ITEM 1. BUSINESS - ------------------
Forward-Looking Statements: Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as "believe," "expect," "anticipate," "intend," "may," "will," "should," "could," "would," and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) variances in the actual versus projected growth in assets; (2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries; (9) changes in the regulatory environment; (10) changes in business conditions and inflation; (11) changes in securities markets; (12) data processing problems; (13) a decline in real estate values in the Company's operating market areas; (14) the effects of terrorism, the threat of terrorism or the impact of the current military conflict in Iraq and the conduct of the war on terrorism by the United States and its allies, as well as other factors. The factors set forth under "Item 1A
ITEM 1A. RISK FACTORS - ---------------------
In addition to the risks associated with the business of banking generally, as described above under Item 1 (Description of Business), the Company's business, financial condition, operating results, future prospects and stock price can be adversely impacted by certain risk factors, as set forth below, any of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results.
Dependence on Key Officers and Employees. We are dependent on the successful recruitment and retention of highly qualified personnel. Our ability to implement our business strategies is closely tied to the strengths of our executive officers who have extensive experience in the banking industry but who are not easily replaced. In addition, business banking, one of the Company's principal lines of business, is dependent on relationship banking, in which First National Bank personnel develop professional relationships with small business owners and officers of larger business customers who are responsible for the financial management of the companies they represent. If these employees were to leave First National Bank and become employed by a local competing bank, we could potentially lose business customers. In addition, we rely on our customer service staff to effectively serve the needs of our consumer customers. We actively recruit for all open positions and management believes that its relations with employees are good.
Growth strategy. We have pursued and continue to pursue a growth strategy which depends primarily on generating an increasing level of loans and deposits at acceptable risk levels. We may not be able to sustain this growth strategy without establishing new branches or new products. Therefore, we may expand in our current market by opening or acquiring branch offices or other financial institutions or branch offices. This expansion may require significant investments in equipment, technology, personnel and site locations. We cannot assure you of our success in implementing our growth strategy without corresponding increases in our noninterest expenses.
Commercial loans. As of December 31, 2006, approximately 15.6% of our loan portfolio consisted of commercial business loans, which have a higher degree of risk than other types of loans. Commercial business loans generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the mobility of collateral, the effect of general economic conditions and the
increased difficulty of evaluating and monitoring these types of loans. In addition, unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired.
Real Estate Values. A large portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2006, real estate (including construction loans) served as the principal source of collateral with respect to approximately 83.7% of the Company's loan portfolio. A substantial decline in the economy in general, or a decline in real estate values in the Company's primary operating market areas in particular, could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available-for-sale investment portfolio, as well as the Company's financial condition and results of operations in general and the market value for Company Common Stock. Acts of nature, including fires, earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition.
Allowance for Loan and Lease Losses. Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance, but its allowance for loan losses may not be adequate to cover actual loan and lease losses. In addition, future provisions for loan and lease losses could materially and adversely affect the Company and therefore the Company's operating results. The Company's allowance for loan and lease losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Company's control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Company's loans and allowance for loan and lease losses. Although we believe that the Company's allowance for loan and lease losses is adequate to cover current losses, we cannot assure you that it will not further increase the allowance for loan and lease losses or that the regulators will not require it to increase this allowance. Either of these occurrences could materially and adversely affect the Company's earnings.
Environmental Liabilities. In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigations or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we could become subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become
subject to significant environmental liabilities, our business prospects, financial condition, liquidity, results of operations and stock price could be materially and adversely affected.
Dilution of Common Stock. Shares of the Company's common stock eligible for future sale could have a dilutive effect on the market for common stock and could adversely affect the market price. The Articles of Incorporation of the Company authorize the issuance of 10,000,000 shares of common stock, of which 2,852,765 were outstanding at December 31, 2006. Pursuant to its 1997 and 2002 Stock Option Plans, at December 31, 2006, the Company had outstanding options to purchase 254,915 shares of common stock. As of December 31, 2006, 36,705 shares of common stock remained available for grants under the 2002 Stock Option Plan. Sales of substantial amounts of the Company's common stock in the public market could adversely affect the market price of common stock.
Operating Losses. The Company is subject to certain operations risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company's internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company's business, financial condition or results of operations.
Business Confidence Uncertainty. The terrorist actions on September 11, 2001, and thereafter, plus military actions taken by the United States in Afghanistan, Iraq and elsewhere, have had significant adverse effects upon the United States economy. Whether terrorist activities in the future and the actions taken by the United States and its allies in combating terrorism on a worldwide basis will adversely impact the Company, and the extent of such impact, is uncertain. However, such events have had and may continue to have an adverse effect on the economy in the Company's market areas. Such continued economic deterioration could adversely affect the Company's future results of operations by, among other matters, reducing the demand for loans and the amounts required to be reserved for loan losses, reducing the value of collateral held as security for the Company's loans, and causing a decline in the Company's stock price.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS - ----------------------------------
None.
ITEM 2.
ITEM 2. PROPERTIES - ------------------
FNB Bancorp does not own any real property. Since its incorporation on February 28, 2001, FNB Bancorp has conducted its operations at the administrative offices of First National Bank, located at 975 El Camino Real, South San Francisco, California 94080.
First National Bank owns the land and building at 975 El Camino Real, South San Francisco, California 94080. The premises consist of a modern, three-story building of approximately 15,000 square feet and off-street parking for employees and customers of approximately 45 vehicles. The Buri Buri Branch Office of First National Bank is located on the ground floor of this three-story building and administrative offices, including the offices of senior management, occupy the second and third floors.
First National Bank owns the land and two-story building occupied by the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land and two-story building occupied by the Colma Branch Office (1300 El Camino Real, Colma, CA 94014); the land and two-story building occupied by the South San Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080); the land and two-story building occupied by the Redwood City Branch Office (700 El Camino Real, Redwood City, CA 94063); the land and two-story building occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA 94030); the land and single-story building occupied by the Half Moon Bay Branch Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA 94060). All properties include adequate vehicle parking for customers and employees.
First National Bank leases premises at 1450 Linda Mar Shopping Center, Pacifica, California 94044, for its Linda Mar Branch Office. This ground floor space of approximately 4,100 square feet is leased from Fifty Associates and Demartini/Linda Mar, LLC. The lease term is 10 years and expires on September 1, 2009.
First National Bank leases premises at 210 Eureka Square, Pacifica, California 94044, for its Eureka Square Branch Office. This ground floor space of approximately 3,000 square feet is leased from Joseph A. Sorci and Eldiva Sorci. The lease term is for 5 years, commencing January 1, 1995, with two 5-year options to extend the lease term, the second of which has been exercised and expires on December 31, 2009.
First National Bank leases premises at 65 Post Street, San Francisco, CA 94104, for its Financial District Office. The current lease term expires April 30, 2008, with two 5-year options to extend the lease. The location consists of approximately 2,826 square feet of street level, 1,322 square feet of basement, and 1,077 square feet of mezzanine space.
First National Bank leases premises at 6599 Portola Drive, San Francisco, CA 94127, for its Portola Office. The current lease expires June 30, 2009, and has a remaining 5-year option to extend the lease. The location consists of approximately 1,325 square feet of street level space.
First National Bank leases premises at 150 East Third Avenue, San Mateo, CA 94401, for its San Mateo Branch Office. The lease term is for 5 years, which will expire July 31, 2008. The location consists of approximately 4,000 square feet of ground floor usable commercial space.
The foregoing summary descriptions of leased premises are qualified in their entirety by reference to the full text of the lease agreements listed as exhibits to this report.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
There are no material legal proceedings adverse to the Company or First National Bank to which any director, officer, affiliate of the Company, or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or First National Bank.
From time to time, the Company and/or First National Bank 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 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -----------------------------------------------------------
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------
Since March 18, 2002, the common stock of the Company has been quoted on the OTC Bulletin Board under the trading symbol, "FNBG.OB." There has been limited trading in the shares of common stock of the Company. On February 15, 2007, the Company had approximately 400 shareholders of common stock of record.
The following table summarizes sales of the common stock of FNB Bancorp during the periods indicated of which management of the Bank has knowledge, including the approximate high and low bid prices during such periods and the per share cash dividends declared for the periods indicated. All information has been adjusted to reflect 5% stock dividends effected on December 16, 2005 and on December 15, 2006. The prices indicated below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Bid Price of FNB Bancorp Common Stock Cash Dividends High Low Declared (1) ---- --- ------------ ---- First Quarter $33.5601 $30.3855 $0.15 Second Quarter $30.3855 $26.7573 0.15 Third Quarter 28.7982 27.5737 0.15 Fourth Quarter 31.6667 29.2857 0.15
---- First Quarter $33.5619 $31.6667 $0.15 Second Quarter 34.2857 32.7619 0.15 Third Quarter 34.2857 32.8571 0.15 Fourth Quarter 34.6000 32.5000 0.15
(1) See Item 1, "Limitations on Dividends," above, for a description of the limitations applicable to the payment of dividends by FNB Bancorp.
Comparison of First National Bank/FNB Bancorp Shareholder Return
Set forth below is a line graph comparing the annual percentage change in the cumulative total return on First National Bank Commn Stock and FNB Bancorp Common Stock with the cumulative total return of the SNL Securities Index of Pink Banks (asset size of $100 million to $500 million and over $500 million) and the Russell 2000 Index as of the end of each of the last five fiscal years. The SNL index for over $500 million was added because the Bank exceeded $500 million during the year. Effective March 15, 2002, First National Bank became the wholly owned subsidiary of FNB Bancorp. Thereafter, the common stock of FNB Bancorp has been quoted on the OTC Bulletin Board under the symbol "FNBG.OB."
