SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, |
| or | |
| o | Transition report pursuant to Section 13 or 15 (d) of Securities Exchange Act of 1934 |
Commission File No. 000-49693
FNB BANCORP
(Exact name of registrant as specified in its charter)
| California | 91-2115369 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer ID Number) | |
| 975 El Camino Real, South San Francisco, California | 94080 | ||
| (Address of principal executive offices) | (Zip code) | ||
| (650) 588-6800 | ||||||
| (Registrant’s telephone number, including area code) | ||||||
| Securities registered pursuant to Section 12(b) of the Act: | None | |||||
| Securities registered pursuant to Section 12(g) of the Act: | ||||||
| Title of Class: | Common Stock, no par value | |||||
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this 10-K o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition 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 Act). Yes o No x
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $59,600,975
Page 1 of 117 pages
Number of shares outstanding of each of the registrant’s classes of common stock, as of March 10, 2014
No par value Common Stock – 3,978,505 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: Part III, Items 10 through 14 from Registrant’s definitive proxy statement for the 2013 annual meeting of shareholders.
TABLE OF CONTENTS
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Forward-Looking Statements: Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,” “would,” and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) variances in the actual versus projected growth in assets; (2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company, including State and local issues being addressed in California; (9) changes in the regulatory environment; (10) changes in business conditions and inflation; (11) changes in securities markets; (12) data processing problems; (13) a furtherdecline in real estate values in the operating market areas of the Company; (14) the effects of terrorism, the threat of terrorism or the impact of the current military conflicts in Afghanistan and Syria, and the conduct of the war on terrorism by the United States and its allies, worsening financial and economic conditions, natural disasters, and disruption of power supplies and communications; and (15) changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations, as well as other factors. The factors set forth under “Item 1A – Risk Factors” in this report and other cautionary statements and information set forth in this report should be read carefully, considered and understood as being applicable to all related forward-looking statements contained in this report when evaluating the business prospects of the Company and its subsidiary.
Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, or to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.
General
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.
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As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located at 975 El Camino Real, South San Francisco, California, 94080, and its telephone number is (650) 588-6800.
The Company owns all of the issued and outstanding shares of common stock of First National Bank of Northern California, a national banking association. The Company has no other subsidiary.
The Bank was organized in 1963 as “First National Bank of Daly City.” In 1995, the shareholders approved a change in the name to “First National Bank of Northern California.” The administrative headquarters of the Bank is located at 975 El Camino Real, South San Francisco, California. The Bank is locally owned and presently operates eleven full service banking offices in the cities of Daly City, South San Francisco, Millbrae, Pacifica, Half Moon Bay, San Mateo, Redwood City, Pescadero, and San Francisco. The Bank also has a loan production office in Sunnyvale. The Bank’s primary business is servicing the business or commercial banking needs of individuals and small to mid-sized businesses within San Mateo and San Francisco Counties.
The Bank is chartered under the laws of the United States and is governed by the National Bank Act, and as a national bank is a member of the Federal Reserve System. The Federal Deposit Insurance Corporation insures the deposits of the Bank up to the applicable legal limits, currently $250,000 per separately insured depositor. The Bank is subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency. The regulations of the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency govern many aspects of the Bank’s business and activities, including investments, loans, borrowings, branching, mergers and acquisitions, reporting and numerous other areas. The Bank is also subject to applicable provisions of California law to the extent those provisions are not in conflict with or preempted by federal banking law. See “Supervision and Regulation” below.
The Bank’s market areas consist primarily of the counties of San Francisco and San Mateo. Based on latest available reports from the U. S. Department of Commerce Bureau of Economic Analysis, per capita income in the counties of San Francisco and San Mateo for the year 2012 were $80,014 and $74,582, respectively, which represented an increase of 19.6% and a decrease of 14.1%, respectively, over 2009 levels. Management believes per capita income levels grew at single digit growth rates during the year ended December 31, 2013, based upon expected economic activity levels and overall employment prospects. Unemployment data published by the California Employment Development Department report sun employment levels of 4.8% in San Francisco County, 4.6% in San Mateo County, and 7.9% for the State of California, in December 2013. For December 2012, San Francisco County showed 6.5%, San Mateo County showed 6.0%, and the State of California 9.7%.
In addition, a report from the California Employment Development Department (“EDD”), based on information published by America’s Labor Market Information System (ALMIS) Employer Database 2013 2nd Edition, lists the following major employers in San Francisco County: Bechtel, Deloitte, Federal Reserve Bank, GSA Pacific Rim Region, California Pacific Medical Center, Kaiser Permanente Medical Center, San Francisco General Hospital, Pacific Gas & Electric, San Francisco Chronicle, San Francisco State University, UCSF-Medical Center, US Veterans Medical Center and University of California-San Francisco. The following were listed as major employers in San Mateo County: Gilead Sciences, Kaiser Permanente Medical Group, Mills-PeninsulaMedical Center, San Mateo County Human Resources, Oracle Corp., SRI International, Stanford Linear Accelerator, U.S. Interior Department, and Visa International Services Association. The major labor force in both counties is represented by the service industries, including financial services, educational and health services, professional and business services, leisure and hospitality and state government.
