
Commercial 52,860 14.6 53,070 13.8
Consumer 3,064 0.8 3,420 0.9
---------- ---------- ---------- ----------
Gross loans 362,505 100.0% 385,546 100.0%
========== ==========
Net deferred loan fees (776) (948)
Allowance for loan losses (4,692) (4,547)
---------- ----------
Net loans $ 357,037 $ 380,051
========== ==========
14
Allowance for loan losses. The Company has the responsibility of
assessing the overall risks in its portfolio, assessing the specific loss
expectancy, and determining the adequacy of the allowance for loan losses. The
level of the allowance is determined by internally generating credit quality
ratings, reviewing economic conditions in the Company's market area, and
considering the Company's historical loan loss experience. The Company is
committed to maintaining an adequate allowance, identifying credit weaknesses by
consistent review of loans, and maintaining the ratings and changing those
ratings in a timely manner as circumstances change.
A summary of transactions in the allowance for loan losses for the
three months ended March 31, 2006 and three months ended March 31, 2005 is as
follows:
Table 7
-------
ALLOWANCE FOR LOAN LOSSES
Three months ended Three months ended
(In thousands) March 31, 2006 March 31, 2005
--------------- ---------------
Balance, beginning of period $ 4,547 $ 3,334
Provision for loan losses 150 120
Recoveries 1 13
Amounts charged off (6) (73)
--------------- ---------------
Balance, end of period $ 4,692 $ 3,394
=============== ===============
In management's judgment, the allowance was adequate to absorb losses
currently inherent in the loan portfolio at March 31, 2006. However, changes in
prevailing economic conditions in the Company's markets or in the financial
condition of its customers could result in changes in the level of nonperforming
assets and charge-offs in the future and, accordingly, changes in the allowance.
Nonperforming assets. Nonperforming assets consist of nonaccrual loans,
foreclosed assets, and loans that are 90 days or more past due but are still
accruing interest. At March 31, 2006, there were four non-accrual loans for a
total of $144,000, compared to one for $17,000 at December 31, 2005, since paid
off.
Deposits. Total deposits at March 31, 2006 were $498,084,000 compared
to $507,544,000 on December 31, 2005. Of these totals, noninterest-bearing
demand deposits were $120,960,000 or 24.3% of the total on March 31, 2006 and
$123,641,000 or 24.4% on December 31, 2005. Time deposits were $139,487,000 on
March 31, 2006 and $140,833,000 on December 31, 2005.
The following table sets forth the maturity schedule of the time certificates of
deposit on March 31, 2006:
Table 8
-------
(In thousands) Under $100,000
Maturities: $100,000 or more Total
--------------- --------------- ---------------
Three months or less $ 20,550 $ 37,594 $ 58,144
Over three to six months 14,010 21,014 35,024
Over six through twelve months 14,947 12,834 27,781
Over twelve months 11,978 6,560 18,538
--------------- --------------- ---------------
Total $ 61,485 $ 78,002 $ 139,487
=============== =============== ===============
15
The following table shows the risk-based capital ratios and leverage
ratios at March 31, 2006 and December 31, 2005 for the Bank.
Table 9
-------
Minimum "Well
March 31, December 31, Capitalized"
Risk-Based Capital Ratios 2006 2005 Requirements
------------------------- ---------- ------------ -------------
Tier 1 Capital 11.48% 10.67% > 6.00%
-
Total Capital 12.48% 11.59% > 10.00%
-
Leverage Ratios 9.70% 9.50% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimum loss. As of March 31, 2006, Liquid Assets were
$165,128,000, or 29.3% of total assets. As of December 31, 2005, Liquid Assets
were $148,761,000, or 26.1% of total assets. Liquidity consists of cash and due
from other banks accounts, federal funds sold, and securities
available-for-sale. The Company's primary uses of funds are loans, and the
primary sources of funds are deposits. The relationship between total net loans
and total deposits is a useful additional measure of liquidity. The Company also
has federal fund borrowing facilities for a total of $50,000,000, a Federal Home
Loan Bank line of up to 25% of total assets, and a Federal Reserve Bank
facility. As of March 31, 2006, there were no amounts outstanding.
A higher loan to deposit ratio means that assets will be less liquid.
This has to be balanced against the fact that loans represent the highest
interest earning assets. A lower loan to deposit ratio means lower potential
income. On March 31, 2006 net loans were at 71.7% of deposits. On December 31,
2005 net loans were at 74.9%.
Forward-Looking Information and Uncertainties Regarding
-------------------------------------------------------
Future Financial Performance.
-----------------------------
This report, including management's discussion above, concerning
earnings and financial condition, contains "forward-looking statements".
