10-Q 1 fnb_q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2002 ------------------------------------------------- FNB BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) California ---------------------------------------------- (State or other jurisdiction of incorporation) 000-49693 92-2115369 ------------------------ --------------------------------- (Commission File Number) (IRS Employer Identification No.) 975 El Camino Real, South San Francisco, California 94080 --------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 588-6800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock as of November 12, 2002: 2,321,236 shares. PART I--FINANCIAL INFORMATION Item 1. Financial Statements FNB BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) ASSETS
September 30 December 31 2002 2001 -------- -------- Cash and due from banks $ 18,165 $ 22,493 Federal funds sold 6,000 -- -------- -------- Cash and cash equivalents 24,165 22,493 Securities available-for-sale 81,073 65,311 Loans, net 281,919 288,067 Premises and equipment, net 11,385 11,655 Accrued interest receivable and other assets 9,232 9,862 -------- -------- $407,774 $397,388 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand, noninterest bearing $ 87,186 $ 87,982 Demand, interest bearing 46,959 55,357 Savings and money market 129,579 98,891 Time 90,012 101,849 -------- -------- Total deposits 353,736 344,079 Federal funds purchased -- 2,100 Accrued expenses and other liabilities 3,724 4,686 -------- -------- Total liabilities 357,460 350,865 -------- -------- Stockholders' equity Preferred stock, no par value, authorized 5,000,000 -- -- shares; issued and outstanding - none Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 2,321,236 shares at September 30, 2002 and 2,318,849 shares at December 31, 2001 23,452 23,396 Retained earnings 24,852 22,546 Accumulated other comprehensive income 2,010 581 -------- -------- Total stockholders' equity 50,314 46,523 -------- -------- Total liabilities and stockholders' equity $407,774 $397,388 ======== ========
See accompanying notes to unaudited consolidated financial statements. 2 FNB BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (In thousands, except per share amounts)
Three months ended Nine months ended September 30, September 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Interest income: Interest and fees on loans $ 5,614 $ 6,879 $ 16,957 $ 20,266 Interest on securities 375 619 1,335 2,128 Interest on tax-exempt securities 435 330 1,099 1,110 Federal funds sold 92 100 208 595 ---------- ---------- ---------- ---------- Total interest income 6,516 7,928 19,599 24,099 Interest expense: Interest on deposits 1,089 1,942 3,387 6,469 Other 1 3 13 7 ---------- ---------- ---------- ---------- Total interest expense 1,090 1,945 3,400 6,476 ---------- ---------- ---------- ---------- Net interest income 5,426 5,983 16,199 17,623 Provision for loan losses -- 75 150 225 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 5,426 5,908 16,049 17,398 Noninterest income: Service charges 480 409 1,333 1,205 Credit card fees 255 262 709 727 Gain on sales of securities 121 21 121 56 Other income 49 58 218 321 ---------- ---------- ---------- ---------- Total noninterest income 905 750 2,381 2,309 Noninterest expense: Salaries and employee benefits 2,683 2,769 7,963 8,035 Occupancy expense 311 320 926 943 Equipment expense 374 375 1,594 1,114 Professional fees 241 123 915 378 Telephone, postage and supplies 249 250 835 761 Bankcard expenses 215 58 603 389 Other expense 441 451 1,352 1,470 ---------- ---------- ---------- ---------- Total noninterest expense 4,514 4,346 14,188 13,090 ---------- ---------- ---------- ---------- Earnings before income tax expense 1,817 2,312 4,242 6,617 Income tax expense 457 740 1,101 2,118 ---------- ---------- ---------- ---------- NET EARNINGS $ 1,360 $ 1,572 $ 3,141 $ 4,499 ========== ========== ========== ========== Earnings per share data: Basic $ 0.59 $ 0.71 $ 1.35 $ 2.03 Diluted $ 0.58 $ 0.71 $ 1.35 $ 2.03 Weighted average shares outstanding: Basic 2,321,236 2,214,092 2,319,680 2,214,092 Diluted 2,331,751 2,219,606 2,331,093 2,219,606 Cash dividends per share $ 0.12 $ 0.12 $ 0.36 $ 0.36
See accompanying notes to unaudited consolidated financial statements 3 FNB BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine months ended September 30 2002 2001 -------- -------- Cash flow from operating activities Net earnings $ 3,141 $ 4,499 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 1,282 754 Gain on sale of securities (121) (56) Provision for loan losses 150 225 Changes in assets and liabilities Accrued interest receivable and other assets 630 (912) Accrued expenses and other liabilities (80) (160) -------- -------- Net cash provided by operating activities 5,002 4,350 -------- -------- Cash flows from investing activities Purchase of securities available-for-sale (38,614) (18,978) Proceeds from matured/called/securities available-for-sale 24,740 36,139 Net decrease (increase) in loans 5.998 (55,468) Proceeds from sale of automobile -- 8 Purchases of bank premises, equipment, leasehold improvements (952) (1,672) -------- -------- Net cash used in investing activities (8,828) (39,971) -------- -------- Cash flows from financing activities Net increase in demand and savings deposits 21,495 19,368 Net (decrease) increase in time deposits (11,838) 1,877 Net decrease in federal funds purchased (2,100) -- Dividends paid (2,041) (2,451) Issuance of common stock 57 -- Payments on capital note payable (75) (71) -------- -------- Net cash provided by financing activities 5,498 18,723 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,672 (16,898) Cash and cash equivalents at beginning of period 22,493 41,753 -------- -------- Cash and cash equivalents at end of period $ 24,165 $ 24,855 ======== ======== Additional cash flow information Interest paid $ 3,816 $ 6,547 Income taxes paid $ 530 $ 2,188