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The Bank offers a broad range of services to individuals and businesses in its primary service area, including a full line of business financial products with specialized services such as courier, appointment banking, and business Internet banking. The Bank offers personal and business checking and savings accounts, including individual interest-bearing negotiable orders of withdrawal (“NOW”), money market accounts and/or accounts combining checking and savings accounts with automatic transfer capabilities, IRA accounts, time certificates of deposit, direct deposit services and computer cash management with access through the Internet. The Bank also makes available commercial loans and standby letters of credit and construction, accounts receivable, inventory, automobile, home improvement, residential real estate, and commercial real estate loans,home equity lines, Small Business Administration loans, office equipment, leasehold improvement and consumer loans as well as overdraft protection lines of credit. In addition, the Bank sells travelers checks and cashier’s checks, offers automated teller machine (ATM) services tied in with major statewide and national networks and offers other customary commercial banking services.
Most of the Bank’s deposits are obtained from commercial and non-profit businesses, professionals and individuals. As of December 31, 2013, the Bank had a total of 22,540 deposit accounts. The Bank has obtained deposits through deposit brokers for which it pays a broker fee. As of December 31, 2013, The Bank had $4,905,000 in such deposits. There is no concentration of deposits or any customer with 5% or more of the Bank’s total deposits.
At December 31, 2013, the Company had total assets of $891,930,000, net loans of $552,343,000, deposits of $773,615,000 and stockholders’ equity of $94,249,000. The Company competes with approximately 34 other banking or savings institutions in its San Francisco and San Mateo County service area. The Company’s market share of Federal Deposit Insurance Corporation insured deposits in the service area of San Mateo County is approximately 2.66%, and 0.07% in the San Francisco County marketarea (based upon the most recent information available from the Federal Deposit Insurance Corporation through June 30, 2013). See “Competitive Data” below.
Employees
At December 31, 2013, the Company employed 184 persons on a full-time equivalent basis. The Company believes its employee relations are good. The Company is not a party to any collective bargaining agreement.
Available Information
The Company and the Bank maintain an Internet website at http://www.FNBNORCAL.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available free of charge on or through such website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Also made available on or through such website are the Section 16 reports of ownership and changes in ownership of the Company’s common stock which are filed with the Securities and Exchange Commission by the directors and executive officers of the Company and by any persons who own more than 10 percent of the outstanding shares of such stock. Simply select the “Investor Relations” menu item and then click on “Financial Statements.” Information on such website is not incorporated by reference into this report.
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SUPERVISION AND REGULATION
General
FNB Bancorp. The common stock of the Company is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. FNB Bancorp has registered its common stock under Section 12 (g) of the Securities Exchange Act of 1934, as amended. The Company is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, annual, quarterly and other current reports required to be filed with the Securities and Exchange Commission.
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is registered as such with, and subject to the supervision of, the Board of Governors of the Federal Reserve System (the “Board of Governors”). The Company is required to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, FNB Bancorp would own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act prohibits the Company from acquiring any voting shares of, or interest in, all or substantially all of the assets of a bank located outside the State of California unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any such interstate acquisition is also subject to the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
The Company, and any non-bank subsidiary which it may acquire or organize, are deemed to be “affiliates” of the Bank within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by the Bank to its affiliates, and (b) on investments by the Bank in affiliates’ stock as collateral for loans to any borrower. The Company and the Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
In addition, regulations of the Board of Governors under the Federal Reserve Act require that reserves be maintained by the Bank in conjunction with any liability of the Company under any obligation (promissory note, acknowledgment of advance, banker’s acceptance or similar obligation) with a weighted average maturity of less than seven (7) years to the extent that the proceeds of such obligations are used for the purpose of supplying funds to the Bank for use in its banking business, or to maintain the availability of such funds.
First National Bank of Northern California. As a national banking association licensed under the national banking laws of the United States, the Bank is regularly examined by the Office of the Comptroller of the Currency and is further subject to supervision and regulation by the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System.
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This supervision and regulation includes comprehensive reviews of all major aspects of the Bank’s business and condition, including its capital ratios, allowance for possible loan losses and other factors. However, no inference should be drawn that such authorities have approved any such factors. The Bank is required to file reports with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation up to the applicable legal limits.
Capital Standards.
The Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the “OCC”) have adopted risk-based guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, the Company and the Bank are required to maintain capital equal to at least 8% of its assets and commitments to extend credit, weighted by risk, of which at least 4% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan and lease loss reserves.
Under the risk-based capital guidelines, assets reported on an institution’s balance sheet and certain off-balance sheet items are assigned to risk categories, each of which has an assigned risk weight. Capital ratios are calculated by dividing the institution’s qualifying capital by its period-end risk-weighted assets. The guidelines establish two categories of qualifying capital: Tier 1 capital (defined to include common stockholders’ equity and noncumulative perpetual preferred stock) and Tier 2 capital which includes, among other items, limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserve for credit losses.
The Bank and the Company are required to maintain a minimum ratio of Tier 1 capital to the sum of its quarterly average total assets and quarterly average reserve for loan losses, less intangibles not included in Tier 1 capital (“Leverage Ratio.”) The Leverage ratio minimums have been established at 3% (Tier 1 capital to total assets) for the highest rated bank holding companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth.
At December 31, 2013, the Company and the Bank were in compliance with the risk-based capital and leverage ratios described above. See “Capital” under Item 7 “Management’s Discussion and Analysis of Financial Condition and the Results of Operations” below. Also see Note 20 to the Financial Statements incorporated by reference in Item 8 below.
Prompt Corrective Action
The Board of Governors, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have adopted regulations implementing a system of prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). The regulations establish five capital categories with the following characteristics:
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(1) “Well capitalized” – consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, formal written agreement, capital directive or prompt corrective action directive;
(2) “Adequately capitalized” – consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a “well capitalized” institution;
(3) “Undercapitalized” – consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%;
(4) “Significantly undercapitalized” – consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%;
(5) “Critically undercapitalized” – consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency, among other matters. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause an institution to be classified within any one of the three “undercapitalized” categories, such as declaration of dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution would be classified within one of the “undercapitalized” categories. In addition, institutions that are classified in one of the three “undercapitalized” categories are subject to certain mandatory and discretionary supervisory actions. Mandatory supervisory actions include:
(1) increased monitoring and review by the appropriate federal banking agency;
(2) implementation of a capital restoration plan;
(3) total asset growth restrictions; and
(4) limitation upon acquisitions, branch expansion, and new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may include:
(a) requirements to augment capital;
(b) restrictions upon affiliate transactions;
(c) restrictions upon deposit gathering activities and interest rates paid;
(d) replacement of senior executive officers and directors;
(e) restrictions upon activities of the institution and its affiliates;
(f) requiring divestiture or sale of the institution; and
(g) any other supervisory action that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan.
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The aggregate liability of the parent holding company under the guaranty is limited to the lesser of (i) an amount equal to 5 percent of the depository institution’s total assets at the time it became undercapitalized, and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.”FDICIA also restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are not “well capitalized” and an “undercapitalized” institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution’s normal market areas or in the market areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as “critically undercapitalized” must be placed in conservatorship or receivership within 90 days of such determination unless it is also determined that some other course of action would better serve the purposes of the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of principal or interest on subordinated debt without prior regulatory approval and regulators must prohibit a critically undercapitalized institution from taking certain other actions without prior approval, including (1) entering into any material transaction other than in the usual course of business, including investment expansion, acquisition, sale of assets or other similar actions; (2) extending credit for any highly leveraged transaction; (3) amending articles or bylaws unless required to do so to comply with any law, regulation or order; (4) making any material change in accounting methods; (5) engaging in certain affiliate transactions; (6) paying excessive compensation or bonuses; and (7) paying interest on new or renewed liabilities at rates which would increase the weighted average costs of funds beyond prevailing rates in the institution’s normal market areas.
Under FDICIA, the federal financial institution agencies have adopted regulations which require institutions to establish and maintain comprehensive written real estate policies which address certain lending considerations, including loan-to-value limits, loan administrative policies, portfolio diversification standards, and documentation, approval and reporting requirements. FDICIA further generally prohibits an insured bank from engaging as a principal in any activity that is impermissible for a national bank, absent Federal Deposit Insurance Corporation determination that the activity would not pose a significant risk to the Bank Insurance Fund, and that such bank is, and will continue to be, within applicable capital standards.
Effective January 1, 2015, the risk-based-capital regulations and prompt corrective regulations, described above under “Capital Standards” and “Prompt Corrective Action,” have been amended to the extent described below under Basel III Capital.
Basel III Capital
In July 2013, the federal bank regulatory agencies issued interim final rules that revise and replace the current risk-based capital requirements. These rules implement the “Basel III” regulatory capital reforms released by the Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Basel III reforms reflected in the final rules include an increase in the risk-based capital requirements and certain changes to capital components and the calculation of risk-weighted assets.