The graph assumes that $100.00 was invested on December 31, 2001 in First National Bank Common Stock and each index, and that all dividends were reinvested. Returns have been adjusted for any stock dividends and stock splits declared by First National Bank and FNB Bancorp. Shareholder returns over the indicated period should not be considered indicative of future shareholder returns.
- -------------------------------------------------------------------------------- FNB Bancorp - --------------------------------------------------------------------------------
Total Return Peformance
[GRAPHIC OMITTED]
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information that should be read in conjunction with the Company's financial statements and notes thereto included under Item 8 - "FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA."
Note: per share data has been adjusted for stock dividends.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS OF FNB BANCORP AND SUBSIDIARY - -------------------------------------------
Forward-Looking Statements: Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as "believe," "expect," "anticipate," "intend," "may," "will," "should," "could," "would," and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) variances in the actual versus projected growth in assets; (2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries; (9) changes in the regulatory environment; (10) changes in business conditions and inflation; (11) changes in securities markets; (12) data processing problems; (13) a decline in real estate values in the Company's operating market areas; (14) the effects of terrorism, the threat of terrorism or the impact of the current military conflict in Iraq and the conduct of the war on terrorism by the United States and its allies, as well as other factors. The factors set forth under "Item 1A - Risk Factors" in this report and other cautionary statements and information set forth in this report should be read carefully considered and understood as being applicable to all related forward-looking statements contained in this report when evaluating the business prospects of the Company and its subsidiary.
Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, or to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.
Critical Accounting Policies And Estimates - ------------------------------------------
Management's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to its loans and allowance for loan losses. The Company bases its estimates on current market conditions, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policy requires significant judgments and estimates used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company's loan loss experience, known and inherent risks in the portfolio, current economic conditions, known adverse situations that may affect the borrower's ability to repay, regulatory policies, and the estimated value of underlying collateral. The evaluation of the adequacy of the allowance is based on the above factors along with prevailing and anticipated economic conditions that may impact borrowers' ability to repay loans. Determination of the allowance is in part objective and in part a subjective judgment by management given the information it currently has in its possession. Adverse changes in any of these factors or the discovery of new adverse information could result in higher charge-offs and loan loss provisions.
Recent Accounting Changes - -------------------------
In February, 2006, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140." Statement 155 permits the revaluation of fair value for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It also clarifies which interest-only and principal-only strips are not subject to the requirements of Statement 133. Statement 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material impact on the Company's financial statements.
In March, 2006, FASB issued Statement No. 156, "Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140." Statement 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a qualifying servicing contract, including a transfer of loans with servicing retained that meets the requirements for sale accounting treatment. Statement 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material impact on the Company's financial statements.
In June 2006, FASB issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes." This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition reversals, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this standard is not expected to have a material impact on the Company's consolidated balance sheets or income statements.
In September 2006, FASB issued Statement No. 157, "Fair Value Measurements." This Statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement supplements other accounting pronouncements that require or permit fair value measurements. This statement also expands disclosures using fair value to measure assets and liabilities in interim and annual periods subsequent to the period of initial recognition. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company's financial statements.
In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 108. This SAB provides detailed guidance to registrants in the determination of what is material to their financial statements. SAB 108 is required to be applied to financial statements issued after November 15, 2006. Upon adoption, the cumulative effect of applying the new guidance is to be reflected as an adjustment to opening retained earnings as of the beginning of the current fiscal year. The application of SAB 108 is not expected to have a material impact on the Company's financial statements.
Earnings Analysis - -----------------
Net earnings in 2006 were $7,582,000, a $1,854,000 or 32.4% increase from 2005 earnings of $5,728,000. Earnings for the year 2005 increased $1,040,000 or 22.2% from year 2004 earnings of $4,688,000. The primary reason for this increase was a gain on sale of Pacific Coast Banker's Bank stock of $1,352,000 recorded in the first quarter of 2006, and an increase in net interest income. The principal source of earnings is interest income on loans. In the year 2004, the prime lending rate rose from 4.00% to 5.25%. During 2005, the prime lending rate rose eight times, ending at 7.25%. During the first half of 2006, it continued to rise to 8.25%, where it ended the year.
Basic earnings per share were $2.67 in 2006, $2.02 in 2005 and $1.63 in 2004. Diluted earnings per share were $2.60 in 2006; $1.98 in 2005; and $1.60 in 2004.
Net interest income for 2006 was $27,375,000, an increase of $2,176,000 or 8.6% from 2005. Net interest income was $25,199,000 in 2005, an increase of $3,686,000 or 17.1% from 2004. Interest income was $37,196,000 in 2006, an increase of $6,464,000 or 21.0% over 2005. Interest income was $30,732,000 in 2005, an increase of $6,686,000, or 27.8% over 2004. The increase in net interest income was caused by an increase in both the rate and volume of earning assets generated through our existing branch network. Average interest earning
assets in 2006 were $520,930,000, an increase of $43,097,000 or 9.0% from 2005. In 2005, they were $477,833,000, an increase of $59,510,000, or 14.2% over 2004. The yield on interest earning assets increased 71 basis points in 2006 compared to 2005. The yield on interest earning assets increased 68 basis points in 2005 compared to 2004. The principal earning assets were loans, and average loans outstanding increased $23,764,000 in 2006 versus 2005, while their yield increased 88 basis points in 2006 versus 2005. Average loans were $363,399,000 in 2005, an increase of $43,822,000 over 2004, while their yield increased 72 basis points.
Interest expense for 2006 was $9,821,000 compared to $5,533,000 in 2005, an increase of $4,288,000 or 77.5%. Interest expense was $5,533,000 in 2005, an increase of $3,000,000 compared to 2004, or 118.4%. The increase in interest expense during 2006 was caused by both a volume and rate increase on deposits obtained through our existing branch network. No new branches or significant product lines were added during 2006. Average interest bearing liabilities were $386,254,000 in 2006, and $353,857,000 in 2005, an increase of $32,397,000 or 9.2%. Average interest bearing liabilities were $353,857,000 in 2005, and $295,062,000 in 2004, an increase of $58,795,000 or 19.9%. The cost of these liabilities increased 98 basis points in 2006 compared to 2005, and increased 70 basis points in 2005 compared to 2004. The principal cost was in time deposits, which increased 105 basis points in 2006 compared to 2005, and increased 97 basis points in 2005 compared to 2004.
Net Interest Income - -------------------
Net interest income is the difference between interest yield generated by earning assets and the interest expense associated with the funding of those assets. Net interest income is affected by the interest rate earned or paid and by volume changes in loans, investment securities, deposits and borrowed funds.
Interest income is reflected on an actual basis, not on a fully taxable equivalent basis. Yields on gross loans were not adjusted for nonaccrual loans, as these were considered not material for this calculation. Fee income included in interest income was $1,445,000 in 2006, $1,318,000 in 2005 and $1,561,000 in 2004.
The following table analyzes the dollar amount of change in interest income and expense and the changes in dollar amounts attributable to (a) changes in volume (changes in volume at the current year rate), (b) changes in rate (changes in rate times the prior year's volume) and (c) changes in rate/volume (changes in rate times changes in volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.
In 2006, net interest income represented 85.60% of net revenue (net interest income plus non interest income), compared to 86.77% in 2005 and 85.28% in 2004. The net interest margin on average earning assets was 5.26% in 2006 compared to 5.27% in 2005 and 5.14% in 2004. The average rate earned on interest earning assets was 7.14% in 2006, up from 6.43% in 2005 and 5.75% in 2004. The average cost for interest-bearing liabilities was 2.54% in 2006, compared to 1.56% in 2005 and 0.86% in 2004. The net effect of the above changes resulted in a 1 basis point decrease in net interest margin for 2006 compared to 2005. Net interest margin was positively affected by the Sequoia National Bank acquisition that was effected April 30, 2005. As part of that acquisition, two full service branch facilities located in San Francisco with approximately $56,000,000 in deposits were added to the retail deposit branch network.
As mentioned above under the heading "Earnings Analysis", there were increases in the prime lending rate during 2004, 2005 and 2006, as a result of action by the Federal Open Market Committee of the Federal Reserve, which affected interest-bearing assets and interest-bearing liabilities.
Yield on average loans was 8.24% in 2006, increasing from 7.36% in 2005 and 6.64% in 2004. Interest on average taxable securities was 4.13% in 2006, increasing from 3.60% in 2005 and 2.92% in 2004. Interest on average nontaxable securities was 3.54% in 2006, increasing from 3.39% in 2005 and 3.44% in 2004. Interest on average federal funds sold was 4.94% in 2006, an increase from 3.12% in 2005 and 1.09% in 2004. Interest on average total interest earning assets was 7.14% in 2006, 6.43% in 2005, and 5.75% in 2004. On the expense side, interest on average interest bearing demand deposits was 0.54% in 2006, an increase from 0.29% in 2005 and 0.20% in 2004. Interest on average money market accounts was 2.86% in 2006, increasing from 1.71% in 2005 and 0.87% in 2004. Interest on average savings accounts was 0.49% in 2006, an increase from 0.31% in 2005 and 0.27% in 2004. Interest on average time deposits was 3.63% in 2006, an increase from 2.58% in 2005 and 1.61% in 2004. Interest on average Federal Home Loan Bank advances was 5.55% in 2006, 2.49% in 2005, and no borrowings in 2004. Interest on federal funds purchased was 5.77% in 2006, 3.03% in 2005, and 2.26% in 2004. Interest on average total interest bearing liabilities was 2.54% in 2006, an increase from 1.56% in 2005 and 0.86% in 2004. Yields on interest earning assets and interest bearing liabilities increased in 2005 and 2006 as a result of increased short term market interest rates. There were no new branches added in 2006.