Forward-looking statements are estimates of or statements about expectations or
beliefs regarding the Company's future financial performance or anticipated
future financial condition that are based on current information and that are
subject to a number of risks and uncertainties that could cause actual operating
results in the future to differ significantly from those expected at the current
time. Those risks and uncertainties include, although they are not limited to,
the following components.
Increased competition. Increased competition from other banks and
financial service businesses, mutual funds and securities brokerage and
investment banking firms that offer competitive loan and investment products
could require us to reduce interest rates and loan fees to attract new loans or
to increase interest rates that we offer on time deposits, either or both of
which could, in turn, reduce interest income and net interest margins.
Possible adverse changes in economic conditions. Adverse changes in
national or local economic conditions could (i) reduce loan demand which could,
in turn, reduce interest income and net interest margins; (ii) adversely affect
the financial capability of borrowers to meet their loan obligations, which, in
turn, could result in increases in loan losses and require increases in
provisions for possible loan losses, thereby adversely affecting operating
results; and (iii) lead to reductions in real property values that, due to the
Company's reliance on real property to secure many of its loans, could make it
more difficult to prevent losses from being incurred on non-performing loans
through the sale of such real properties.
16
Possible adverse changes in national economic conditions and Federal
Reserve Board monetary policies. Changes in national economic policies, such as
increases in inflation or declines in economic output often prompt changes in
Federal Reserve Board monetary policies that could reduce interest income or
increase the cost of funds to the Company, either of which could result in
reduced earnings.
Changes in regulatory policies. Changes in federal and national bank
regulatory policies, such as increases in capital requirements or in loan loss
reserve or asset/liability ratio requirements, could adversely affect earnings
by reducing yields on earning assets or increasing operating costs.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this report, which speak only as of the date of this report, or to
make predictions based solely on historical financial performance. The Company
also disclaims any obligation to update forward-looking statements contained in
this report.
Other Matters
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. As of March 31,
2006 and December 31, 2005, 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 $105,571,000 and $97,701,000 at March 31, 2006 and December 31,
2005, respectively. As a percentage of net loans, these off-balance sheet items
represent 29.6% and 25.7% respectively.
Corporate Reform Legislation
President George W. Bush signed the "Sarbanes-Oxley Act of 2002" (the
"Act") on July 30, 2002, which responds to the recent corporate accounting
scandals. Among other matters, the Act increases the penalties for securities
fraud, establishes new rules for financial analysts to prevent conflicts of
interest, creates a new independent oversight board for the accounting
profession, imposes restrictions on the consulting activities of accounting
firms that audit company records and requires certification of financial reports
by corporate executives. The SEC has adopted a number of rule changes to
implement the provisions of the Act. The SEC has also approved new rules
proposed and adopted by the New York Stock Exchange and the Nasdaq Stock Market
to strengthen corporate governance standards for listed companies. The Company
does not currently anticipate that compliance with the Act (including the rules
adopted pursuant to the Act) will have a material effect upon its financial
position or results of its operations or its cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may change
as a result of changes in interest rates and other market conditions. Market
risk is attributed to all market risk sensitive financial instruments, including
loans, investment securities, deposits and borrowings. The Company does not
engage in trading activities or participate in foreign currency transactions for
its own account. Accordingly, exposure to market risk is primarily a function of
asset and liability management activities and of changes in market rates of
interest. Changes in rates can cause or require increases in the rates paid on
deposits that may take effect more rapidly or may be greater than the increases
in the interest rates that the Company is able to charge on loans and the yields
that it can realize on its investments. The extent of that market risk depends
on a number of variables including the sensitivity to changes in market interest
rates and the maturities of the Company's interest earning assets and deposits
17
(See discussion of comparative changes in prime lending rate and the Federal
Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds, in the second
paragraph under Earnings Analysis on page 8). The changes did not have a
material effect on earnings.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
and other members of the Company's senior management as of the end of the
Company's fiscal quarter ended March 31, 2006. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
(b) Internal Control Over Financial Reporting: Management has
responsibility for establishing and maintaining adequate internal control over
financial reporting for the Company. An evaluation of any changes in the
Company's internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)), that occurred during the Company's fiscal
quarter ended March 31, 2006, 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 Procedures
There are currently no material legal procedures in effect, other than
those in the normal course of business.
Item 1A. Risk Factors
There have been no material changes from risk factors previously
disclosed by the Company in response to Item 1A., Part 1 of Form 10-K as of
December 31, 2005.
Item 6. Exhibits
Exhibits
31: Rule 13a-14(a)/15d-14(a) Certifications
32: Section 1350 Certifications
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FNB BANCORP
(Registrant)
Dated: May 12, 2006. By: /s/ THOMAS C. MCGRAW
-------------------------------------
Thomas C. McGraw
Chief Executive Officer
(Authorized Officer)
By: /s/ JAMES B. RAMSEY
-------------------------------------
James B. Ramsey
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
19