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, 2010

FNB BANCORP
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
000-49693	91-2115369
(Commission File Number)	(IRS Employer Identification No.)
975 El Camino Real, South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

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

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

Yes x No o

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

Yes o No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o

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

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock as of November 10, 2010: 3,181,714 shares.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 30,		December 31,
(Dollar amounts in thousands)	2010		2009
ASSETS
Cash and due from banks	$	69,731	$	62,853
Securities available-for-sale		131,123		97,188
Loans, net of allowance for loan losses of $9,250 and $9,829 on September 30, 2010 and December 31, 2009		475,464		494,349
Bank premises, equipment, and leasehold improvements, net		11,801		11,784
Other real estate owned, net		6,608		7,320
Goodwill		1,841		1,841
Accrued interest receivable and other assets		30,934		32,974
Total assets	$	727,502	$	708,309
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand, noninterest bearing	$	136,315	$	120,515
Demand, interest bearing		61,609		57,368
Savings and money market		314,864		293,758
Time		126,222		127,323
Total deposits		639,010		598,964
Federal Home Loan Bank advances	—			25,000
Accrued expenses and other liabilities		6,405		5,480
Total liabilities		645,415		629,444
Stockholders’ equity
Preferred stock - series A - no par value, authorized and outstanding 12,000 shares, issued on February 27, 2009 (liquidation preference of $1,000 per share plus accrued dividends)		11,693		11,534
Preferred stock - series B - no par value, authorized and outstanding 600 shares, issued on February 27, 2009 (liquidation preference of $1,000 per share plus accrued dividends)		619		629
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 3,181,714 shares at September 30, 2010 and 3,181,714 shares at December 31, 2009		45,170		45,044
Retained earnings		22,597		20,945
Accumulated other comprehensive income		2,008		713
Total stockholders’ equity		82,087		78,865
Total liabilities and stockholders’ equity	$	727,502	$	708,309

See accompanying notes to consolidated financial statements.

2

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

(Dollars in thousands, except per share amounts)

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Interest income:
Interest and fees on loans	$	7,799	$	8,578	$	23,735	$	24,396
Interest on taxable securities		482		389		1,423		1,359
Interest on tax-exempt securities		335		298		874		1,004
Federal funds sold		0		18		0		78
Total interest income		8,616		9,283		26,032		26,837
Interest expense:
Deposits		1,154		1,911		3,817		5,298
Federal Home Loan Bank advances		184		382		551		1,676
Total interest expense		1,338		2,293		4,368		6,974
Net interest income		7,278		6,990		21,664		19,863
Provision for loan losses		464		796		1,029		3,696
Net interest income after provision for loan losses		6,814		6,194		20,635		16,167
Noninterest income:
Service charges		686		707		2,045		2,134
Credit card fees		159		179		473		517
Gain on sale of securities available-for-sale		330		659		492		905
Other income		160		127		427		710
Total noninterest income		1,335		1,672		3,437		4,266
Noninterest expense:
Salaries and employee benefits		3,418		3,250		10,399		10,000
Loss on impairment of other real estate owned		85		296		732		1,659
Occupancy expense		515		533		1,532		1,568
Equipment expense		472		470		1,495		1,427
FDIC assessment		363		222		986		880
Professional fees		372		277		951		902
Telephone, postage and supplies		271		282		816		814
Other real estate owned expense		207		225		819		729
Bankcard expenses		147		159		436		476
Other expense		848		713		2,283		2,150
Total noninterest expense		6,698		6,427		20,449		20,605
Earnings before income tax expense (benefit)		1,451		1,439		3,623		(172	)
Income tax expense (benefit)		426		176		855		(250	)
Net earnings		1,025		1,263		2,768		78
Dividends and discount accretion on preferred stock		214		214		640		419
Net earnings (loss) available to common shareholders	$	811	$	1,049	$	2,128	$	(341	)
Earnings (loss) per share data:
Basic	$	0.25	$	0.33	$	0.67	$	(0.11	)
Diluted	$	0.25	$	0.33	$	0.67	$	(0.11	)
Weighted average shares outstanding:
Basic		3,182		3,182		3,182		3,182
Diluted		3,192		3,182		3,192		3,182

See accompanying notes to consolidated statements.

3

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

(UNAUDITED)

	Three months ended						Nine months ended
	September 30,						September 30,
(Dollar amounts in thousands)	2010			2009			2010			2009
Net earnings	$	1,025		$	1,263		$	2,768		$	78
Unrealized gain on AFS securities		869			501			1,585			211
Reclassification adjustment for gain on available-for-sale securities sold, net of tax		(195	)		(389	)		(290	)		(535	)
Total comprehensive earnings (loss)	$	1,699		$	1,375		$	4,063		$	(246	)

See accompanying notes to consolidated financial statements.

4

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended
	September 30
(Dollar amounts in thousands)	2010			2009
Cash flow from operating activities:
Net earnings	$	2,768		$	78
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of securities available-for-sale		(492	)		(905	)
Depreciation, amortization and accretion		1,828			1,595
Stock-based compensation expense		126			87
Provision for loan losses		1,029			3,696
Decrease in interest receivable and other assets		2,040			1,624
Valuation allowance on real estate owned		732			1,659
Increase (decrease) in accrued expenses and other liabilities		25			(356	)
Net cash provided by operating activities		8,056			7,478
Cash flows from investing activities:
Purchase of securities available-for-sale		(105,958	)		(56,302	)
Proceeds from matured/called/sold securities available-for-sale		74,008			61,189
Proceeds from sale of other real estate owned		3,631			358
Net investment in other real estate owned		(468	)		—
Net decrease (increase) in loans		14,673			(20,134	)
Purchases of bank premises, equipment, leasehold improvements		(1,143	)		(178	)
Net cash (used) provided by investing activities		(15,257	)		(15,067	)
Cash flows from financing activities:
Net increase in demand and savings deposits		41,147			95,452
Net decrease in time deposits		(1,101	)		(11,195	)
Net decrease Federal Home Loan Bank advances		(25,000	)		(56,100	)
Dividends paid on common stock		(477	)		(757	)
Dividends paid on preferred stock series A and B		(490	)		(305	)
Issuance of preferred stock series A		—			11,360
Issuance of preferred stock series B		—			640
Net cash provided by financing activities		14,079			39,095
NET INCREASE IN CASH AND CASH EQUIVALENTS		6,878			31,506
Cash and cash equivalents at beginning of period		62,853			14,865
Cash and cash equivalents at end of period	$	69,731		$	46,371
Additional cash flow information:
Interest paid		4,630			7,317
Income taxes paid		207			218
Non-cash investing and financing activities:
Accrued dividends		159			151
Change in fair value of available for-sale securities		1,295			(324	)
Loans transferred to other real estate owned		3,183			7,885
Deemed dividends on preferred stock		149			114