Allowance For Loan Losses - -------------------------
The Bank has the responsibility of assessing the overall risks in its loan portfolio, assessing the specific loss expectancy, and determining the adequacy of the loan loss reserve. The level of reserves is determined by internally generating credit quality ratings, reviewing economic conditions in the Bank's market area, and considering the Bank's historical loan loss experience. The Bank is committed to maintaining adequate reserves, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change.
Effective 2006, the Bank provides a reserve for unfunded loan commitments in a separate account in Other Liabilities. The Allowance for Loan Losses in Table 3 has been reclassified for prior years to agree with the current year presentation.
Real estate loans outstanding increased by $15,842,000 in 2006 compared to 2005. They increased by $47,380,000 in 2005 compared to 2004. The proportion of the Allowance for Loan Losses attributable to real estate loans was $3,864,000 in 2006 compared to $3,373,000 in 2005 and $1,940,000 in 2004. As a percentage of total loans, the allowance allocated to these loans was 74.9% in 2006, 78.5% in 2005, and 73.9% in 2004. The growth in real estate loans in 2005 was primarily the result of the Sequoia National Bank acquisition. The growth in 2006 was primarily the result of increased market penetration within our existing market area.
The allowance for loan losses totaled $5,002,000, $4,374,000 and $3,133,000 at December 31, 2006, 2005 and 2004, respectively. This represented 1.18%, 1.14% and 0.91% of total loans outstanding on those dates. These balances reflect amounts that, in management's judgment, are adequate to provide for probable loan losses based on the considerations listed above. During 2006, the provision for loan losses was $683,000, while charge-offs were $59,000. In 2005, the provision for loan losses was $628,000, while charge-offs were $110,000. In 2004, the provision for loan losses was $408,000, while charge-offs were $431,000.
Table 4 summarizes transactions in the allowance for loan losses and details the charge-offs, recoveries and net loan losses by loan category for each of the last five fiscal years ended December 31, 2006. The amount added to the provision and charged to operating expenses for each period is based on the risk profile of the loan portfolio.
Non-performing Assets - ---------------------
Non-performing assets consist of nonaccrual loans, foreclosed assets, and loans that are 90 days or more past due but are still accruing interest. The accrual of interest on non-accrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. For the year ended December 31, 2006, had non-accrual loans performed as agreed, approximately $70,000 in additional interest would have been accrued.
At December 31, 2006, nonaccrual loans totaled $2,628,000, and primarily consisted of one well-secured commercial real estate loan which was brought current in the first quarter of 2007. At December 31, 2005, nonaccrual loans totaled $17,000. At December 31, 2004, nonaccrual loans totaled $2,798,000, of which a loan secured by an office building located in the Silicon Valley community of Mountain View, represented $2,679,000. During 2005, this loan was foreclosed and classified as Other Real Estate Owned, with a balance of $2,600,000. The loan secured by this property had an original balance of $3,592,000, was written down to the appraised value of the property in June 2003, March 2004 and March 2005. The property was sold in the second quarter of 2006 for $3,356,000, resulting in a net gain of $756,000.
Table 5 provides a summary of contractually past due loans for the most recent five years. Nonperforming loans were 0.6% of total loans at December 31, 2006 and less than 0.01% at December 31, 2005, compared to 0.8% of total loans at the end of 2004. Management believes the current list of past due loans are collectible and does not anticipate significant losses. There were no foreclosed assets as of December 31, 2006.
There was no commitment to lend additional funds to any customer whose loan was classified nonperforming at December 31, 2006, 2005 or 2004.
Noninterest Income - ------------------
The following table sets forth the principal components of noninterest income:
Noninterest income for the year ended December 31, 2006 was $6,259,000, compared to $3,841,000 at December 31, 2005 and $3,787,000 for 2004. After a gain on sale of other equity securities of $1,352,000 related to the sale of Pacific Coast Banker's Bank stock and a gain of $756,000 on sale of other real estate owned in 2006, service charges and credit card fees represented the major portion of noninterest income. In 2005 and 2004, the Bank recognized impairment charges of $116,000 and $27,000, respectively, representing the other than temporary impaired value of one security investment. The principal source of Other Income was Tax Free Income on Officers' Life Insurance, which was $304,000, $310,000, and $269,000 in the years 2006, 2005 and 2004, respectively, which reflected an increased investment in this insurance. As to the $349,000 increase in Other Income in 2005 over 2004, income on Officers' Life Insurance (already mentioned) increased $41,000; letter of credit fees and SBA-related fees were $114,000 in 2005 (from the acquisition of Sequoia National Bank), but zero in 2004; and dividends on equity securities increased $111,000. The remaining smaller accounts increased a total of $83,000.
Noninterest Expenses - --------------------
The following table sets forth the various components of noninterest expense:
TABLE 7 Noninterest Expenses ------------------------------------ (Dollars in thousands)
Years Ended December 31, ------------------------------------ 2006 2005 2004 ---------- ---------- ----------
Salaries and employee benefits $ 12,300 $ 11,344 $ 10,521 Occupancy expense 1,728 1,444 1,288 Equipment expense 1,665 1,624 1,662 Advertising expense 770 710 472 Data processing expense 452 416 344 Professional fees 1,278 952 1,086 Director expense 207 180 180 Surety insurance 479 555 479 Telephone, postage, supplies 1,056 939 1,103 Bankcard expenses 797 802 803 Other 1,028 1,289 689 ---------- ---------- ---------- Total noninterest expense $ 21,760 $ 20,255 $ 18,627 ========== ========== ==========
Noninterest expenses for the year ended December 31, 2006 were $21,760,000, compared to $20,255,000 for the year ended December 31, 2005, an increase of $1,505,000 or 7.4%. For the year ended December 31, 2005 they were $20,255,000, an increase of $1,628,000 or 8.7% compared to 2004. Increases in Noninterest expenses in 2005 and 2006 were partially attributable to the acquisition of Sequoia National Bank in the second quarter, 2005. In 2006, salaries and employee benefits were $12,300,000 in 2006 and $11,344,000 in 2005, compared to $10,521,000 in 2004. Salaries and employee benefits represent over 50% of noninterest expense. They increased by 8.4% in 2006 over 2005, and by 7.8% in 2005 over 2004. The principal single item causing the increase was related to the acquisition of two branches in San Francisco, which represented $522,000 in 2006 and $318,000 in 2005, while the remaining increase was related to merit increases and promotional rewards. Occupancy expense increased by $284,000 in 2006 compared to 2005, and increased by $156,000 in 2005 over 2004. The addition of the two former Sequoia branches in May of 2005 accounted for $269,000 in 2006 and $210,000 in 2005. Advertising expense continued to increase from $472,000 in 2004 to $710,000 in 2005 to $770,000 in 2006. In 2006, newspaper and community advertising represented $229,000; in 2005, $280,000; and in 2004 it was $103,000. Contributions, public relations/fund raising, marketing materials and giveaway items were $441,000 in 2006; $381,000 in 2005; and $291,000 in 2004. All other expense was $1,028,000 in 2006, $1,289,000 in 2005, and $689,000 in 2004. Of the $600,000 increase in Other Expense during 2005, $339,000 was from acquisition related expense; $106,000 deposit intangible amortization; $61,000 in Other Real Estate Owned expense; and an impairment write-down of an equity security for $75,000. The remainder was in numerous smaller accounts.
Balance Sheet Analysis - ----------------------
Total assets of the Company were $581,270,000 at December 31, 2006, an increase of 2.1% over 2005. Total assets were $569,314,000 at December 31, 2005, an increase of 16.1% over 2004. Assets averaged $576.1 million in 2006, compared to $529.7 million in 2005, and $461.1 million in 2004. Average earning assets increased from $418.3 million in 2004 to $477.8 million in 2005 and $520.9 million in 2006. Average earning assets represented 90.7% of total average assets in 2004, 90.2% in 2005 and 90.6% in 2006. Average interest-bearing liabilities were $295.1 million in 2004, $353.9 million in 2005 and $386.3 million in 2006.
Loans - -----
The loan portfolio is the principal earning asset of the Bank. Loans outstanding at December 31, 2006 increased by $39.8 million or 10.4% over December 31, 2005. Loans outstanding at December 31, 2005 increased by $40.4 million or 11.7% compared to December 31, 2004.
Real estate loans increased by $15.8 million or 5.2% in 2006 compared to 2005, and by $47.4 million or 18.5%, in 2005 compared to 2004. Construction loans increased by $10.9 million or 41.3% in 2006 compared to 2005, but decreased by $2.8 million or 9.5% in 2005 compared to 2004. Commercial loans increased by $13.1 million or 24.6% in 2006 compared to 2005, but decreased by $5.8 million or 9.8% in 2005 compared to 2004. Consumer loans represent a nominal portion of total loans. They decreased $0.1 million in 2006, while they increased $0.8 million or 32.1% in 2005 compared to 2004. During 2006, the Bank purchased single family loans totaling $15,147,000, of which $12,831,000 was outstanding as of December 31, 2006.
Table 8 presents a detailed analysis of loans outstanding at December 31, 2002 through December 31, 2006.
The following table shows the Bank's loan maturities and sensitivities to changes in interest rates as of December 31, 2006.