See accompanying notes to unaudited consolidated financial statements. 4 FNB BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE A - BASIS OF PRESENTATION FNB Bancorp (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on February 28, 2001. The consolidated financial statements include the accounts of FNB Bancorp and its wholly owned subsidiary, First National Bank of Northern California (the Bank). The Bank provides traditional banking services in San Mateo and San Francisco counties. 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 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. Significant intercompany transactions and balances have been eliminated in consolidation. The financial statements include all adjustments of a normal and recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods. The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2001. Results of operations for interim periods are not necessarily indicative of results for the full year. 5 NOTE B - LOANS The loan portfolio consisted of the following at the dates indicated: September 30, December 31, (In thousands) 2002 2001 --------- --------- Real Estate $ 211,008 $ 217,604 Construction 36,437 34,062 Commercial 37,887 39,195 Consumer 2,058 2,600 --------- --------- Gross loans 287,390 293,461 Net deferred loan fees (1,801) (1,851) Allowance for loan losses (3,670) (3,543) --------- --------- Net loans $ 281,919 $ 288,067 ========= ========= NOTE C - EARNINGS PER SHARE CALCULATION Earnings per common share (EPS) are computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings by the weighted average of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Earnings per share have been computed based on the following (dollars in thousands):
Three months ended Nine months ended (In thousands, except number of shares) September 30, September 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net earnings $ 1,360 $ 1,572 $ 3,141 $ 4,499 Average number of shares outstanding 2,321,236 2,214,092 2,319,680 2,214,092 Effect of dilutive options 10,515 5,514 11,413 5,514 ---------- ---------- ---------- ---------- Average number of shares outstanding used to calculate diluted earnings per share 2,331,751 2,219,606 2,331,093 2,219,606 ========== ========== ========== ==========
Options to purchase 15,336 shares of common stock were not included in the computation of diluted EPS for nine months ended September 30, 2002, because the options' exercise price was greater than the average market price of the common shares. Options to purchase 17,466 shares of common stock were not included in the computation of diluted EPS for nine months ended September 30, 2001 for the same reason. The options that expire on May 31, 2008 were still outstanding as of September 30, 2002. NOTE D - COMPREHENSIVE INCOME Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income consists of net unrealized gains 6 on investment securities available for sale. Comprehensive income for the three months ended September 30, 2002 was $2,437,000 compared to $1,909,000 for the three months ended September 30, 2001. Comprehensive income for the nine months ended September 30, 2002 was $4,570,000 compared to $5,222,000 for the nine months ended September 30, 2001. NOTE E - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of Statement 142 effective January 1, 2002. The Company does not have any goodwill and intangible assets acquired in business combinations. The adoption of Statement 142 did not have a material impact on the financial condition or operating results of the Company. Accounting For Asset Retirement Obligations The FASB issued Statement No. 143, Accounting for Asset Retirement Obligations in August 2001. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. As a result, Statement No. 143 applies to all entities that have legal obligations associated with the retirement of long-lived tangible assets that result from the acquisition, construction, development or normal use of the asset. As used in this Statement, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppels. Statement No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Since the requirement is to recognize the obligation when incurred, approaches that have been used in the past to accrue the asset retirement obligation over the life of the asset are no longer acceptable. Statement No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Enterprises are 7 required to adopt Statement No. 143 for fiscal years beginning after June 15, 2002. Early adoption is encouraged. The Company does not expect adoption of Statement No. 143 to have a material impact on the financial condition or operating results of the Company. Accounting For The Impairment Or Disposal Of Long-Lived Assets In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management's ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. The Company adopted the provisions of Statement 144 on January 1, 2002. The adoption of Statement No. 144 did not have a material impact on the financial condition or operating results of the Company. Rescission Of Sfas No. 4, 44, And 64, Amendments Of Sfas No. 13, And Technical Corrections Statement Financial Accounting Standards No. 145 rescinds SFAS No. 4, which requires all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded. The accounting, disclosure and financial