5

FNB BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

NOTE A – BASIS OF PRESENTATION

FNB Bancorp (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on February 28, 2001. The consolidated financial statements include the accounts of FNB Bancorp and its wholly owned subsidiary, First National Bank of Northern California (the “Bank”). The Bank provides traditional banking services in San Mateo and San Francisco counties.

All material intercompany transactions and balances have been eliminated in consolidation. The financial statements include all adjustments of a normal and recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods, as required by Regulation S-X, Rule 10-01.

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2009.

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

NOTE B – STOCK OPTION PLANS

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

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

6

The amount of compensation expense for options recorded in the quarters ended September 30, 2010 and September 30, 2009 was $41,000 and $28,000, respectively. There was no income tax benefit recognized in the statements of earnings for these amounts for the quarters ended September 30, 2010 and September 30, 2009, respectively. The amount of compensation expense for options recorded in the nine months ended September 30, 2010 and September 30, 2009 was $126,000 and $87,000, respectively. There was no income tax benefit recognized in the statements of earnings for these amounts for the nine months ended September 2010 and 2009, respectively.

There was no intrinsic value for options exercisable or exercised during the quarter and nine months ended September 30, 2010.

The amount of total unrecognized compensation expense related to non-vested options at September 30, 2010 was $465,000, and the weighted average period over which it will be amortized is 2.4 years.

NOTE C – EARNINGS (LOSS) PER SHARE CALCULATION

Earnings per common share (EPS) is computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings available to common stockholders (after deducting dividends and related accretion on preferred stock) by the weighted average of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. All common stock equivalents are anti-dilutive when a net loss occurs.

Earnings (loss) per share have been computed based on the following :

	Three months ended				Nine months ended
	September 30,				September 30,
(Dollar amounts in thousands)	2010		2009		2010		2009
Net earnings	$	1,025	$	1,263	$	2,768	$	78
Dividends and discount accretion on preferred stock		214		214		640		419
Net earnings (loss) available to common stockholders	$	811	$	1,049	$	2,128	$	(341	)
Average number of shares outstanding		3,182		3,182		3,182		3,182
Effect of dilutive options		10		—		10		—
Average number of shares outstanding used to calculate diluted earnings per share		3,192		3,182		3,192		3,182
Anti-dilutive options not included		323,000		331,000		323,000		331,000

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NOTE D – SECURITIES AVAILABLE FOR SALE

The amortized cost and carrying values of securities available-for-sale as of September 30, 2010 are as follows:

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized			Carrying
September 30, 2010	cost		gains		losses			value
U. S. Treasury securities	$	12,470	$	112	$	—		$	12,582
Obligations of U.S.Government agencies		49,097		781		(15	)		49,863
Mortgage backed securities		25,386		792		—			26,178
Obligations of states and political subdivisions		36,092		1,573		(24	)		37,641
Corporate notes		4,674		185		—			4,859
Total	$	127,719	$	3,443	$	(39	)	$	131,123

	Amortized		Unrealized		Unrealized			Carrying
(Dollar amounts in thousands)	cost		gains		losses			value
December 31, 2009:
Obligations of U.S. Government agencies	$	45,100	$	274	$	(67	)	$	45,307
Mortgage-backed securities		22,185		238		(144	)		22,279
Obligations of states and political subdivisions		24,998		887		(18	)		25,867
Corporate debt		3,696		41		(2	)		3,735
Total	$	95,979	$	1,440	$	(231	)	$	97,188

An analysis of gross unrealized losses within the available-for-sale investment securities portfolio as of September 30, 2010 and December 31, 2009 follows:

			Less than					12 Months
		Total	12 Months			Total		or Longer		Total		Total
(Dollar amounts in thousands)		Fair	Unrealized			Fair		Unrealized		Fair		Unrealized
September 30, 2010		Value	Losses			Value		Losses		Value		Losses
Obligations of U.S. Government agencies	$	6,446	$	(15	)	$	—	$	—	$	6,446	$	(15	)
Obligations of states and political subdivisions		946		(24	)		—		—		946		(24	)
Total	$	7,392	$	(39	)	$	—	$	—	$	7,392	$	(39	)

	Total		< 12 Months			Total		12 Months or >			Total		Total
December 31, 2009:	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
Obligations of U.S. Government agencies	$	12,252	$	(67	)	$	—	$	—		$	12,252	$	(67	)
Mortgage-backed securities		14,332		(144	)		—		—			14,332		(144	)
Obligations of states and political subdivisions		1,502		(7	)		439		(11	)		1,941		(18	)
Corporate debt		1,058		(2	)		—		—			1,058		(2	)
Total	$	29,144	$	(220	)	$	439	$	(11	)	$	29,583	$	(231	)

8

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

The amortized cost and carrying value of debt securities as of September 30, 2010 and December 31, 2009, respectively, 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.

(Dollar amounts in thousands)	Amortized		Carrying
September 30, 2010	Cost		Value
Available-for-sale:
Due in one year or less	$	3,813	$	3,871
Due after one through five years		78,195		79,854
Due after five years through ten years		13,079		13,531
Due after ten years		32,632		33,867
Total	$	127,719	$	131,123

(Dollar amounts in thousands)	Amortized		Carrying
December 31, 2009	Cost		Value
Available-for-sale:
Due in one year or less	$	9,133	$	9,184
Due after one through five years		57,676		58,584
Due after five years through ten years		5,963		6,087
Due after ten years		23,207		23,333
Total	$	95,979	$	97,188

For the nine months ended September 30, 2010, gross realized gains amounted to $492,000 on $50,910,000 in securities sold or called. For the nine months ended September 30, 2010, there were no gross losses on the sale of investment securities.