Investment Portfolio - --------------------
Investments at December 31, 2006 were $94,945,000, a decrease of $18,518,000 or 16.3% over 2005. At December 31, 2005 they were $113,463,000, an increase of $10,640,000 or 10.3% over 2004. The decrease in investments in 2006 was achieved primarily through the sale of approximately $20,984,000 of investment securities during the fourth quarter of 2006. These proceeds were used to repay short term borrowings and to fund part of the increase in loans. Federal Home Loan Bank advances funded the remainder of the loan increase, and helped offset the decrease in deposits.
Available funds are first used to fund Loans, then Investments, and the remainder is sold as Federal Funds. The primary source of funds is the deposit base. If more funds are needed, maturities from the Investment Portfolio maturity may be used, as well as sales and calls, which accounts for the volume variances in Investments. The Bank's investment portfolio is concentrated in U. S. Government Agencies and in obligations of States and their political subdivisions. The Bank believes this provides for an appropriate liquidity level.
The following table sets forth the maturity distribution and interest rate sensitivity of investment securities at December 31, 2006:
The following table shows the securities portfolio mix at December 31, 2006, 2005 and 2004.
Deposits - --------
The increase in average earning assets in 2006 was funded by increases in average deposits and from the Federal Home Loan Bank advances. During 2006, average deposits were $490,580,000, a increase of $23,459,000, or 5.0% over 2005. During 2005, average deposits were $467,121,000, an increase of $67,537,000 or 16.9% over 2004. In 2006, average interest-bearing deposits were $368,623,000, an increase of $17,833,000, or 5.1% over 2005. In 2005, average interest-bearing deposits were $350,790,000, an increase of $58,964,000 or 20.2% over 2004.
The prime lending rate rose from 4% at the beginning of 2004 to 7.25% at the end of 2005 and 8.25% at the end of 2006. Time deposits lagged the prime rate changes because their rates changed only as certificates matured or new certificates were issued. Thus, interest-bearing demand costs averaged 0.2% in 2004, 0.3% in 2005 and 0.5% in 2006. Money market deposit costs averaged 0.9% in 2004, 1.7% in 2005, and 2.9% in 2006. Savings rates averaged 0.3% in 2004 and 2005, and 0.5% in 2006. Finally, average interest on time certificates of deposit of $100,000 or more was 1.5% in 2004, 2.7% in 2005 and 4.0% in 2006. On certificates under $100,000, average rates were 1.7% in 2004, 2.5% in 2005, and 3.1% in 2006.
The following table summarizes the distribution of average deposits and the average rates paid for them in the periods indicated:
The following table indicates the maturity schedule of time deposits of $100,000 or more:
Capital - -------
At December 31, 2006, shareholders' equity of the Company was $62,063,000, an increase of $6,820,000 or 12.3% over 2005; at December 31, 2005 shareholders' equity was $55,243,000, an increase of $2,614,000 or 5.0% over 2004. The increases were primarily attributable to retention of net income after payment of cash dividends of $1,625,000 in 2006, $1,542,000 in 2005, and $1,526,000 in 2004.
In 1989, the Federal Deposit Insurance Corporation (FDIC) established risk-based capital guidelines requiring banks to maintain certain ratios of "qualifying capital" to "risk-weighted assets". Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the Company's Tier 1 capital consists of common shareholders' equity, though other instruments such as certain types of preferred stock can also be included in Tier 1 capital. Tier 2 capital consists of eligible reserves for possible loan losses and qualifying subordinated notes and debentures. Total capital is the sum of Tier 1 plus Tier 2 capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance sheet assets and off-balance sheet obligations.
At year-end 1990, the FDIC also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by quarterly average assets during the reporting period. This requirement established a minimum leverage ratio of 3.0% for the highest rated banks and ratios of 100 to 200 basis points higher for most other banks. Furthermore, in 1993, the FDIC began assessing risk-based deposit insurance assessments based on financial institutions' capital resources and "management strength", as mandated by the FDIC Improvement Act of 1991. To qualify for the lowest insurance premiums as indicated in the following table, "well-capitalized" financial institutions must maintain risk-based Tier 1 and total capital ratios of at least 6.0% and 10.0% respectively. "Well-capitalized financial institutions must also maintain a leverage ratio equal to or exceeding 5.0%.
The following table shows the risk-based capital ratios and the leverage ratios at December 31, 2006, 2005 and 2004 for the Bank.
Minimum "Well Capitalized" Risk-Based Capital Ratios 2006 2005 2004 Requirements ------------------------- ----------------------------
Tier 1 Capital 11.03% 10.64% 12.69% > 6.00% -
Total Capital 11.98% 11.56% 13.50% > 10.00% -
Leverage Ratios 10.06% 9.47% 10.71% > 5.00% -
Liquidity - ---------
The Company's primary source of liquidity on a stand-alone basis is dividends from the Bank. The payment of dividends by the Bank is subject to regulatory restrictions. Liquidity is a measure of the Company's ability to convert assets into cash with minimum loss. Liquidity consists of cash and due from other banks accounts, including time deposits, federal funds sold, and Securities Available-for-Sale. The Company's policy is to maintain a liquidity ratio of 20% or greater of total assets. As of December 31, 2006, the Company's primary liquidity was 20.98%, compared to 26.14% in 2005 and 24.47% in 2004. During the fourth quarter of 2006, management of the Bank sold investment securities and used the sale proceeds to fund loan originations. This caused a significant decrease in the liquidity ratio for 2006. Total Liquid Assets were $121,967,000 in 2006, $148,761,000 in 2005, and $119,907,000 in 2004. The objective of liquidity management is to ensure that the Company has funds available to meet all present and future financial obligations and to take advantage of business opportunities as they occur. Financial obligations arise from withdrawals of deposits, repayment on maturity of purchased funds, extension of loans or other forms of credit, payment of operating expenses and payments of dividends.
Core deposits, which consist of all deposits other than time deposits, have provided the Company with a sizable source of relatively stable low-cost funds. The Company's average core deposits funded 62.3% of average total assets of $575,116,000 for the year ended December 31, 2006, 64.8% of average total assets of $529,741,000 for the year ended December 31, 2005; and funded 67.4% of average total assets of $461,091,000 for the year ended December 31, 2004.
As of December 31, 2006, the Company had contractual obligations and other commercial commitments totaling approximately $138,234,000. The following table sets forth the Company's contractual obligations and other commercial commitments as of December 31, 2006. These obligations and commitments will be funded primarily by loan repayments and the Company's liquidity sources, such as cash and due from other banks, federal funds sold, securities available for sale, as well as time deposits.
The largest component of the Company's earnings is net interest income, which can fluctuate widely when significant interest rate movements occur. The prime lending rate went from 5.25% at the end of 2004, to 7.25% at the end of 2005 and 8.25% at the end of 2006. The Company's management is responsible for minimizing the Bank's exposure to interest rate risk and assuring an adequate level of liquidity. This is accomplished by developing objectives, goals and strategies designed to enhance profitability and performance.
Ongoing management of the Company's interest rate sensitivity limits interest rate risk by controlling the mix and maturity of assets and liabilities. 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 is provided by the Company's ability to attract deposits. The primary source of liability liquidity is the Bank's customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. The Company has federal fund borrowing facilities for a total of $70,000,000, a Federal Home Loan Bank line of credit of up to 25% of total assets, and a Federal Reserve Bank facility. Management believes the
Company's liquidity sources at December 31, 2006 are adequate to meet its operating needs in 2007 and into the foreseeable future.
Effect of Changing Prices - -------------------------
The results of operations and financial conditions presented in this report are based on historical cost information and are not adjusted for the effects of inflation.
Since the assets and liabilities of banks are primarily monetary in nature (payable in fixed, determinable amounts), the performance of the Company is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.
The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plant and inventories. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, increases in the price of goods and services will result in increased operating expenses.
The following table includes key ratios, including returns on average assets and equity.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
Interest Rate Risk - ------------------
Closely related to the concept of liquidity is the concept of interest rate sensitivity (i. e., the extent to which assets and liabilities are sensitive to changes in interest rates). Interest rate sensitivity is often measured by the extent to which mismatches or "gaps" occur in the repricing of assets and liabilities within a given time period. Gap analysis is used to quantify such mismatches. A "positive" gap results when the amount of earning assets repricing within a given time period exceeds the amount of interest-bearing liabilities repricing within that time period. A "negative" gap results when the amount of interest-bearing liabilities repricing within a given time period exceeds the amount of earning assets repricing within such time period.
In general, a financial institution with a positive gap in relevant time periods will benefit from an increase in market interest rates and will experience erosion in net interest income if such rates fall. Likewise, a financial institution with a negative gap in relevant time periods will normally benefit from a decrease in market interest rates and will be adversely affected by an increase in rates. By maintaining a balanced interest rate sensitivity position, where interest rate sensitive assets roughly equal interest sensitive liabilities in relevant time periods, interest rate risk can be limited.
As a financial institution, the Company's potential interest rate volatility is a primary component of its market risk. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those that possess a short-term maturity. Based upon the nature of the Company's operations, the Company is not subject to foreign currency or commodity price risk. The Company does not own any trading assets and does not have any hedging transactions in place, such as interest rate swaps and caps.