statements provision of SFAS No. 145 are effective for financial statements in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion No. 30 for classification as an extraordinary item shall be reclassified. The implementation of Statement No. 145 is not expected to have a material impact on the financial condition or operating results of the Company. Accounting For Costs Associated With Exit Or Disposal Activities The Financial Accounting Standards Board issued FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS 146), which requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an 8 exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of SFAS 146 are to apply prospectively to exit or disposal activities initiated after December 31, 2002. Acquisitions Of Certain Financial Institutions On October 1, the Financial Accounting Standards Board issued Financial Accounting Standard (FAS) No. 147, Acquisitions of Certain Financial Institutions. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of FAS 141, Business Combinations. FAS 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with FAS 141 and the related intangibles accounted for in accordance with FAS 142, Goodwill and Other Intangible Assets. FAS 147 removes such acquisitions from the scope of FAS 72, Accounting for Certain Acquisitions of Banking or Thrifts Institutions, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved "troubled" institutions. FAS 147 also amends FAS 144, Accounting for the Impairment of Disposal of Long-Lived Assets to include in its scope long-term customer-relations intangible assets of financial institutions. FAS 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of FAS 72. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements relating to future results of the Company (including certain projections and business trends) that are considered "forward-looking statements." Actual results may differ materially from those projected as a result of certain risks and uncertainties including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Company's market, equity and bond market fluctuations, personal and corporate customers' bankruptcies and financial condition, inflation and results of litigation. Accordingly, historical performance, as well as reasonably applied projections and assumptions, may not be a reliable indicator of future earnings due to risks and uncertainties. As circumstances, conditions or events change that affect the Company's assumptions and projections on which any of the statements are based, the Company disclaims any obligation to issue any update or revision to any forward-looking statement contained herein. 9 Earnings Analysis ----------------- Net earnings for the quarter and nine months ended September 30, 2002 were $1,360,000 and $3,141,000 respectively, compared to net earnings of $1,572,000 and $4,499,000 respectively, for the quarter and nine months ended September 30, 2001. The year 2001 experienced a succession of 11 reductions in the prime lending rate and the effects of the lower rate have continued through the third quarter of 2002. As a result, net interest income for the quarter ended September 30, 2002 decreased $557,000 compared to the quarter ended September 30, 2001. Net interest income for nine months ended September 30, 2002 decreased $1,424,000 compared to the nine months ended September 30, 2001. Net interest income is the difference between interest yield generated by earning assets and the interest expense associated with the funding of those assets. The following tables present an analysis of net interest income and average earning assets and liabilities for the three- and nine-month periods ended September 30, 2002 compared to the three- and nine-month periods ended September 30, 2001. Table 1 NET INTEREST INCOME AND AVERAGE BALANCES ------- FNB BANCORP AND SUBSIDIARY
Three months ended September 30 2002 2001 ------------------------------ ------------------------------ Interest Average Interest Average Average Income Yield Average Income Yield INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost) -------- -------- -------- -------- -------- -------- Loans, gross $285,465 $ 5,614 7.80% $283,137 $ 6,879 9.64% Taxable securities 42,131 375 3.53 41,540 619 5.91 Nontaxable securities 31,643 435 5.45 28,571 330 4.58 Federal funds sold 22,694 92 1.61 11,152 100 3.56 -------- -------- -------- -------- Total interest earning assets $381,933 $ 6,516 6.77 $364,400 $ 7,928 8.63 NONINTEREST EARNING ASSETS Cash and due from banks $ 17,387 $ 23,039 Premises and equipment 11,522 11,967 Other assets 5,797 6,294 -------- -------- Total noninterest earning assets $ 34,706 $ 41,300 -------- -------- TOTAL ASSETS $416,639 $405,700 ======== ======== INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 50,371 ($ 64) (0.50) $ 52,123 ($ 133) (1.01) Money market 77,919 (317) (1.61) 59,405 (399) (2.66) Savings 52,642 (79) (0.60) 46,777 (191) (1.62) Time deposits 93,688 (629) (2.66) 105,324 (1,219) (4.59) Federal funds purchased and other Borrowings 84 (1) (4.72) 258 (3) (4.61) -------- -------- -------- -------- Total interest bearing liabilities $274,704 ($ 1,090) (1.57) $263,887 ($ 1,945) (2.92) -------- -------- -------- -------- NONINTEREST BEARING LIABILITIES Demand deposits 88,018 89,227 Other liabilities 4,989 6,287 -------- -------- Total noninterest bearing liabilities $ 93,007 $ 95,514 -------- -------- TOTAL LIABILITIES $367,711 $359,401 Stockholders' equity $ 48,928 $ 46,299 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $416,639 $405,700 ======== ======== NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 5,426 5.64% $ 5,983 6.59%