At September 30, 2010, securities with an amortized cost of $84,740,000 and fair value of $87,176,000 were pledged as collateral for public deposits and for other purposes required by law.

At September 30, 2010, the Bank had investments of $1,062,000 in Federal Reserve Bank stock classified as other assets in the accompanying balance sheet. These investments in Federal Reserve Bank stock are carried at cost, and evaluated periodically for impairment. At September 30, 2010, the stock was determined to be not impaired.

At September 30, 2010, the Bank had investments of $4,103,000 in Federal Home Loan Bank (“FHLB”) stock classified as other assets in the accompanying balance sheet. These investments in FHLB stock are carried at cost, and evaluated periodically for impairment. At September 30, 2010, the stock was determined to be not impaired.

9

NOTE E – FAIR VALUE MEASUREMENT

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

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

			Fair Value Measurements
			at September 30, 2010, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
(Dollar amounts in thousands)	Fair Value		Assets		Inputs		Inputs
Description	9/30/2010		(Level 1)		(Level 2)		(Level 3)
U. S. Treasury securities	$	12,582	$	12,582	$	—	$	—
Obligations of U.S. Government agencies		49,863		—		49,863		—
Mortgage-backed securities		26,178		—		26,178		—
Obligations of states and political subdivisions		37,641		—		37,641		—
Corporate debt		4,859		—		4,859		—
Total assets measured at fair value	$	131,123	$	12,582	$	118,541	$	—

			Fair Value Measurements
			at December 31, 2009, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
(Dollar amounts in thousands)	Fair Value		Assets		Inputs		Inputs
Description	12/31/2009		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities	$	97,188	$	—	$	97,188	$	—
Total assets measured at fair value	$	97,188	$	—	$	97,188	$	—

Fair values established for available-for-sale investment securities are based on estimates of fair values quoted for similar types of securities with similar maturities, risk and yield characteristics.

10

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

			Fair Value Measurements
			at September 30, 2010, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
(Dollar amounts in thousands)	Fair Value		Assets		Inputs		Inputs		Total
Description	9/30/2010		(Level 1)		(Level 2)		(Level 3)		losses
Impaired loans	$	6,730	$	—	$	—	$	6,730	$	417
Other real estate owned		710		—		—		—		85
Total impaired assets measured at fair value	$	7,440	$	—	$	—	$	6,730	$	502

			Fair Value Measurements
			at December 31, 2009, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
(Dollar amounts in thousands)	Fair Value		Assets		Inputs		Inputs		Total
Description	12/31/2009		(Level 1)		(Level 2)		(Level 3)		losses
Impaired loans	$	23,743	$	—	$	—	$	23,743	$	2,875
Other real estate owned		7,320		—		—		7,320		1,831
Total impaired assets measured at fair value	$	31,063	$	—	$	—	$	31,063	$	4,706

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

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

11

Fair Values of Financial Instruments.

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

Cash and Cash Equivalents.

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

Securities Available-for-Sale.

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

Loans Receivable.

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

Bank Owned Life Insurance.

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

Deposit liabilities.

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

Federal Home Loan Bank Advances.

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

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

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

12

The following table provides summary information on the estimated fair value of financial instruments at September 30, 2010:

	Carrying		Fair
(Dollar amounts in thousands)	amount		value
Financial assets:
Cash and cash equivalents	$	69,731	$	69,731
Securities available for sale		131,123		131,123
Loans, gross		484,714		480,787
Bank owned life insurance		9,112		9,112
Financial liabilities:
Deposits		639,010		639,568
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit		—		1,075

The carrying amount of loans include $17,298,000 of nonaccrual loans (loans that are not accruing interest) as of September 30, 2010. The fair value of nonaccrual loans is based on the collateral values that secure the loans, or the cash flows expected to be received.

The following table provides summary information on the estimated fair value of financial instruments at December 31, 2009:

	Carrying		Fair
(Dollar amounts in thousands)	amount		value
Financial assets:
Cash and cash equivalents	$	62,853	$	62,853
Securities available for sale		97,188		97,188
Loans, gross		504,178		499,291
Bank owned life insurance		8,866		8,866
Financial liabilities:
Deposits		598,964		599,619
Federal Home Loan Bank advances		25,000		25,295
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit		—		902

NOTE F – PREFERRED STOCK

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

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

Forward-Looking Information and Uncertainties Regarding Future Financial Performance.

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

Increased Competition. Increased competition from other banks and financial service businesses, mutual funds and securities brokerage and investment banking firms that offer competitive loan and investment products and competitive market pricing, which could require us to reduce interest rates and loan fees to attract new loans or to increase interest rates that we offer on time deposits, either or both of which could, in turn, reduce interest income and net interest margins. These factors could reduce our ability to attract new deposits and loans and leases.

Liquidity Risk. The stability of funding sources and our ability to raise capital or incur debt on reasonable terms. Tightening credit standards leading to reduced borrowing lines of credit and reduced funding sources.

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

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

Changes in Regulatory Policies. Changes in federal and national bank regulatory policies, such as increases in capital requirements or in loan loss reserve or asset/liability ratio requirements, Liquidity requirements, and the risks associated with concentration in real estate related loans could adversely affect earnings by reducing yields on earning assets or increasing operating costs. For example, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed by President Obama on July 21, 2010.

14

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

Critical Accounting Policies And Estimates

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

Allowance for Loan Losses

The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company’s loan loss experience, known and inherent risks in the portfolio, current economic conditions, known adverse situations that may affect the borrower’s ability to repay, regulatory policies, and the estimated value of underlying collateral. The evaluation of the adequacy of the allowance is based on the above factors along with prevailing and anticipated economic conditions that may impact our borrowers’ ability to repay their loans. Determination of the allowance is based upon objective and subjective judgments by management from the information currently available. Adverse changes in information could result in higher than expected charge-offs and loan loss provisions.

Goodwill

Goodwill arises from the Company’s purchase price exceeding the fair value of the net assets of an acquired business. Goodwill represents the value attributable to intangible elements acquired.