The Company's Board of Directors has adopted an Asset/Liability policy designed to stabilize net interest income and preserve capital over a broad range of interest rate movements. This policy outlines guidelines and ratios dealing with, among others, liquidity, volatile liability dependence, investment portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap analysis ratio. The Board of Directors monitors the Company's performance as compared to Asset/Liability Policy. In addition, to effectively administer the Asset/Liability Policy and to monitor exposure to fluctuations in interest rates, the Company maintains an Asset/Liability Committee, consisting of the Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Branch Administrator, and Controller. This committee meets monthly to review the Company's lending and deposit-gathering activities, to review competitive interest rates, to develop strategies to implement the Asset/Liability Policy and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as "gap analysis") and an interest rate risk management model. With the interest rate risk management model, the Company projects future net interest income, and then estimates the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. The Company also uses the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging the Company's interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference (or "interest rate sensitivity gap") between the assets and liabilities that are estimated to reprice during each time period and cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount rates.
Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures.
The following table sets forth the estimated maturity/repricing structure of the Company's interest-bearing assets and interest-bearing liabilities at December 31, 2006. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of interest-bearing demand deposits and savings deposits are assumed to be "core" deposits, or deposits that will remain at the Company regardless of market interest rates. The table does not assume any prepayment of fixed-rate loans.
Changes in estimates and assumptions made for interest rate sensitivity modeling and gap analysis could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the impact of general interest rate movements on the Company's net interest income or net portfolio value.
Because of the limitations in the gap analysis discussed above, members of the Company's Asset/Liability Management Committee believe that the interest sensitivity modeling more accurately reflects the effects and exposure to changes in interest rates. Net interest income simulation considers the relative sensitivities of the balance sheet, including the effect of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest income simulation is designed to address the probability of interest rate changes and behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance sheet items. The starting point (or "base case") for the following table is the Company's net portfolio at December 31, 2006, using current discount rates, and an estimate of net interest income for 2006 assuming that both interest rates and the Company's interest-sensitive assets and liabilities remain at December 31, 2006 levels. The "rate shock" information in the table shows estimates of net portfolio value at December 31, 2006 and net interest income for 2006 assuming fluctuations or "rate shocks" of minus 100 and 200 basis points and plus 100 and 200 basis points. Rate shocks assume that current interest rates change immediately. The information set forth in the following table is based on significant estimates and assumptions, and constitutes a forward-looking statement within the meaning of that term set forth in Rule 175 under the Securities Act of 1933 and Rule 3b-6(c) of the Securities Exchange Act of 1934.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors FNB Bancorp
We have audited the accompanying consolidated balance sheets of FNB Bancorp and subsidiary (the Company) as of December 31, 2006 and 2005 and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash flows for the two years ended December 31, 2006. We have also audited management's assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FNB Bancorp and subsidiary as of December 31, 2006 and 2005 and the results of their operations and cash flows for the two years ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion management's assessment that FNB Bancorp and subsidiary maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Furthermore, in our opinion, FNB Bancorp and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO.
As discussed in notes 1 and 16 to the financial statements, effective January 1, 2006, the Company changed its method of accounting for share-based payment arrangements to conform to Statement of Financial Accounting Standard No. 123(R), "Share-Based Payment".
/s/ Moss Adams LLP
Stockton, California March 14, 2007
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders FNB Bancorp:
We have audited the accompanying consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows of FNB Bancorp and Subsidiary for the year ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of FNB Bancorp and Subsidiary for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Sacramento, California March 3, 2005
FNB BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2006 and 2005
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(1) The Company and Summary of Significant Accounting Policies
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.
The Bank and the Company entered into an Agreement and Plan of Reorganization dated November 1, 2001 (the Plan of Reorganization), and the shareholders of the Bank approved the Plan of Reorganization at a Special Meeting of the Shareholders of the Bank held on February 27, 2002. The Plan of Reorganization was consummated on March 15, 2002. Each outstanding share of the common stock, par value $1.25 per share, of the Bank (other than any shares as to which dissenters' rights of appraisal have been properly exercised) was converted into one share of the no par common stock of the Company, and the former holders of Bank common stock became the holders of all of the Company common stock. The change in capital structure has been included for all periods presented.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. For the Bank, the significant accounting estimate is the allowance for loan losses (note 1f). A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
(a) Basis of Presentation
The accounting and reporting policies of the Company and its wholly owned subsidiary are in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. The cash equivalents are readily convertible to known amounts of cash and present insignificant risk of changes in value due to original maturity dates of 90 days or less. Included in cash and cash equivalents are amounts restricted for the Federal Reserve requirement of approximately $1,219,000 and $2,358,000 at December 31, 2006 and 2005, respectively.
(c) Investment Securities
Investment securities consist of U.S. Treasury securities, U.S. agency securities, obligations of states and political subdivisions, obligations of U.S. corporations, mortgage-backed securities and other securities. At the time of purchase of a security, the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs, and intent to hold. The Company does not purchase securities with the intent to engage in trading activity. Held to maturity securities are recorded at amortized cost, adjusted for amortization of premiums or accretion of discounts. The Company did not have any investments in the held-to-maturity portfolio at December 31, 2006 or 2005. Available-for-sale securities are recorded at fair value with unrealized holding gains or losses, net of the related tax effect, reported as a separate component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Amortization of premiums and accretion of discounts on debt securities are included in interest income over the life of the related held-to-maturity or available-for-sale security using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
(d) Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheet and measured at fair value. The Company did not hold any derivatives at December 31, 2006 and 2005.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(e) Loans
Loans are reported at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. An impaired loan is measured based upon the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by a charge to the allowance for loan losses.
Unearned discount on installment loans is recognized as income over the terms of the loans by the interest method. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.
Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield, are deferred and amortized over the contractual term of the loan using the interest method.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Restructured loans are loans on which concessions in terms have been granted because of the borrowers' financial difficulties. Interest is generally accrued on such loans in accordance with the new terms. Net interest written off in 2006 was not considered material (see Allowance for Loan Losses caption on page 34 in the Management Discussion and Analysis section).
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(f) Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses inherent in existing loans, standby letters of credit, overdrafts, and commitments to extend credit based on evaluations of collectibility and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans and current and anticipated economic conditions that may affect the borrowers' ability to pay. While management uses these evaluations to determine the level of the allowance for loan losses, future provisions may be necessary based on changes in the factors used in the evaluations.
Material estimates relating to the determination of the allowance for loan losses are particularly susceptible to significant change in the near term. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, the banking regulators, as an integral part of its examination process, periodically review the Bank's allowance for loan losses. The banking regulators may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.
(g) Premises and Equipment
Premises and equipment are reported at cost less accumulated depreciation using the straight-line method over the estimated service lives of related assets ranging from 3 to 50 years original life. Those set up for 50 years were before 1986, when the IRS rules shortened the allowable lives for assets. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
(h) Cash Dividends
The Company's ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
dividends by the Company would be obtained from its investments as well as dividends and/or management fees from First National Bank. First National Bank's ability to pay cash dividends is subject to restrictions imposed under the National Bank Act and regulations promulgated by the Office of the Comptroller of the Currency.
(i) Stock Dividend
On October 27, 2006, the Company announced that its Board of Directors had declared a stock dividend of approximately 135,947 shares, payable at the rate of one share of Common Stock for every twenty (20) shares of Common Stock owned. The stock dividend was paid on December 15, 2006, to shareholders of record on December 1, 2006. The earnings per share data presented have been adjusted for this stock dividend.
(j) Income Taxes
Deferred income taxes are determined using the assets and liabilities method. Under this method, the net deferred tax asset or liability is recognized for tax consequences of temporary differences by applying current tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
(k) Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. There were no antidilutive shares in the years ended December 31, 2006, 2005 and 2004. For each of the years presented, net income is the same for basic and diluted earnings per share. Reconciliation of weighted average shares used in computing basic and diluted earnings per share is as follows:
(l) Stock Option Plans
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment". This Statement requires that compensation costs related to share-based payment transactions be recognized in the financial statements. Measurement of the cost of stock options granted is based on the grant-date fair value of each stock option granted using the Black-Scholes valuation model. The cost is then amortized to expense ratably over each option's five year vesting period. The amortized expense of the stock option's fair value has been included in salaries and employee benefits expense for the three years ended December 31, 2006, 2005 and 2004. Net income and earnings per share calculations include the amortized cost of stock options that vested during each year.
Effective January 1, 2006, the Company adopted SFAS No. 123(R) "Share-Based Payment", on a modified prospective basis.
The expected term of options granted is derived from the output of the option valuation model 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. FNB Bancorp stock has limited liquidity and limited trading activity. Volatility was calculated using historical price changes on a monthly basis over the expected life of the option.
(m) Fair Values of Financial Instruments
The notes to financial statements include various estimated fair value information as of December 31, 2006 and 2005. Such information, which pertains to the Company's financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies and subjective consideration, which vary widely among different financial institutions and which are subject to change.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(n) Income Tax Credits
At December 31, 2006, the Bank had a $2,077,000 equity investment in three partnerships, which own low-income affordable housing projects that generate tax benefits in the form of federal and state housing tax credits. As a limited partner investor in these partnerships, the Company receives tax benefits in the form of tax deductions from partnership operating losses and federal and state income tax credits. The federal and state income tax credits are earned over a 10-year period as a result of the investment properties meeting certain criteria and are subject to recapture for noncompliance with such criteria over a 15-year period. The expected benefit resulting from the low-income housing tax credits is recognized in the period for which the tax benefit is recognized in the Company's consolidated tax returns. These investments are accounted for using the effective yield method and are recorded in other assets on the balance sheet. Under the effective yield method, the Company recognizes tax credits as they are allocated and amortizes the initial cost of the investments to provide a constant effective yield over the period that tax credits are allocated to the Company. The effective yield is the internal rate of return on the investment, based on the cost of the investment and the guaranteed tax credits allocated to the Company. Any
expected residual value of the investment was excluded from the effective yield calculation. Cash received from operations of the limited partnership or sale of the properties, if any, will be included in earnings when realized or realizable. These investments are included in other securities in securities available-for-sale.