10 Interest income is reflected on an actual basis, not on a fully taxable equivalent basis. Yield on gross loans was not adjusted for nonaccrual loans, which were not considered material for this calculation. Table 2 NET INTEREST INCOME AND AVERAGE BALANCES ------- FNB BANCORP AND SUBSIDIARY
Nine months ended September 30 2002 2001 ------------------------------ ------------------------------ Interest Average Interest Average Average Income Yield Average Income Yield INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost) -------- -------- -------- -------- -------- -------- Loans, gross $289,739 $ 16,957 7.82% $265,442 $ 20,266 10.21% Taxable securities 37,373 1,335 4.78 46,009 2,128 6.18 Nontaxable securities 31,550 1,099 4.66 32,001 1,110 4.64 Federal funds sold 17,026 208 1.63 16,851 595 4.72 -------- -------- -------- -------- Total interest earning assets $375,688 $ 19,599 6.97 $360,303 $ 24,099 8.94 NONINTEREST EARNING ASSETS Cash and due from banks $ 18,426 $ 22,621 Premises and equipment 11,647 11,752 Other assets 5,897 5,948 -------- -------- Total noninterest earning assets $ 35,970 $ 40,321 -------- -------- TOTAL ASSETS $411,658 $400,624 ======== ======== INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 53,229 ($ 194) (0.49) $ 54,862 ($ 592) (1.44) Money market 69,421 (866) (1.67) 55,420 (1,206) (2.91) Savings 51,829 (230) (0.59) 45,910 (629) (1.83) Time deposits 97,154 (2,097) (2.89) 105,514 (4,042) (5.12) Federal funds purchased and other Borrowings 308 (13) (5.64) 226 (7) (4.14) -------- -------- -------- -------- Total interest bearing liabilities $271,941 ($ 3,400) (1.67) $261,932 ($ 6,476) (3.31) -------- -------- -------- -------- NONINTEREST BEARING LIABILITIES Demand deposits 87,190 87,825 Other liabilities 4,564 5,614 -------- -------- Total noninterest bearing liabilities $ 91,754 $ 93,439 -------- -------- TOTAL LIABILITIES $363,695 $355,371 Stockholders' equity $ 47,963 $ 45,253 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $411,658 $400,624 ======== ======== NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 16,199 5.76% $ 17,623 6.54%
11 Interest income is reflected on an actual basis, not on a fully taxable basis. Yield on gross loans was not adjusted for nonaccrual loans, which were not considered material for this calculation. Tables 1 and 2, above, show the various components that contributed to changes in net interest income for the quarterly and nine month periods. The principal earning assets are loans, from a volume perspective as well as from an earnings rate. As mentioned earlier, there was a series of eleven declines in the prime lending rate during 2001, which continues to affect net interest income. For the quarter ended September 30, 2002, compared to the quarter ended September 30, 2001, interest on loans decreased $1,265,000 or 18.39%, while the yield decreased 184 basis points, and average loans outstanding increased $2,328,000. Average taxable securities increased $591,000 in the same periods, as fewer callable issues remained, and reinvestment took place. Yields on these securities decreased 238 basis points, and their income decreased $244,000. Average nontaxable securities increased $3,072,000, and their interest increased $105,000, while the yield increased 87 basis points. Average federal funds sold increased $11,542,000, but interest decreased $8,000, as the much higher volume was offset by decrease in yield from 3.56% to 1.61 % Average total interest earning assets increased by $17,533,000, but their income decreased $1,412,000 and the yield decreased 186 basis points. For the quarter ended September 30, 2002 compared with the quarter ended September 30, 2001, average interest bearing demand deposits decreased $1,752,000, while the rate paid decreased 51 basis points, and the cost decreased $69,000.Average money market deposits increased $18,514,000 but the rate decreased from 2.66% to 1.61%, and the cost decreased $82,000. Average savings accounts increased $5,865,000, while their rate decreased 102 basis points, and the cost decreased $112,000. Average time deposits decreased $11,636,000, as rates decreased 193 basis points, and their cost decreased $590,000. Average federal funds purchased and other borrowed money decreased $174,000, rates increased 11 basis points, but the cost decreased $2,000. Average total interest bearing liabilities increased by $10,817,000, while the overall rate decreased 135 basis points, as costs decreased $855,000. For the nine months ended September 30, 2002, compared to the nine months ended September 30, 2001, interest on loans decreased $3,309,000 or 16.33%, while the yield decreased 239 basis points, although average loans outstanding increased $24,297,000. Average taxable securities decreased $8,636,000. Yields on these securities decreased 140 basis points, and their income decreased $793,000. Average nontaxable securities decreased $451,000, while interest decreased $11,000 and the yield increased slightly by 2 basis points. Average federal funds sold increased $175,000, but interest decreased $387,000 while their yield decreased from 4.72% to 1.63%. Total interest earning assets increased by $15,385,000 but their income decreased by $4,500,000 and their yields decreased 197 basis points. For the nine months ended September 30, 2002 compared with the nine months ended September 30, 2001, average interest bearing demand deposits decreased $1,633,000 and the rate paid decreased 95 basis points, and the cost decreased $398,000. Average money market deposits increased $14,001,000, but the rate decreased from 2.91% to 1.67%, while the cost decreased $340,000. Average savings accounts increased $5,919,000, while their rate decreased 124 basis points, and the cost decreased $399,000. Average time deposits decreased $8,360,000, as rates decreased 223 basis points, and their cost decreased $1,945,000. Average federal funds purchased and other borrowed money increased $82,000, interest increased 150 basis points, and the cost increased $6,000. Average total interest bearing liabilities increased by $10,009,000, while the overall rate decreased 164 basis points, as costs decreased $3,076,000. For the three months and nine months ended September 30, 2002 compared to the three months and nine months ended September 30, 2001, the following Tables 3 and 4 show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), b) changes in rate (changes in rate times the prior year's volume) and (c) changes in rate/volume (changes in rate times change in volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately. 12
Table 3 FNB BANCORP AND SUBSIDIARY RATE/VOLUME VARIANCE ANALYSIS Three Months Ended September 30, (In thousands) 2002 Compared To 2001 Increase (decrease) Interest Variance Income/Expense Attributable To Variance Rate Volume ------- ------- ------- INTEREST EARNING ASSETS Loans ($1,265) ($1,311) $ 46 Taxable securities (244) (249) 5 Nontaxable securities 105 63 42 Federal funds sold (8) (55) 47 ------- ------- ------- Total ($1,412) ($1,552) $ 140 ------- ------- ------- INTEREST BEARING LIABILITIES Demand deposits ($ 69) ($ 65) ($ 4) Money market (82) (157) 75 Savings deposits (112) (121) 9 Time deposits (590) (455) (135) Federal funds purchased and other borrowings (2) -- (2) ------- ------- ------- Total ($ 855) ($ 798) ($ 57) ------- ------- ------- NET INTEREST INCOME (557) (754) $ 197 ======= ======= =======
Table 4 FNB BANCORP AND SUBSIDIARY RATE/VOLUME VARIANCE ANALYSIS Nine Months Ended September 30, (In thousands) 2002 Compared To 2001 Increase (decrease) Interest Variance Income/Expense Attributable To Variance Rate Volume ------- ------- ------- INTEREST EARNING ASSETS Loans ($3,309) ($4,731) $ 1,422 Taxable securities (793) (394) (399) Nontaxable securities (11) 5 (16) Federal funds sold (387) (389) 2 ------- ------- ------- Total ($4,500) (5,509) $ 1,009 ------- ------- ------- INTEREST BEARING LIABILITIES Demand deposits ($398) ($380) ($18) Money market (340) (515) 175 Savings deposits (399) (425) 26 Time deposits (1,945) (1,625) (320) Federal funds purchased and other borrowings 6 3 3 ------- ------- ------- Total ($3,076) ($2,942) ($134) ------- ------- ------- NET INTEREST INCOME ($1,424) ($2,567) $ 1,143 ======= ======= ======= Noninterest income
13 The following table shows the principal components of noninterest income for the periods indicated. Table 5 NONINTEREST INCOME Three months ended Nine months ended September 30, September 30, (In thousands) 2002 2001 2002 2001 ------- ------- ------- ------- Service charges $ 480 $ 409 $ 1,333 $ 1,205 Credit card fees 255 262 709 727 Gain on sales of securities 121 21 121 56 Other income 49 58 218 321 ------- ------- ------- ------- Total noninterest income $ 905 $ 750 $ 2,381 $ 2,309 Noninterest income consists mainly of service charges on deposits and credit card fees, gain on sale of securities, and other miscellaneous types of income. Service charges and credit card fees increased by 10% in the quarter ended September 30, 2002 over the same quarter in 2001, and increased 6% in the nine months ended September 30, 2002 compared to the same period in 2001, due to a reduction in waived charges. Security gains increased 476% for the quarter ended September 2002 over the same quarter in 2001, and increased 116% for the nine months ended September 30, 2002 over the same nine months in 2001, due to a significant increase in the value of fixed rate securities sold. Noninterest expense The following table shows the principal components of noninterest expense for the periods indicated. Table 6
NONINTEREST EXPENSE Three months ended Nine months ended September 30, September 30, (In thousands) 2002 2001 2002 2001 ------- ------- ------- ------- Salaries and employee benefits $ 2,683 $ 2,769 $ 7,963 $ 8,035 Occupancy expense 311 320 926 943 Equipment expense 374 375 1,594 1,114 Professional fees 241 123 915 378 Telephone, postage & supplies 249 250 835 761 Bankcard expenses 215 58 603 389 Other expense 441 451 1,352 1,470 ------- ------- ------- ------- Total noninterest expense $ 4,514 $ 4,346 $14,188 $13,090
14 Noninterest expense consists of salaries and employee benefits representing more than half of the total, and various other categories. The only significant variance was the equipment expense and professional fees, which increased $117,000 for the quarter and $1,017,000 for the nine months ended September 30, 2002. The nine months also included non-recurring expenses in connection with the final phase of the conversion of the Bank's accounting and related application systems. Income taxes The effective tax rate was 32% for the first nine months of 2001. Investment in tax-exempt securities and tax-favored Enterprise Zone loans generated a higher proportion of tax-exempt interest income to total interest income in 2002 than 2001. The effective tax rate for the nine months of 2002 was reduced to 26%. Asset and Liability Management 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 the Company's customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. Management believes the Company's liquidity sources at September 30, 2002 are adequate to meet its operating needs in 2002 and going forward into the foreseeable future. The following table sets forth information concerning rate sensitive assets and rate sensitive liabilities as of September 30, 2002. The assets and liabilities are classified by the earlier of maturity or repricing date in accordance with their contractual terms. Since all interest rates and yields do not adjust at the same speed or magnitude, and since volatility is subject to change, the gap is only a general indicator of interest rate sensitivity. The Company's asset/liability gap is the difference between the cash flow amounts of interest-sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year or longer period, the institution is in an asset-sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. Alternatively, if more liabilities than assets will reprice, the institution is in a liability-sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. 15