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

15

Other Than Temporary Impairment

Other than temporary impairment (“OTTI”) is triggered if the Company has the intent to sell the security, it is likely that it will be required to sell the security before recovery, or if the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security or it is likely it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that the Company will be required to sell the security but the Company does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI. The credit loss is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected of a security. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, would be recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are to be presented as a separate category within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is re-evaluated accordingly based on the procedures described above.

Provision for and Deferred Income Taxes

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

Recent Accounting Pronouncements

In January, 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06, to improve disclosure requirements related to “Fair Value Measurements and Disclosures-Overall Subtopic (Subtopic 820-10)” of the FASB Accounting Standards Codification, which was originally issued as FASB Statement No. 157, Fair Value Measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the rollforward activity in Level 3 fair value measurements. The new disclosures require separate disclosures regarding transfers in and out of Levels 1 and 2 fair value measurements, and to describe the reasons for the transfers. As to activity in Level 3, a reporting entity is required to present separate information about purchases, sales, issuances and settlements (on a gross basis rather than as one net number).This requires first quarter of 2010 implementation so that investments shown by class and changes or transfers in levels disclosed. The Company only measures investment securities, impaired loans and real estate owned at fair value.

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In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855)—Amendments to Certain Recognition and disclosure Requirements.” This ASU eliminates the requirement to disclose the date through which a Company has evaluated subsequent events and refines the scope of the disclosure requirements for reissued financial statements. This ASU is effective for the first quarter of 2010. This ASU did not have a material impact on the Company’s consolidated financial statements.

In March, the FASB issued ASU No. 2010-11, “Derivatives and Hedging (Topic 815)—Scope Exception Related to Embedded Credit Derivatives.” The ASU eliminates the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets, unless they are created solely by subordination of one financial instrument to another. The ASU is effective the first quarter beginning after June 15, 2010. The Company has evaluated the impact of adoption and the ASU did not have a material impact on the Company’s consolidated financial statements.

In April, the FASB issued ASU No. 2010-18, “Receivables (Topic 310)—Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset.” This ASU clarifies that modifications of loans that are accounted for within a pool under Topic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. No additional disclosures are required with this ASU. The amendments in this ASU are effective for modifications of loans accounted for within pools under Topic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively and early application is permitted. Upon initial adoption of the guidance in this ASU, an entity may make a onetime election to terminate accounting for loans as a pool under Topic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Company has evaluated the impact of adoption and the ASU did not have an impact on the Company’s consolidated financial statements.

In July, the FASB issued ASU No. 2010-20, “Receivables (Topic 310)-Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The objective of the amendments in this Update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:

1.	The nature of credit risk inherent in the entity’s portfolio of financing receivables.
2.	How that risk is analyzed and assessed in arriving at the allowance for credit losses.
3.	The changes and reasons for those changes in the allowance for credit losses.

The disclosures about activity that occurs during a reporting period are effective for interim and annual reports beginning on or after December 15, 2010.

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Earnings Analysis

Net earnings for the quarter ended September 30, 2010 were $1,025,000, compared to net earnings of $1,263,000 for the quarter ended September 30, 2009, a decrease of $238,000. Net earnings for the nine months ended September 30, 2010 were $2,768,000 compared to net earnings of $78,000 for the nine months ended September 30, 2009, an improvement of $2,690,000. Earnings before income tax expense for the quarter ended September 30, 2010 were $1,451,000, compared to $1,439,000 for the quarter ended September 30, 2009, an improvement of $12,000. Earnings before income tax expense for the nine months ended September 30, 2010 were $3,623,000, compared to net losses before income tax expense for the nine months ended September 30, 2009 of $172,000. Net earnings available to common stockholders for the quarter ended September 30, 2010 were $811,000, compared to net earnings available to common stockholders of $1,049,000 for the quarter ended September 30, 2009. Net earnings available to common stockholders for the nine months ended September 30, 2010, were $2,128,000,compared to net losses available to common stockholders of $341,000 for the nine months ended September 30, 2009, an improvement of $2,469,000. Earnings for the quarter ended September 30, 2010 were positively affected by higher net interest income and lower provision for loan losses when compared to the same period in 2009.

Net interest income for the quarter ended September 30, 2010 was $7,278,000, compared to $6,990,000 for the quarter ended September 30, 2009, an increase of $288,000, or 4%. Net interest income for the nine months ended September 30, 2010 was $21,664,000 compared to $19,863,000 for the nine months ended September 30, 2009, an increase of $1,801,000, or 9%.

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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, 2010 compared to the three-and nine-month periods ended September 30, 2009.

TABLE 1	NET INTEREST INCOME AND AVERAGE BALANCES FNB BANCORP AND SUBSIDIARY
	Three months ended September 30,
	2010							2009
					Annualized							Annualized
	Average				Average			Average				Average
(Dollar amounts in thousands)	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	486,528	$	7,799		6.36	%	$	497,445	$	8,578		6.92	%
Taxable securities (3)		90,214		482		2.12	%		57,111		389		2.73	%
Nontaxable securities (3)		38,294		444		4.60	%		32,817		392		4.79	%
Fed funds sold		6		—		—			27,909		18		0.26	%
Tot int earn assets		615,042		8,725		5.63	%		615,282		9,377		6.11	%
NONINTEREST EARNING ASSETS:
Cash and due		72,113							37,759
Premises		11,947							12,249
Other assets		33,039							29,516
Tot nonint earning assets		117,099							79,524
TOTAL ASSETS	$	732,141						$	694,806
Demand, int bearing	$	63,064		41		0.26	%	$	59,847		86		0.58	%
Money market		273,334		728		1.06	%		217,363		1,169		2.16	%
Savings		44,342		28		0.25	%		43,583		32		0.29	%
Time deposits		123,411		357		1.15	%		131,946		624		1.90	%
FHLB advances (5)		6,739		184		10.83	%		39,891		382		3.84	%
Fed funds purchased		—		—		—			—		—		—
Tot interest bearing liabilities		510,890		1,338		1.04	%		492,630		2,293		1.87	%
NONINTEREST BEARING LIABILITIES:
Demand deposits		130,773							116,875
Other liabilities		8,933							6,776
Tot nonint bear liabilities		139,706							123,651
TOTAL LIABILITIES		650,596							616,281
Stockholders’ equity		81,545							78,525
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	732,141						$	694,806
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	7,387		4.77	%			$	7,084		4.62	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis.