(o) Reclassifications
Certain prior year information has been reclassified to conform to current year presentation.
(p) Bank Owned Life Insurance
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005, and 2004
The Corporation purchased insurance on the lives of certain employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as the deferred compensation plan. Increases in the cash surrender value are recorded as other noninterest income in the consolidated statements of income. The cash surrender value of bank owned life insurance is reflected in other assets on the consolidated balance sheets in the amount of $7,267,000 and $7,011,000 at December 31, 2006 and 2005, respectively.
(q) Acquisition
On May 2, 2005, the Company announced that its wholly owned subsidiary, First National Bank of Northern California, completed its acquisition of Sequoia National Bank, which had two offices in San Francisco. Sequoia was consolidated with and merged into First National Bank of Northern California effective April 30, 2005. Sequoia had approximately $62,000,000 in total assets on an historical cost basis. A table showing the fair values of the assets acquired follows this note. Under the terms of the Acquisition Agreement, holders of Sequoia shares of common stock and options received approximately $10,450,000 in cash, after adjustments for certain contingencies specified in the Acquisition Agreement. At closing of the transaction $9,350,000 was paid to the former Sequoia National Bank shareholders, and on November 1, 2005, after submission and payment of all such claims and expenses, the escrow was terminated and the approximately $1,100,000, the balance of funds remaining in escrow, was distributed to the former shareholders of Sequoia National Bank in accordance with their interests. Effective April 30, 2005, the former banking offices of Sequoia National Bank began operating as branch offices of First National Bank of Northern California. In accordance with SFAS No. 141 the Bank recorded the assets acquired and liabilities assumed at their fair values at the acquisition date. The total acquisition cost exceeded the fair value of the new assets acquired by $4,781,000. This amount was recognized at acquisition date as intangible assets consisting of Goodwill of $3,235,000, Loan Premium of $271,000 and Core Deposit intangibles of $1,275,000. Goodwill has been adjusted for tax benefits of $1,394,000, net of deferred income tax liability of $525,000, related to Sequoia National Bank net operating losses that became available to the Company, the Core Deposit Intangibles, and the book reserve for possible loan losses. The tax benefits (Net deferred tax assets) are included in Other Assets, and the Loan Premium included in Net Loans in the table shown below.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by First National Bank of Northern California at the date of the acquisition:
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
During 2006 and 2005, Core Deposit Intangible and Loan Premium were amortized $106,000 and $15,000, respectively.
In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", goodwill will not be expensed over a fixed period of time, but will be tested for impairment at least annually. None of the goodwill is deductible for income tax purposes. Identifiable intangible assets, namely core deposit intangibles and premium on loans, are amortized over their period of benefit. In the fourth quarter of 2006, the annual review of goodwill for impairment was performed, and it was determined that no adjustment was necessary. Additionally, the core deposit intangible and loan premium were evaluated for impairment at the end of each quarter, and no adjustments were determined to be necessary.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The following table shows proforma earnings of FNB Bancorp and its subsidiary combined with Sequoia National Bank as if the acquisition had taken place as of January 1, 2004:
(thousands, except per share data) Consolidated Statements of Earnings Year ended December 31 2005 2004 ------------ ------------ Interest income $ 31,858 $ 27,379 Interest expense 5,836 3,402 ------------ ------------ Net interest income 26,022 23,977
Provision for loan losses 610 480 ------------ ------------ Net interest income after provision for loan losses 25,412 23,497
Noninterest income 3,938 4,136 Noninterest expense 21,860 21,310 ------------ ------------
Earnings before income tax expense 7,490 6,323 Income tax expense 2,232 1,593 ------------ ------------ Net earnings $ 5,258 $ 4,730 ============ ============
Earnings per share data: Basic $ 1.95 $ 1.72 Diluted $ 1.91 $ 1.69
Weighted average shares outstanding: Basic 2,699,000 2,748,000 Diluted 2,758,000 2,799,000
(2) Restricted Cash Balance
Cash and due from banks includes balances with the Federal Reserve Bank (the FRB). The Bank is required to maintain specified minimum average balances with the FRB, based primarily upon the Bank's deposit balances. As of December 31, 2006 and 2005, the Bank maintained deposits in excess of the FRB reserve requirement.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(3) Securities Available-for-Sale
The amortized cost and carrying values of securities available-for-sale are as follows:
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
A total of 78 securities make up the amount of securities in an unrealized loss position for greater than 12 consecutive months. Management periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. Management has determined that no investment security is other-than-temporarily impaired. The unrealized losses are due solely to interest rate changes and the Company has the ability and intent to hold all investment securities with identified impairments resulting from interest rate changes to the earliest of forecasted recovery or the maturity of the underlying investment security.
The amortized cost and carrying value of debt securities as of December 31, 2006, 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.
Amortized Carrying Cost Value Available -for-sale: Due in one year or less $ 28,628,000 28,557,000 Due after one year though five years 34,023,000 33,975,000 Due after five years through ten years 29,094,000 29,210,000 Due after ten years 3,207,000 3,203,000 ------------ ------------ $ 94,952,000 94,945,000 ============ ============
For the years ended December 31, 2006, 2005, and 2004, gross realized gains amounted to $185,000, $15,000, and $4,000, respectively. For the years ended December 31, 2006, 2005, and 2004, gross realized losses amounted to $196,000, $116,000, and $35,000, respectively.
At December 31, 2006 and 2005, securities with an amortized cost of $49,551,000 and $57,801,000 and fair value of $49,635,000 and $57,646,000, respectively, were pledged as collateral for public deposits and for other purposes required by law.
As of December 31, 2006 and 2005, the Bank had investments in Federal Reserve Bank stock classified as other assets in the accompanying balance sheets of $702,000. These investments in Federal Reserve Bank stock are carried at cost, and evaluated periodically for impairment.
BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(4) Loans, Net
Loans are summarized as follows at December 31:
2006 2005 -------------- --------------
Real estate $ 318,655,000 302,813,000 Construction 37,094,000 26,243,000 Commercial 66,139,000 53,070,000 Consumer & other 3,279,000 3,420,000 -------------- -------------- 425,167,000 385,546,000
Allowance for loan losses (5,002,000) (4,374,000) Net deferred loan fees (728,000) (948,000) -------------- -------------- $ 419,437,000 380,224,000 ============== ==============
The Bank had total impaired loans of $2,628,000 and$17,000 at December 31, 2006 and 2005, respectively. The allowance for loan losses related to the impaired loans was $51,000 and $9,000 as of December 31, 2006 and 2005, respectively. The amount of the recorded investment in impaired loans for which there is no related allowance is $2,577,000 and $8,000 as of December 31, 2006 and 2005. During 2006 and 2005, nonaccrual loans represented all impaired loans. The average recorded investment in impaired loans during 2006, 2005 and 2004 was $610,000, $1,205,000 and $4,010,000, respectively. Interest income on impaired loans of $3,000, $0, and $4,800, was recognized for cash payments received in 2006, 2005, and 2004, respectively. The amount of interest on impaired loans not collected in 2006, 2005 and 2004, respectively was $70,000, $2,000 and $255,000.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(5) Allowance for Loan Losses
Changes in the allowance for loan losses are summarized as follows for the years ended December 31:
(6) Related Party Transactions
In the ordinary course of business, the Bank made loans and advances under lines of credit to directors, officers, and their related interests. The Bank's policies require that all such loans be made at substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk or unfavorable features. The following summarizes activities of loans to such parties in 2006 and 2005:
2006 2005 ------------ ------------ Balance, beginning of year $ 3,918,000 3,376,000 Additions 3,354,000 5,673,000 Repayments 3,751,000 5,131,000 ------------ ------------ Balance, end of year $ 3,521,000 3,918,000 ============ ============
(7) Bank Premises, Equipment, and Leasehold Improvements
Bank premises, equipment and leasehold improvements are stated at cost, less accu-mulated depreciation and amortization, and are summarized as follows at December 31:
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Depreciation expense for the years ended December 31, 2006, 2005, and 2004 was $1,183,000, $1,163,000 and $1,282,000, respectively.
(8) Deposits
The aggregate amount of jumbo time certificates, each with a minimum denomination of $100,000 or more, was $77,039,000 and $77,572,000 at December 31, 2006 and 2005, respectively.
At December 31, 2006, the scheduled maturities of all time certificates are as follows:
Year ending December 31: 2007 $ 119,567,000 2008 10,536,000 2009 4,022,000 2010 265,000 -------------- $ 134,390,000 ==============
(9) Commitments and Contingencies
The Bank leases a portion of its facilities and equipment under noncancelable operating leases expiring at various dates through 2009. Some of these leases provide that the Bank pay taxes, maintenance, insurance, and other occupancy expenses applicable to leased premises. Generally, the leases provide for renewal for various periods at stipulated rates.
The minimum rental commitments under the operating leases as of December 31, 2006 are as follows:
Year ending December 31: 2007 $ 499,000 2008 351,000 2009 163,000 -------------- $ 1,013,000 ==============
Total rent expense for operating leases was $554,000, $401,000 and $284,000, in 2006, 2005, and 2004, respectively.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The Bank is engaged in various lawsuits either as plaintiff or defendant in the ordinary course of business and in the opinion of management, based upon the advice of counsel, the ultimate outcome of these lawsuits will not have a material effect on the Bank's financial statements.