Table 7 RATE SENSITIVE ASSETS/LIABILITIES As of September 30, 2002 Over Three Three To Over One Over Not Months Twelve Through Five Rate- Or Less Months Five Years Years Sensitive Total --------- --------- --------- --------- --------- --------- Interest earning assets: Federal funds sold $ 6,000 $ -- $ -- $ -- $ -- $ 6,000 Securities available for sale 2,963 10,889 46,102 21,119 -- 81,073 Loans 243,768 21,930 8,056 11,726 (3,561) 281,919 --------- --------- --------- --------- --------- --------- Total interest earning assets 252,731 32,819 54,158 32,845 (3,561) 368,992 Noninterest earning assets -- -- -- -- 38,782 38,782 --------- --------- --------- --------- --------- --------- Total assets $ 252,731 $ 32,819 $ 54,158 $ 32,845 $ 35,221 $ 407,774 ========= ========= ========= ========= ========= ========= Interest bearing liabilities: Demand, interest bearing $ 46,959 $ -- $ -- $ -- $ -- $ 46,959 Savings and money market 129,579 -- -- -- -- 129,579 Time deposits 38,303 35,621 16,088 -- -- 90,012 --------- --------- --------- --------- --------- --------- Total interest bearing liabilities 214,841 35,621 16,088 -- -- 286,550 --------- --------- --------- --------- --------- --------- Noninterest demand deposits -- -- -- -- 87,186 87,186 Other liabilities -- -- -- -- 3,724 3,724 Stockholders' equity -- -- -- -- 50,314 50,314 --------- --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 214,841 $ 35,621 $ 16,088 $ -- $ 141,224 $ 407,224 ========= ========= ========= ========= ========= ========= Interest rate sensitivity gap $ 37,890 ($ 2,802) $ 38,070 $ 32,845 ($106,003) $ -- Cumulative interest rate sensitivity gap $ 37,890 $ 35,088 $ 73,158 $ 106,003 $ -- $ -- ========= ========= ========= ========= ========= ========= Cumulative interest rate sensitivity gap ratio 14.99% 12.29% 21.54% 28.45%
16 Financial Condition Assets. Total assets increased to $407,774,000 at September 30, 2002 from $397,388,000 at December 31, 2001, an increase of $10,386,000. Most of this increase was in Securities available for sale, which increased $15,762,000 and was partly offset by a decrease in loans. Most of the increase in total assets came from total deposits, which increased by $9,657,000. Loans. Net loans at September 30, 2002 were $281,919,000, a decrease of $6,148,000 or 2.1% from December 31, 2001, which showed $288,067,000. Real Estate loans decreased $6,596,000, representing most of the change. The portfolio breakdown was as follows. Table 8 LOAN PORTFOLIO September 30, December 31 (In thousands) 2002 Percent 2001 Percent --------- ------- --------- ------- Real Estate $ 211,008 73.4% $ 217,604 74.1% Construction 36,437 12.7 34,062 11.6 Commercial 37,887 13.2 39,195 13.4 Consumer 2,058 0.7 2,600 0.9 --------- ----- --------- ----- Gross loans 287,390 100.0% 293,461 100.0% ===== ===== Net deferred loan fees (1,801) (1,851) Allowance for loan losses (3,670) (3,543) --------- --------- Net loans $ 281,919 $ 288,067 ========= ========= Allowance for loan losses. The Company has the responsibility of assessing the overall risks in its portfolio, assessing the specific loss expectancy, and determining the adequacy of the allowance for loan losses. The level of the allowance is determined by internally generating credit quality ratings, reviewing economic conditions in the Company's market area, and considering the Company's historical loan loss experience. The Company is committed to maintaining an adequate allowance, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change. A summary of transactions in the allowance for loan losses for the nine months ended September 30, 2002 and the year ended December 31, 2001 is as follows: 17 Table 9 ALLOWANCE FOR LOAN LOSSES Nine months ended Year ended (In thousands) September 30, 2002 December 31, 2001 ------------------ ----------------- Balance, beginning of period $ 3,543 $ 3,332 Provision for loan losses 150 300 Recoveries 7 5 Amounts charged off (30) (94) ------- ------- Balance, end of period $ 3,670 $ 3,543 ======= ======= In management's judgment, the allowance was adequate to absorb potential losses currently inherent in the loan portfolio at September 30, 2002. However, changes in prevailing economic conditions in the Company's markets or in the financial condition of its customers could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the allowance. Nonperforming assets. Nonperforming assets consist of nonaccrual loans, foreclosed assets, and loans that are 90 days or more past due but are still accruing interest. At September 30, 2002, there was $1,910,000 in non-accrual loans, compared to $1,964,000 at December 31, 2001. There were no foreclosed assets or loans past due 90 days and still accruing on either date. Deposits. Total deposits at September 30, 2002 were $353,736,000 compared to $344,079,000 on