(2) Amounts of interest earned include loan fees of $291,000 and $269,000 for the quarters ended September 30, 2010 and 2009, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $109,000 and $94,000 for the quarters ended September 30, 2010 and 2009, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

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

(5) The 10.83% includes the effect of a prepayment penalty for early payoff of advances due later this yearand the first quarter of 2011, for $139,000. Excluding this, the rate would be 2.65%.

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TABLE 2	NET INTEREST INCOME AND AVERAGE BALANCES FNB BANCORP AND SUBSIDIARY
	Nine months ended September 30,
	2010							2009
					Annualized							Annualized
	Average				Average			Average				Average
(Dollar amounts in thousands)	Balance		Interest		Yield			Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	493,984	$	23,735		6.42	%	$	498,716	$	24,396		6.54	%
Taxable securities (3)		86,261		1,423		2.21	%		54,287		1,359		3.35	%
Nontaxable securities (3)		33,220		1,158		4.66	%		37,105		1,319		4.75	%
Fed funds sold		2		—		—			17,954		78		0.58	%
Total interest earning assets		613,467		26,316		5.74	%		608,062		27,152		5.97	%
NONINTEREST EARNING ASSETS:
Cash and due		69,777							25,885
Premises		11,852							12,590
Other assets		34,089							28,950
Total noninterest earning assets		115,718							67,425
TOTAL ASSETS	$	729,185						$	675,487
Demand, int bearing	$	61,038		137		0.30	%	$	58,563		242		0.55	%
Money market		270,825		2,407		1.19	%		181,339		2,879		2.12	%
Savings		43,256		82		0.25	%		43,631		95		0.29	%
Time deposits		123,970		1,191		1.28	%		135,644		2,082		2.05	%
FHLB advances		15,476		551		4.76	%		57,062		1,676		3.93	%
Fed funds purchased		4		—		—			2		—		—
Tot interest bearing liabilities		514,569		4,368		1.13	%		476,241		6,974		1.96	%
NONINTEREST BEARING LIABILITIES:
Demand deposits		126,344							115,633
Other liabilities		7,974							6,779
Total noninterest bearing liabilities		134,318							122,412
TOTAL LIABILITIES		648,887							598,653
Stockholders’ equity		80,298							76,834
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	729,185						$	675,487
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	21,948		4.78	%			$	20,178		4.44	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis.

(2) Amounts of interest earned included loan fees of $821,000 and $897,000 for the nine months ended September 30, 2010 and 2009, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $284,000 and $315,000 for the nine months ended September 30, 2010 and 2009, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

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

Tables 1 and 2, above, show the various components that contributed to changes in net interest income for the three and nine months ended September 30, 2010 and 2009. The principal interest earning assets are loans, from a volume as well as from a rate or yield perspective. For the quarter ended September 30, 2010, average loans outstanding represented 79.1% of average earning assets. For the quarter ended September 30, 2009, they represented 80.8% of average earning assets. For the nine months ended September 30, 2010 and 2009, average loans outstanding represented 80.5% and 82.0%, respectively, of average earning assets.

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The taxable equivalent yield on average interest earning assets for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009 decreased from 6.11% to 5.63%, or 48 basis points. Average loans decreased by $10,917,000, quarter to quarter, and the loan yield decreased from 6.92% to 6.36%, or 56 basis points. Interest income on total interest earning assets decreased $652,000 or 7.0%. The decrease in yield resulted primarilyfrom lower prevailing market rates on loans. During the third quarter of 2009, the Bank purchased approximately $19 million dollars in servicing released loans from another community bank in our service area. This loan purchase was funded with available cash and helped to improve yields that otherwise would have decreased further during the quarter.

For the three months ended September 30, 2010 compared to the three months ended September 30, 2009, the cost of total interest bearing liabilities decreased from 1.87% to 1.04%, a decrease of 83 basis points. During 2009 and 2010, the Bank promoted our Money Market Maximizer product that pays an adjustable interest rate tied to the number and types of Bank products utilized by the customer. This account has brought in significant amounts of new deposits during 2009 and 2010. Our most expensive source of interest bearing liabilities during the three months ended September 30, 2010 came from Federal Home Loan Bank advances. Their average cost increased from 3.84% to 10.83% for the quarter ended September 30, 2010 compared to the same period in 2009. The 10.83% includes prepayment penalties for the early payoff of FHLB advances due later this year and during the first quarter of 2011. Their average balances outstanding decreased $33,152,000 and the expense related to these advances decreased $198,000 for the three months ended September 30, 2010 compared to 2009. The remaining Federal home Loan Bank advances were paid off during the third quarter of 2010. Time deposit interest cost decreased from 1.90% to 1.15%. Their average balance outstanding decreased by $8,535,000, or 6.5%, while their expense decreased $267,000. Money market deposits average volume increased $55,971,000, or 25.8%, while their cost decreased 110 basis points, which resulted in a $441,000 decrease in their interest expense.

For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, interest income on interest earning assets decreased $836,000 or 3.08%, while average earning assets increased $5,405,000, or 0.9%. Average loans decreased by $4,732,000, or 0.9%. Interest on loans decreased $661,000 or 2.7%, while yield decreased 12 basis points, or 1.8%. The cost on total interest bearing liabilities decreased from 1.96% to 1.13% due primarily to new volumes in the Bank’s Money Market Maximizer product, and a decrease in the interest rate on time certificates of deposit from 2.05% to 1.28%. Average Federal Home Loan Bank advances decreased $41,586,000 or 72.9%. Their yield increased from 3.93% to 4.76% (including prepayment interest), and their cost decreased $1,125,000. Time deposit averages decreased $11,674,000 or 8.6%. Their yield decreased 77 basis points, or 37.6%. Money market deposit average balances increased $89,486,000, or 49.3%, and their cost decreased $472,000, or 16.4%.

For the three and nine month periods ended September 30, 2010 and September 30, 2009, respectively, the following tables show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), and b) changes in rate (changes in rate times the prior year’s volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.