(10) Bank Savings Plan
The Bank maintains a salary deferral 401(k) plan covering substantially all employees, known as the First National Bank Savings Plan (the Plan). The Plan allows employees to make contributions to the Plan up to a maximum allowed by law and the Bank's contribution is discretionary. The Plan expense for the years ended December 31, 2006, 2005, and 2004 was $600,000, $626,000 and $540,000, respectively.
(11) Salary Continuation and Deferred Compensation Plans
The Bank maintains a Salary Continuation Plan for certain Bank officers. Officers participating in the Salary Continuation Plan are entitled to receive a monthly payment for a period of fifteen to twenty years upon retirement. The Company accrues such post-retirement benefits over the individual's employment period. The Salary Continuation Plan expense for the years ended December 31, 2006, 2005, and 2004 was $239,000, $325,000 and $305,000, respectively. Accrued compensation payable under the salary continuation plan totaled $1,959,000 and $1,780,000 at December 31, 2006 and 2005, respectively.
The Deferred Compensation Plan allows eligible officers to defer annually their compensation up to a maximum 80% of their base salary and 100% of their cash bonus. The officer will be entitled to receive distribution upon reaching a specified age, passage of at least five years or termination of employment. As of December 31, 2006 and 2005, the related liability included in accrued expenses and other liabilities was $1,935,000 and $1,851,000, respectively.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(12) Income Taxes
The provision for income taxes for the years ended December 31, consists of the following:
2006 2005 2004 ------------ ------------ ------------
Current: Federal $ 2,789,000 2,223,000 1,275,000 State 827,000 387,000 228,000 ------------ ------------ ------------ 3,616,000 2,610,000 1,503,000 ------------ ------------ ------------ Deferred: Federal (69,000) (207,000) 62,000 State 62,000 26,000 12,000 ------------ ------------ ------------ (7,000) (181,000) 74,000 ------------ ------------ ------------ $ 3,609,000 2,429,000 1,577,000 ============ ============ ============
The reasons for the differences between the statutory federal income tax rate and the effective tax rates for the years ended December 31, are summarized as follows:
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The tax effect of temporary differences giving rise to the Bank's net deferred tax asset is as follows:
As of December 31, 2006, the Bank had no state tax credit carryforwards for income tax purposes as these were all used during 2005. Accordingly, there is no valuation allowance as of December 31, 2006 or 2005. Additionally, management believes that it is more likely than not that the deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. The Bank had net operating loss carryforwards resulting from the acquisition of Sequoia National Bank which expire from December 31, 2008 through December 31, 2020, for a total balance of $3,547,000.
(13) Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss is represented by the contractual amount of those instruments and is usually limited to amounts funded or drawn. The contract or notional amounts of these agreements, which are not included in the balance sheets, are an indicator of the Bank's credit exposure. Commitments to extend credit generally carry variable interest rates and are subject to the same credit standards used in the lending process for on-balance-sheet instruments. Additionally, the Bank periodically reassesses the customer's creditworthiness through ongoing credit reviews. The Bank generally
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, and 2005 and 2004
requires collateral or other security to support commitments to extend credit. The following table provides summary information on financial institutions whose contract amounts represent credit risk as of December 31:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial and residential properties.
Equity reserve and unused credit card lines are additional commitments to extend credit. Many of these customers are not expected to draw down their total lines of credit, and therefore, the total contract amount of these lines does not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank issues both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. As of December 31, 2006, there were $1,223,000 issued in financial standby letters of credit. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. As of December 31, 2006 there were $128,000 issued in performance standby letters of credit. The terms of the guarantees will expire in 2006.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The Bank has experienced no draws on these letters of credit, and does not expect to in the future; however, should a triggering event occur, the Bank either has collateral in excess of the letters of credit or embedded agreements of recourse from the customer.
The following methods and assumptions were used by the Company to estimate the fair value of financial instruments.
(a) Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets fair values.
(b) Securities
Fair values for 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.
(c) Loans
Fair values for variable-rate loans that reprice frequently and have no significant change in credit risk are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
(d) Off-Balance Sheet Commitments
Fair values for the company's off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties.
(e) Deposit Liabilities
The fair values estimated for demand deposits (interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
on certificates for a schedule of the aggregate expected monthly maturities on time deposits.
(f) Federal Funds Sold/Purchased
The carrying amount of federal funds sold/purchased approximates their fair values.
(g) The carrying amount of Federal Home Loan Bank advances approximates their fair values.
(h) Bank Owned Life Insurance
The carrying amount is the cash surrender value for all policies.
The following table provides summary information on the estimated fair value of financial instruments at December 31, 2006:
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The following table provides summary information on the estimated fair value of financial instruments at December 31, 2005:
The carrying amounts of loans include $2,628,000 and $17,000 of nonaccrual loans (loans that are not accruing interest) at December 31, 2006 and 2005, respectively. Management has determined that primarily because of the uncertainty of predicting an observable market interest rate, excessive amounts of time and money would be incurred to estimate the fair values of nonperforming loans. As such, these loans are recorded at their carrying amount in the estimated fair value columns. The following aggregate information is provided at December 31, about the contractual provisions of these loans:
2006 2005 ------------ ------------ Aggregate carrying amount $ 2,628,000 17,000 Effective rate 9.61% 13.11% Average term to maturity 7 months 5 months
(14) Significant Group Concentrations of Credit Risk
Most of the Bank's business activity is with customers located within San Mateo and San Francisco counties. Generally, the loans are secured by assets of the borrowers. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers. The Bank does not have significant concentrations of loans to any one industry.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers.
The contractual amounts of credit-related financial instruments such as commitments to extend credit, credit-card arrangements, and letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.
(15) Regulatory matters
The Company, as a bank holding company, is subject to regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2006, that the Company and the Bank have met all capital adequacy requirements to which they are subject.
As of December 31, 2006, the most recent notification from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's categories.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The consolidated actual capital amounts and ratios of FNB Bancorp and Subsidiary are also presented in the following table:
(16) 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 option plan known as the 2002 FNB Bancorp Plan. The Plans allow the Company to grant options to employees of up to 360,571 shares, which includes the effect of stock dividends of common stock. Options currently outstanding become exercisable in one to
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
five years from the grant date, based on a vesting schedule of 20% per year and expire 10 years after the grant date. The options exercise price is the fair value of the options at the grant date.
The amount of compensation expense for options recorded in the years ended December 31, 2006, December 31 2005 and December 31, 2004 was $39,000, $10,000 and $6,000, respectively. The income tax benefit recognized in the income statements for these amounts was under $1,000 for the same three periods.
The total intrinsic value of options exercised during the year ended December 31, 2006 was $54,000 under the 2002 Plan and $39,000 under the 1997 Plan.
The amount of total unrecognized compensation expense related to non-vested options at December 31, 2006 was $91,000, and the weighted average period it will be amortized over is 2.9 years. The amount of total unrecognized compensation expense related to non-vested options at December 31, 2005 was $60,000, and the weighted average period it will be amortized over is 2.5 years. The amount of total unrecognized compensation expense related to non-vested options at December 31, 2004 was $46,000, and the weighted average period it will be amortized over is 1.9 years.
The fair value of each option granted is estimated on the date of grant using the fair value method with the following weighted average assumptions used for grants in 2006; dividend yield of 6.66% for the year; risk-free interest rate of 5.19%; expected volatility of 10.0%; expected life of 6.5 years; and weighted average fair value of $1.50. The assumptions for grants in 2005; dividend yield of 6.98% for the year; risk-free interest rate of 3.91%; expected volatility of 10%; expected life of 5.0 years; and weighted average fair value of $0.75. The assumptions used for grants in 2004; dividend yield of 6.85% for the year; risk-free interest rate of 3.73%; expected volatility of 10%; expected life of 5.0 years; and weighted average fair value of $0.76.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
A summary of option activity under the 2002 FNB Bancorp Plan as of December 31, 2006 and changes during the year then ended is presented below.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
A summary of option activity under the 1997 FNB Bancorp Plan as of December 31, 2006, and changes during the year then ended is presented below. No options have been granted under this plan since 2001.
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(17) Quarterly Data (Unaudited)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(18) Condensed Financial Information of Parent Company
The parent company-only condensed balance sheets, condensed statements of income, and condensed statements of cash flows information are presented as of and for the year ended December 31, as follows:
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - --------------------
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES - --------------------------------
Disclosure Controls and Procedures. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting. The Company's management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2006. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, a company's principal executive and principal financial officers and effected by a company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It includes those policies and procedures that:
a) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;
b) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of a company are being made only in accordance with authorizations of management and the board of directors of the company; and
c) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company's assets that could have a material effect on its financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management has used the criteria established in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") to evaluate the effectiveness of the Company's internal control over financial reporting. Management has selected the COSO framework for its evaluation as it is a control framework recognized by the SEC and the Public Company Accounting Oversight Board, that is free from bias, permits reasonably consistent qualitative and quantitative measurement of the Company's internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting.
Based on our assessment, management has concluded that our internal control over financial reporting, based on criteria established in "Internal Control-Integrated Framework" issued by COSO was effective as of December 31, 2006.
Moss Adams LLP, the registered public accounting firm that audited the consolidated financial statements included in this Annual Report under Item 8, "Financial Statements and Supplementary Data," has issued a report with respect to management's assessment of the effectiveness of the Company's internal control over financial reporting. This report appears at page 51 of this Annual Report and is incorporated here by reference.
Date: March 13, 2007
/s/ THOMAS C. MC GRAW /s/ DAVID A. CURTIS - -------------------------- ------------------------ Thomas C. Mc Graw David A. Curtis Chief Executive Officer Chief Financial Officer
Inherent Limitations on Effectiveness of Controls - -------------------------------------------------
The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
ITEM 9B.