December 31, 2001. Of these totals, noninterest-bearing demand deposits were $87,186,000 or 24.7% of the total on September 30, 2002 and $87,982,000 or 25.6% on December 31, 2001. Time deposits were $90,012,000 on September 30, 2002 and $101,849,000 on December 31, 2001. The following table sets forth the maturity schedule of the time certificates of deposit on September 30, 2002: Table 10 (In thousands) Under $100,000 Maturities: $100,000 or more Total -------- -------- -------- Three months or less $ 18,380 $ 19,923 $ 38,303 Over three to six months 11,561 9,044 20,605 Over six through twelve months 10,329 4,687 15,016 Over twelve months 12,474 3,614 16,088 -------- -------- -------- Total $ 52,744 $ 37,268 $ 90,012 -------- -------- ======== 18 The following table shows the risk-based capital ratios and leverage ratios at September30, 2002 and December 31, 2001: Table 11 Minimum "Well September 30, December 31, Capitalized" Risk-Based Capital Ratios 2002 2001 Requirements Tier 1 Capital 13.57% 12.98% > 6.00% - Total Capital 14.61% 13.98% > 10.00% - Leverage Ratios 11.66% 11.41% > 5.00% - Liquidity. Liquidity is a measure of the Company's ability to convert assets into cash with minimum loss. As of September 30, 2002, Liquid Assets were $105,238,000 or 25.8% of total assets. Liquidity consists of cash and due from other banks accounts, federal funds sold, and securities available-for-sale. The Company's primary uses of funds are loans, and the primary sources of funds are deposits. The relationship between total net loans and total deposits is a useful additional measure of liquidity. A higher loan to deposit ratio means that assets will be less liquid. This has to be balanced against the fact that loans represent the highest earning assets, so that a lower loan to deposit ratio means lower potential income. On September 30, 2002 net loans were at 79.7% of deposits. The primary source of liquidity for FNB Bancorp, on a stand-alone basis, is the receipt of dividends from First National Bank of Northern California, and the ability of First National Bank of Northern California to pay dividends is subject to restrictions imposed under the National Bank Act and regulations promulgated by the Office of the Comptroller of the Currency. In addition, under certain circumstances, the Federal Deposit Insurance Corporation has the authority to place restrictions on the ability of a bank to pay dividends. Forward-Looking Information and Uncertainties Regarding Future -------------------------------------------------------------- Financial Performance. --------------------- This report, including management's discussion above, concerning earnings and financial condition, contains "forward-looking statements". Forward-looking statements are estimates of or statements about our expectations or beliefs regarding the Company's future financial performance or anticipated future financial condition that are based on current information and that are subject to a number of risks and uncertainties that could cause actual operating results in the future to differ significantly from those expected at the current time. Those risks and uncertainties include, although they are not limited to, the following: Increased competition. Increased competition from other banks and financial service businesses, mutual funds and securities brokerage and investment banking firms that offer competitive loan and investment products could require us to reduce interest rates and loan fees to attract new loans or to increase interest rates that we offer on time deposits, either or both of which could, in turn, reduce interest income and net interest margins. 19 Possible Adverse Changes in Economic Conditions. Adverse changes in national or local economic conditions could (i) reduce loan demand which could, in turn, reduce interest income and net interest margins; (ii) adversely affect the financial capability of borrowers to meet their loan obligations, which, in turn, could result in increases in loan losses and require increases in provisions for possible loan losses, thereby adversely affecting operating results; and (iii) lead to reductions in real property values that, due to the Company's reliance on real property to secure many of its loans, could make it more difficult to prevent losses from being incurred on non-performing loans through the sale of such real properties. Possible Adverse Changes in National Economic Conditions and Federal Reserve Board Monetary Policies. Changes in national economic policies, such as increases in inflation or declines in economic output often prompt changes in Federal Reserve Board monetary policies that could reduce interest income or increase the cost of funds to the Company, either of which could result in reduced earnings. Changes in Regulatory Policies. Changes in federal and national bank regulatory policies, such as increases in capital requirements or in the allowance for loan losses or asset/liability ratio requirements, could adversely affect earnings by reducing yields on earning assets or increasing operating costs. Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of the Quarterly Report, or to make predictions based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report, in our Prospectus, or in our Annual Report. Other Matters Off-Balance Sheet Items The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results. As of September 30, 2002 and December 31, 2001, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and letters of credit were $70,544,000 and $67,983,000 at September 30, 2002 and December 31, 2001, respectively. As a percentage of net loans, these off-balance sheet items represent 25.0% and 23.6% respectively. Certain financial institutions have elected to use special purpose vehicles ("SPV") to dispose of problem assets. An SPV is typically a subsidiary company with an asset and liability structure and legal status that transfers its obligations to a third party even if the parent corporation goes bankrupt. Under the circumstances, these financial institutions may exclude the problem assets from their reported impaired and non-performing assets. The Company does not use SPV or other structures to dispose of problem assets. 20 Corporate Reform Legislation President George W. Bush signed the "Public Company Accounting Reform and Investor Protection Act of 2002" (the "Act") on July 30, 2002, which responds to the recent corporate accounting scandals. Among other matters, the Act increases the penalties for securities fraud, establishes new rules for financial analysts to prevent conflicts of interest, creates a new independent oversight board for the accounting profession, imposes restrictions on the consulting activities of accounting firms that audit company records and requires certification of financial reports by corporate executives. The effect of the Act upon corporations is uncertain; however, it is likely that compliance costs may increase as corporations modify procedures if required to conform to the provisions of the Act. The Company does not currently anticipate that compliance with the Act will have a material effect upon the results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss to future earnings, to fair values of assets or to future cash flows that may result from changes in the price or value of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates and other market conditions. Market risk is attributed to all market risk sensitive financial instruments, including loans, investment securities, deposits and borrowings. The Company does not engage in trading activities or participate in foreign currency transactions for its own account. Accordingly, exposure to market risk is primarily a function of asset and liability management activities and of changes in market rates of interest. Changes in rates can cause or require increases in the rates paid on deposits that may take effect more rapidly or may be greater than the increases in the interest rates that the Company is able to charge on loans and the yields that it can realize on its investments. The extent of that market risk depends on a number of variables including the sensitivity to changes in market interest rates and the maturities of the Company's interest earning assets and deposits. There have been no material changes in the Company's quantitative and qualitative disclosures about market risk as of September 30, 2002, from those presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)-14(c)) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and other members of the Company's senior management within the 90-day period preceding the filing date of this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. 21 (b) Changes in Internal Controls: In the quarter ended September 30, 2002, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.23 FNB Bancorp 2002 Stock Option Plan, adopted June 28, 2002, incorporated by reference to Exhibit 99.1 to registrant's Registration Statement on Form S-8 (No. 333-98293) filed with the Commission on August 16, 2002. * 10.24 Form of Incentive Stock Option Agreement under FNB Bancorp 2002 Stock Option Plan, adopted June 28, 2002, incorporated by reference to Exhibit 99.2 to registrant's Registration Statement on Form S-8 (No. 333-98293) filed with the Commission on August 16, 2002. * 10.25 Form of Nonstatutory Stock Option Agreement under FNB Bancorp 2002 Stock Option Plan, adopted June 28, 2002, incorporated by reference to Exhibit 99.3 to registrant's Registration Statement on Form S-8 (No. 333-98293) filed with the Commission on August 16, 2002. * 99.10 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -------------------------------------------------------------- *Denotes management contracts, compensatory plans or arrangements. 22 (b) Reports on Form 8-K The following reports on Form 8-K have been filed during the quarter ended September 30, 2002: Filed August 9, 2002: cash dividend payable to shareholders of record on July 31, 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FNB BANCORP (Registrant) Dated: November 12, 2002. By: /s/ THOMAS C. MCGRAW ------------------------------ Thomas C. McGraw Chief Executive Officer (Authorized Officer) By: /s/ JAMES B. RAMSEY ------------------------------ James B. Ramsey Senior Vice President Chief Financial Officer (Principal Financial Officer) 23 CERTIFICATIONS -------------- I, Thomas C. McGraw, Chief Executive Officer (Principal Executive Officer) of the registrant, FNB Bancorp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FNB Bancorp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 24 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002. /s/ THOMAS C. MCGRAW ------------------------------ Thomas C. McGraw Chief Executive Officer (Principal Executive Officer) 25 I, James B. Ramsey, Senior Vice President and Chief Financial Officer (Principal Financial Officer) of the registrant, FNB Bancorp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FNB Bancorp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 26 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002. /s/ JAMES B. RAMSEY ------------------------------ James B. Ramsey Senior Vice President and Chief Financial Officer (Principal Financial Officer) 27