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Table 3	FNB BANCORP AND SUBSIDIARY RATE/VOLUME VARIANCE ANALYSIS
	Three Months Ended September 30,
	2010 Compared to 2009
				Variance
	Interest			Attributable to
(Dollar amounts in thousands)	Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(779	)	$	(604	)	$	(175	)
Taxable securities		93			(84	)		177
Nontaxable securities (1)		52			(12	)		64
Federal funds sold		(18	)		0			(18	)
Total	$	(652	)	$	(700	)	$	48
INTEREST BEARING LIABILITIES
Demand deposits	$	45		$	50		$	(5	)
Money market		441			590			(149	)
Savings deposits		4			5			(1	)
Time deposits		267			227			40
Federal Home Loan Bank advances		198			(120	)		318
Total	$	955		$	752		$	203
NET INTEREST INCOME	$	303		$	52		$	251

(1) Includes tax equivalent adjustment of $109,000 and $94,000 in the three months ended September 30, 2010, and September 30, 2009, respectively.

Table 4	FNB BANCORP AND SUBSIDIARY RATE/VOLUME VARIANCE ANALYSIS
	Nine Months Ended September 30,
	2010 Compared to 2009
				Variance
	Interest			Attributable to
(Dollar amounts in thousands)	Income/Expense			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(661	)	$	(429	)	$	(232	)
Taxable securities		64			(736	)		800
Nontaxable securities (1)		(161	)		(26	)		(135	)
Federal funds sold		(78	)		0			(78	)
Total	$	(836	)	$	(1,191	)	$	355
INTEREST BEARING LIABILITIES
Demand deposits	$	105		$	115		$	(10	)
Money market		472			1,893			(1,421	)
Savings deposits		13			12			1
Time deposits		891			712			179
Federal Home Loan Bank advances		1,125			(96	)		1,221
Total	$	2,606		$	2,636		$	(30	)
NET INTEREST INCOME	$	1,770		$	1,445		$	325

(1) Includes tax equivalent adjustment of $284,000 and $315,000 in the nine months ended September 30, 2010 and September 30, 2009, respectively.

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Noninterest income

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

Table 5	NONINTEREST INCOME
	Three months
	ended September 30,				Variance
(Dollar amounts in thousands)	2010		2009		Amount			Percent
Service charges	$	686	$	707	$	(21	)		-3.0	%
Credit card fees		159		179		(20	)		-11.2	%
Gain on available-for-sale of securities		330		659		(329	)		-49.9	%
Other income		160		127		33			26.0	%
Total noninterest income	$	1,335	$	1,672	$	(337	)		-20.2	%

	Nine months
	ended September 30,				Variance
(Dollars in thousands)	2010		2009		Amount			Percent
Service charges	$	2,045	$	2,134	$	(89	)		-4.2	%
Credit card fees		473		517		(44	)		-8.5	%
Gain on sale of available-for-securities		492		905		(413	)		-45.6	%
Other income		427		710		(283	)		-39.9	%
Total noninterest income	$	3,437	$	4,266	$	(829	)		-19.4	%

Noninterest income consists mainly of service charges on deposits. For the quarter ended September 30, 2010 compared to September 30, 2009, total noninterest income decreased by $337,000 or 20.2%. For the nine months ended September 30, 2010 and September 30, 2009, total noninterest income decreased by $829,000, or 19.4%. Service charges decreased $21,000 for the quarter, and $89,000 for the nine months. Gain on sale of available-for-sale securities decreased pretax income by $329,000 for the three months, and decreased $413,000 for the nine months ended September 30, 2010 when compared to 2009 levels. The decline in service charge revenue is primarily attributable to a decline in transaction account activity and the fees charged that are associated with that activity. Other income declined by $283,000. The major item in this group was a decline of $307,000 in tax free earnings on officers life insurance. The income in 2009 included a one-time payment as a result of the death of one participant.

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Noninterest expense

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

Table 6	NONINTEREST EXPENSE
	Three months
	ended September 30,				Variance
(Dollar amounts in thousands)	2010		2009		Amount			Percent
Salaries and employee benefits	$	3,418	$	3,250	$	168		5.2	%
Loss on impairment of other real estate owned		85		296		(211	)	-71.3	%
Occupancy expense		515		533		(18	)	-3.4	%
Equipment expense		472		470		2		0.4	%
Professional fees		372		277		95		34.3	%
FDIC assessment		363		222		141		63.5	%
Telephone, postage & supplies		271		282		(11	)	-3.9	%
Other real estate owned expense		207		225		(18	)	-8.0	%
Bankcard expenses		147		159		(12	)	-7.5	%
Other expense		848		713		135		18.9	%
Total noninterest expense	$	6,698	$	6,427	$	271		4.2	%

	Nine months
	ended September 30,				Variance
(Dollars in thousands)	2010		2009		Amount			Percent
Salaries and employee benefits	$	10,399	$	10,000	$	399		4.0	%
Loss on impairment of other real estate owned		732		1,659		(927	)	-55.9	%
Occupancy expense		1,532		1,568		(36	)	-2.3	%
Equipment expense		1,495		1,427		68		4.8	%
Professional fees		951		902		49		5.4	%
FDIC assessment		986		880		106		12.0	%
Telephone, postage & supplies		816		814		2		0.2	%
Other real estate owned expense		819		729		90		12.3	%
Bankcard expenses		436		476		(40	)	-8.4	%
Other expense		2,283		2,150		133		6.2	%
Total noninterest expense	$	20,449	$	20,605	$	(156	)	-0.8	%

Noninterest expense consists mainly of salaries and employee benefits. For the three months ended September 30, 2010 compared to three months ended September 30, 2009, it represented 51.0% and 50.6% of total noninterest expenses. For the nine months ended September 30, 2010 and 2009, it was 50.9% and 48.5% respectively of total noninterest expense. During the first quarter of 2009, a $1,200,000 loss on impairment of other real estate owned was recorded that related to one land development foreclosure property. This property was written down in the first quarter based upon a new appraisal that reflected a significant valuation decline since the Company’s initial acquisition of the property. During 2010, the loss on impairment of other real estate owned was related to impairment charges on two separate parcels of land.