ITEM 9B. OTHER INFORMATION - --------------------------
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE - ---------------------------------------------------------------------- GOVERNANCE - ----------
The information required by Item 10 of Form 10-K is incorporated by reference to the applicable information contained in the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - -------------------------------
The information required by Item 11 of Form 10-K is incorporated by reference to the applicable information contained in the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -----------------------------------------------------------------------
The information required by Item 12 of Form 10-K is incorporated by reference to the applicable information contained in the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------
The information required by Item 13 of Form 10-K is incorporated by reference to the applicable information contained in the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES - -----------------------------------------------
The information required by Item 14 of Form 10-K is incorporated by reference to the applicable information contained in the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, STATEMENT SCHEDULES - ------------------------------------------------------------ (a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. All schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the Financial Statements or notes thereto.
(3) Exhibits.
Exhibit Number Document Description -----------------------------------------------------------------------
**2.1 (deleted)
2.2 Acquisition Agreement dated November 5, 2004, signed among First National Bank of Northern California, Sequoia National Bank and Hemisphere National Bank (incorporated by reference from Exhibit 2.2 to the Company's Current Report on Form 8-K filed with the Commission on November 9, 2004)
2.3 First Addendum to Acquisition Agreement, dated December 13, 2004, signed among First National Bank of Northern California, Sequoia National Bank, Hemisphere National Bank and Privee Financial, Inc. (incorporated by reference from Exhibit 2.5 to the Company's Current Report on Form 8-K filed with the Commission on December 17, 2004)
2.4 Second Addendum to Acquisition Agreement, dated as of April 15, 2005, signed among First National Bank of Northern California, Sequoia National Bank, Hemisphere National Bank and Privee Financial, Inc. (incorporated by Reference from Exhibit 2.4 to the Company's Current Report on Form 8-K Filed with the Commission on May 2, 2005)
**3.1 Articles of Incorporation of FNB Bancorp.
**3.2 Bylaws of FNB Bancorp.
**4.1 Specimen of the Registrant's common stock certificate.
**10.1 Lease agreement dated April 24, 1995, as amended, for Eureka Square Branch Office of First National Bank of Northern California at Eureka Square Shopping Center, Pacifica, California.
**10.2 Lease agreement dated June 8, 1999, as amended, for Linda Mar Branch Office of First National Bank of Nortern California at Linda Mar Shopping Center, Pacifica, California.
**10.3 Lease agreement dated August 21, 1996, as amended, for the Flower Mart facility of First National Bank of Northern California at 640 Brannan Street, Suite 102, San Francisco, California.
**10.4 (deleted)
**10.5 (deleted)
**10.6 First National Bank of Northern California 1997 Stock Option Plan.*
**10.7 Form of Nonstatutory Stock Option Agreement under the First National Bank of Northern California 1997 Stock Option Plan.*
**10.8(a) Form of Incentive Stock Option Agreement under the First National Bank of Northern California 1997 Stock Option Plan.*
**10.8(b) Form of Incentive Stock Option Agreement (Standard Provisions under the First National Bank of Northern California 1997 Stock Option Plan.*
**10.9 First National Bank Profit Sharing and 401(k) Plan dated August 26, 1969.*
**10.10 First National Bank Deferred Compensation Plan dated November 1, 1997.*
**10.11 Salary Continuation Agreement between First National Bank of Northern California And Michael R. Wyman, dated December 20, 1996.*
**10.12 Salary Continuation Agreement between First National Bank of Northern California And Paul B. Hogan dated December 20, 1996.*
**10.13 Salary Continuation Agreement between First National Bank of Northern California And James B. Ramsey, dated December 23, 1999.*
**10.14 Form of Management Continuity Agreement signed on July 20, 2000, between First National Bank of Northern California and Jim D. Black, Charles R. Key and Anthony J. Clifford.*
**10.15 (deleted)
**10.16 Communications Site Lease Agreement as amended dated March 30, 1999, between First National Bank of Northern California, as Lessor and Nextel of California, Inc., as Lessee, with respect to Redwood City Branch Office.
**10.17 (deleted)
**10.18 Separation Agreement between First National Bank of Northern California and Paul B. Hogan, dated December 5, 2001.*
***10.19 First Amendment to Separation Agreement between First National Bank of Northern California and Paul B. Hogan, dated March 22, 2002.*
****10.20 FNB Bancorp Stock Option Plan (effective March 15, 2002).*
****10.21 FNB Bancorp Stock Option Plan, Form of Incentive Stock Option Agreement.*
****10.22 FNB Bancorp Stock Option Plan, Form of Nonstatutory Stock Option Agreement.*
*****10.23 FNB Bancorp 2002 Stock Option Plan (adopted June 28, 2002).*
*****10.24 FNB Bancorp 2002 Stock Option Plan, Form of Incentive Stock Option Agreement.*
*****10.25 FNB Bancorp 2002 Stock Option Plan, Form of Nonstatutory Stock Option Agreement.*
******10.26 Lease Agreement dated August 13, 2003, for San Mateo Branch Office of First National Bank of Northern California, located at 150 East Third Avenue, San Mateo, CA 94401.
10.27 Salary Continuation Agreement and Split-Dollar Agreement for Jim D. Black (incorporated by reference from Exhibit 10.27 to the Company's Current Report on Form 8-K filed with the Commission on September 10, 2004)*
10.28 Salary Continuation Agreement and Split-Dollar Agreement for Anthony J. Clifford (incorporated by reference from Exhibit 10.28 to the Company's Current Report on Form 8-K filed with the Commission on September 10, 2004)*
10.29 Amended and Restated Salary Continuation Agreement and Split-Dollar Agreement for James B. Ramsey (incorporated by reference from Exhibit 10.29 to the Company's Current Report on Form 8-K filed with the Commission on September 10, 2004)*
*******10.30 Lease Agreement dated May 1, 2003, as amended by Assignment, Assumption and Consent Agreement for the Financial District Branch Office of First National Bank of Northern California located at 65 Post Street, San Francisco, California.
*******10.31 Lease Agreement dated July 1, 1999, as amended by Assignment, Assumption and Consent Agreement for the Portola Branch Office of First National Bank of Northern California located at 699 Portola Drive, San Francisco, California.
10.32 Amendment to Salary Continuation Agreement for Jim D. Black (incorporated by reference from Exhibit 99.37 to the Company's Current Report on 10-K filed with the Commission on July 26, 2006)
10.33 Amendment to Salary Continuation Agreement for Anthony J. Clifford (incorporated by reference from Exhibit 99.38 to the Company's Current Report on Form 8-K filed with the Commission on July 26, 2006)
10.34 Amendment to Amended and Restated Salary Continuation Agreement for James B. Ramsey (incorporated by reference from Exhibit 99.39 to the Company's Current Report on Form 8-K filed with the Commission on July 26, 2006)
******14.0 Code of Ethics
21.1 The Registrant has one subsidiary, First National Bank of Northern California.
23.1 Consent of Moss Adams LLP
23.2 Consent of KPMG LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification (principal executive officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (principal financial officer)
32.0 Section 1350 Certifications
- --------------------------------------------------------------------------------
* Denotes management contracts, compensatory plans or arrangements.
** Incorporated by reference to registrant's Registration Statement on Form S-4 (No. 333-74954) filed with the Commission on December 12, 2001.
*** Incorporated by reference to registrant's Annual Report on Form 10-K filed with the Commission on March 31, 2002.
**** Incorporated by reference to registrant's Statement on Form S-8 (No. 333-91596) filed with the Commission on July 1, 2002.
***** Incorporated by reference to registrant's Registration Statement on Form S-8 (No. 333-98293) filed with the Commission on August 16, 2002.
****** Incorporated by reference to registrant's Annual Report on Form 10-K filed with the Commission on March 30, 2003.
******* Incorporated by reference to registrant's Annual Report on Form 10-K filed with the Commission on March 29, 2006.
An Annual Report for the fiscal year ended December 31, 2006, and Notice of Annual Meeting and Proxy Statement for the Company's 2007 Annual Meeting will be mailed to security holders subsequent to the date of filing this report. Copies of said materials will be furnished to the Commission in accordance with the Commission's Rules and Regulations
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FNB BANCORP
Dated: March 13, 2007 By: /s/ THOMAS C. MCGRAW ---------------------------------- Thomas C. McGraw Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ MICHAEL R. WYMAN Chairman of the Board March 13, 2007 - --------------------------- of Directors Michael R. Wyman
/s/ THOMAS C. MCGRAW Director, Chief Executive March 13, 2007 - --------------------------- Officer and Secretary Thomas C. McGraw
/s/ DAVID A. CURTIS Senior Vice President and March 13, 2007 - --------------------------- Chief Financial Officer David A. Curtis (Principal Financial Officer and Principal Accounting Officer)
/s/ MICHAEL PACELLI Director March 13, 2007 - --------------------------- Michael Pacelli
/s/ NEIL J. VANNUCCI Director March 13, 2007 - --------------------------- Neil J. Vannucci
/s/ EDWARD J. WATSON Director March 13, 2007 - --------------------------- Edward J. Watson
/s/ LISA ANGELOT Director March 13, 2007 - --------------------------- Lisa Angelot
/s/ JIM D. BLACK Director and President March 13, 2007 - --------------------------- Jim D. Black
/s/ ANTHONY J. CLIFFORD Director and Executive March 13, 2007 - --------------------------- Vice President and Chief Anthony J. Clifford Operating Officer