Provision for Loan Losses

There was a provision for loan losses of $464,000 for the three-month period ended September 30, 2010 compared to a $796,000 provision for the same period in 2009. The decreased provision was warranted given the decreased level of nonperforming loans and the reduction in the sizeof the Bank’s loan portfolio.

There was a provision for loan losses of $1,029,000 for the nine-month period ended September 30, 2010 compared to a provision for loan losses of $3,696,000 for the same period in 2009. The allowance for loan losses was approximately $9,250,000 or 1.91% of total gross loans at September 30, 2010, compared to $9,829,000 or 1.95% of total gross loans at December 31, 2009. The allowance for loan losses is maintained at a level considered adequate by management to provide for probable loan losses inherent in the loan portfolio. The reduction in the provision for loan losses during the three and nine months ended September 30, 2010 was related to decreasing classified loans compared to the same periods in 2009.

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Income Taxes

The effective tax rate for the quarter ended September 30, 2010 was 29.4% compared to 12.2% for the quarter ended September 30, 2009. The effective tax rate for the nine months ended September 30, 2010 and September 30, 2009, respectively was a tax expense of 23.6% compared to a tax benefit of 145.3%. Tax preference items which usually affect our effective tax rate are changing amounts invested in tax-advantaged securities, available Low Income Housing Credits, and amounts of interest income on qualifying loans in Enterprise Zones. Another significant reason for changes in the effective tax rate provision is the change in the relative proportion of tax -advantaged income in comparison to fully taxable income period over period. The Company was subject to federal Alternative minimum tax during the nine months ending September 30, 2009 and 2010.

Asset and Liability Management

Ongoing management of the Company’s interest rate sensitivity limits interest rate risk through monitoring the mix and maturity of loans, investments and deposits. Management regularly reviews the Company’s position and evaluates alternative sources and uses of funds as well as changes in external factors. Various methods are used to achieve and maintain the desired rate sensitivity position including the sale or purchase of assets and product pricing.

In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company’s ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity comes from Company’s customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. Management believes the Company’s liquidity sources at September 30, 2010 are adequate to meet its operating needs in 2010 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

Financial Condition

Assets. Total assets increased to $727,502,000 at September 30, 2010 from $708,309,000 at December 31, 2009, an increase of $19,193,000. The principal source of this increase was in securities available for sale, which increased by $33,935,000, and a $6,878,000 increase in cash and due from banks, partially offset by a $18,885,000 decrease in net loans, and a net decrease in all other assets of $2,735,000. This asset accumulation was funded by a $40,046,000 increase in deposits, an increase of $925,000 in other liabilities, and an increase in total stockholders’ equity of $3,222,000, net of a reduction of $25,000,000 in Federal Home Loan Bank advances. The majority of the increase in deposits was derived from increased deposit volumes invested in our Money Market Maximizer product.

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Loans. Gross loans (before loan fees (cost) at September 30, 2010 were $485,012,000, a decrease of $19,345,000 or 3.84% from December 31, 2009. Gross real estate loans increased $10,572,000, construction loans decreased $20,340,000, commercial loans decreased $9,279,000 and consumer loans decreased by $298,000. The portfolio breakdown was as follows:

Table 7	LOAN PORTFOLIO
	September 30,						December 31,
(Dollar amounts in thousands)	2010			Percent			2009			Percent
Real Estate	$	397,102			81.9	%	$	386,530			76.6	%
Construction		26,849			5.5	%		47,189			9.4	%
Commercial		58,698			12.1	%		67,977			13.5	%
Consumer		2,363			0.5	%		2,661			0.5	%
Gross loans	$	485,012			100.0	%	$	504,357			100.0	%
Net deferred loan (fees) cost		(298	)					(179	)
Allowance for loan losses		(9,250	)					(9,829	)
Net loans	$	475,464					$	494,349

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

A summary of activity in the allowance for loan losses for the nine months ended September 30, 2010 and the nine months ended September 30, 2009 is as follows:

TABLE 8	ALLOWANCE FOR LOAN LOSSES
	Nine months ended
	September 30,
(Dollar amounts in thousands)	2010			2009
Balance, beginning of period	$	9,829		$	7,075
Provision for loan losses		1,029			3,696
Recoveries		54			68
Amounts charged off		(1,662	)		(1,415	)
Balance, end of period	$	9,250		$	9,424

During the nine months ended September 30, 2010, a provision of $1,029,000 was made. The decrease in provision during 2010 was made possible by improvement in the volume of nonperforming loans and a reduction in the size of the Bank’s loan portfolio during 2010.

In management’s judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at September 30, 2010. 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.

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

Nonperforming assets. Nonperforming assets consist of nonaccrual loans, loans that are 90 days or more past due but are still accruing interest and other real estate owned. At September 30, 2010, there was $23,906,000 in nonperforming assets, compared to $32,912,000 at December 31, 2009. Nonaccrual loans were $17,298,000 at September 30, 2010, compared to $25,592,000 at December 31, 2009. There was $6,608,000 in Other Real Estate Owned at September 30, 2010, and $7,320,000 at December 31, 2009. There were no loans past due 90 days and still accruing at either date. During the second quarter of 2010, the Bank obtained through foreclosure two properties with a fair market value of $2,218,000 that consisted of a single family residence in Redwood City and a parcel of land in Pacifica, CA. During the first quarter of 2010, the Bank obtained $965,000 in Other Real Estate Owned through the foreclosure process. During the first quarter of 2009, the Bank obtained title to two single family residences in San Anselmo, California that had a combined value of $3,298,000 at the time of foreclosure. One property was sold both in the first and second quarter of 2010, and there was one property sold in the fourth quarter of 2009. Management intends to aggressively market these properties. While management believes these properties will sell, there can be no assurance that these properties will sell quickly given the current real estate market, nor can the expected sales price be accurately predicted.

Deposits. Total deposits at September 30, 2010, were $639,021,000compared to $598,964,000 at December 31, 2009. Of these totals, noninterst-bearing demand deposits were $136,315,000 or 21.3% of the total on September 30, 2010, and $120,515,000 or 20.1% on December 31, 2009. Time deposits were $126,222,000 on September 30, 2010, and $127,323,000 on December 31, 2009.

The following table sets forth the maturity schedule of the time certificates of deposit on September 30, 2010:

TABLE 9
(Dollar amounts in thousands)	Under		$100,000
Maturities	$100,000		or more		Total
Three months or less	$	13,076	$	32,180	$	45,256
Over three through six months		9,956		20,613		30,569
Over six through twelve months		12,254		19,074		31,328
Over twelve months		9,150		9,919		19,069
Total	$	44,436	$	81,786	$	126,222

Federal Home Loan Bank advances. These advances declined by $25,000,000 or 100.0% on September 30, 2010 compared to December 31, 2009. The remaining advance was prepaid during the third quarter of 2010. The prepayment penalty paid during the quarter ended Sptember 30, 2010 was $139,000. Funds to repay these advances were primarily obtained from increased deposits generated during 2010.

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The following table shows the risk-based capital ratios and leverage ratios at September 30, 2010 and December 31, 2009 for the Bank:

TABLE 10						Minimum “Well
	September 30,		December 31,			Capitalized”
Regulatory Capital Ratios	2010		2009			Requirements
Total Risk-Based Capital Ratio	14.52	%	14.24	%	≥	10.00	%
Tier 1 Capital Ratio	13.26	%	12.99	%	≥	6.00	%
Leverage Ratios	10.36	%	10.73	%	≥	5.00	%

Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of September 30, 2010, liquid assets were $200,854,000, or 27.6% of total assets. As of December 31, 2009, liquid assets were $160,041,000, or 22.6% of total assets. Liquidity consists of cash and due from banks, federal funds sold, and securities available-for-sale. The Company’s primary uses of funds are loans, and the primary sources of funds are deposits. The relationship between total net loans and total deposits is a useful additional measure of liquidity. The Company also has federal funds borrowing facilities totaling $45,000,000, a Federal Home Loan Bank line up to 30% of total assets, and a Federal Reserve Bank borrowing facility.

A higher loan to deposit ratio may lead to a loss of liquid assets in the future. This must be balanced against the fact that loans represent the highest interest earning assets. A lower loan to deposit ratio means lower potential income. On September 30, 2010, net loans were at 74% of deposits. On December 31, 2009, net loans were at 83% of deposits.

Off-Balance Sheet Items

The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results. As of September 30, 2010 and December 31, 2009, 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 $107,524,000 and $90,247,000 at September 30, 2010 and December 31, 2009, respectively. As a percentage of net loans, these off-balance sheet items represent 22.6% and 18.3% respectively.

Corporate Reform Legislation

President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the “Act”) on July 30, 2002, in response to corporate accounting scandals. Among other matters, the Act increased the penalties for securities fraud, established new rules for financial analysts to prevent conflicts of interest, created a new independent oversight board for the accounting profession, imposed restrictions on the consulting activities of accounting firms that audit company records and required certification of financial reports by corporate executives. The SEC has adopted a number of rule changes to implement the provisions of the Act. The SEC has also approved new rules adopted by the New York Stock Exchange and the Nasdaq Stock Market to strengthen corporate governance standards for listed companies. The Company anticipates that it will continue to incur costs to comply with the Act and the rules and regulations promulgated pursuant to the Act by the Securities and Exchange Commission of approximately $100,000 annually.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of loss to future earnings, to fair values of assets or to future cash flows that may result from changes in the price or value of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates and other market conditions. Market risk is attributed to all market-risk-sensitive financial instruments, including loans, investment securities, deposits and borrowings. The Company does not engage in trading activities or participate in foreign currency transactions for its own account. Accordingly, exposure to market risk is primarily a function of asset and liability management activities and of changes in market rates of interest. Changes in rates can cause or require increases in the rates paid on deposits that may take effect more rapidly or may be greater than the increases in the interest rates that the Company is able to charge on loans and the yields that it can realize on its investments.

The extent of that market risk depends on a number of variables, including the sensitivity to changes in market interest rates and the maturities of the Company’s interest earning assets and deposits.

Item 4T. Controls and Procedures.

(a)           Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management as of the end of the Company’s fiscal quarter ended September 30, 2010. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

(b)           Internal Control Over Financial Reporting: An evaluation of any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company’s fiscal quarter ended September 30, 2010, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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Item 1A. Risk Factors

During the course of normal operations, the Bank and the Company manage a variety of risks including, but not limited to, credit risk, operational risk, interest rate risk and regulatory compliance risk. For a more complete discussion of the risk factors facing the Bank and the Company, please refer to the section entitled “Item 1A – Risk Factors” in the Company’s December 31, 2009 Form 10K.

As a result of our latest Office of the Comptroller of the Currency (“OCC”) examination which occurred during the second quarter of 2010, management and the Board of Directors have informally agreed with the OCC to take actions to further strengthen and improve asset quality and capital adequacy, including, among other things, to: maintain a minimum leverage capital ratio of 9% and total risk-based capital ratio of 12%; seek OCC approval and concurrence before declaring any dividends on common or preferred shares; to reduce the level of risk in the commercial real estate (“CRE”) segment of our loan portfolio; and strengthen the documentation of our analysis and review of the adequacy of our allowance for loan losses. Management believes that we are in compliance with all the requirements of this informal agreement as of September 30, 2010.

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

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

c) ISSUER PURCHASES OF EQUITY SECURITIES

On August 24, 2007, the Board of Directors of the Company authorized a stock repurchase program which calls for the repurchase of up to five percent (5%) of the Company’s then outstanding 2,863,635 shares of Common Stock, or 143,182 shares. There were no repurchases during the quarter ended September 30, 2010. There were 10,457 shares remaining that may be purchased under this Plan as of September 30, 2010. Effective February 27, 2009, based on the Purchase Agreement with the U. S. Treasury, the Company may not repurchase Company common stock so long as the Treasury’s Preferred Stock investment is outstanding.

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Item 6. Exhibits

Exhibits

31:	Rule 13a-14(a)/15d-14(a) Certifications
32:	Section 1350 Certifications

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	FNB BANCORP
	(Registrant)
Dated: November 12, 2010.	By:	/s/ Thomas C. McGraw
		Thomas C. McGraw
		Chief Executive Officer
		(Authorized Officer)
	By:	/s/ David A. Curtis
		David A. Curtis
		Senior Vice President
		Chief Financial Officer
		(Principal Financial Officer)

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