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Effective January 1, 2015, banking organizations like the Company and the Bank must comply with new minimum capital ration requirements to be phased in between January 1, 2015 and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a total capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); a Tier 1 capital to adjusted average total assers (“leverage”) ratio of 4%.
In addition, a “capital conservation buffer” is established which when fully phased-in will require maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer would increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement would be phased in between January 2016 and January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, discretionary payments under Tier 1 instruments and paying discretionary bonuses if its capital ratio level fell below the buffer amount.
The federal bank regulatory agencies have also proposed changes to the prompt corrective action framework (described above under “Prompt Corrective Action”) which is designed to place restrictions on insured depository institutions if their capital ratios begin to show signs of weakness. These changes will take effect January 1, 2015 and will require insured depository institutions to meet the following increased capital ratio requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
Assuming the Basel III interim final rules were in effect at December 31, 2013, and based upon the Company’s capital position at December 31, 2013, management believes that the Company and the Bank would be in compliance with the minimum capital requirements, including the fully phased-in capital conservation buffer requirement, of the interim final rules.
Uniform Rating System
The Federal Financial Institutions Examination Council (“FFIEC”) utilizes the Uniform Financial Institutions Rating System (“UFIRS”), commonly referred to as “CAMELS,” to classify and evaluate the soundness of financial institutions. Bank examiners use the CAMELS measurements to evaluate capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk.
Effective January 1, 2005, bank holding companies such as the Company became subject to evaluation and examination under a revised bank holding company rating system. This so-called BOPEC (Bank, Other subsidiaries, Parent, Earnings, Capital) rating system, implemented in 1979, has been focused primarily on financial condition, consolidated capital and consolidated earnings. The new rating system reflects a change toward analysis of risk management (as reflected in bank examination under the CAMELS measurements), in addition to financial factors and the potential impact of non-depository subsidiaries upon depository institution subsidiaries.
The federal financial institution agencies have established bases for analysis and standards for assessing financial institution’s capital adequacy in conjunction with the risk-based capital guidelines, including analysis of interest rate risk, concentrations of credit risk, risk posed by non-traditional activities, and factors affecting overall safety and soundness. If an agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency will require the institution to correct the deficiency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan, particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution.
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CRA Compliance
Community Reinvestment Act (“CRA”) regulations evaluate banks’ lending to low and moderate income individuals and businesses across a four-point scale from “outstanding” to “substantial noncompliance,” and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in “substantial noncompliance” with the CRA regulations may be subject to enforcement proceedings. First National Bank has a current rating of “satisfactory” for CRA compliance.
FDIC Insurance
The Federal Deposit Insurance Corporation (“FDIC”) is an independent federal agency that insures deposits of federally insured banks (such as the Bank) and savings institutions up to prescribed limits through the Deposit Insurance Fund (“DIF”). All depository accounts of the Bank are covered by FDIC insurance up to established maximum limits.
The amount of FDIC assessments paid by each DIF member institution for insurance coverage is based on its risk profile as measured by regulatory capital ratios and other supervisory factors. In 2011, as required by the Dodd-Frank Act, the FDIC revised the assessment rates and the deposit insurance assessment base used to calculate premiums paid to DIF. The FDIC also increased the minimum designated reserve ratio (“DRR”) to 2.0 percent.
If economic conditions continue to negatively impact financial institutions and there are additional bank and other financial institutions failures, or if the FDIC otherwise determines, the Bank may be required to pay higher FDIC premiums in the future (including the possibility of special assessments and the requirement to prepay estimated quarterly risk-based assessments), which could have a material and adverse effect on the earnings of the Company.
Limitation on Dividends
FNB Bancorp. The Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Also, the Company has been required to make dividend payments to the U. S. Treasury on the shares of Series C, Senior Non-cumulative Perpetual Preferred Stock that were issued on September 15, 2011 as part of the Small Business Lending Fund program established under the Small Business Jobs Act of 2010. See discussion under “Small Business Jobs Act of 2010,” below. On January 23, 2014, the Company redeemed all of the remaining outstanding preferred shares that had been issued to the U.S. Treasury through the Small Business Lending Fund, in a cash redemption transaction.
Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from the Bank. The Bank’s ability to pay cash dividends is subject to restrictions imposed under the National Bank Act and regulations promulgated by the OCC.
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The Company has paid quarterly dividends for each quarter commencing with the second quarter of 2002. Future dividends will continue to be determined after consideration of the Company’s earnings, financial condition, future capital funds, regulatory requirements and other factors such as the Board of Directors may deem relevant. It is the intention of the Company to continue to pay cash dividends, subject to legal restrictions on the payment of cash dividends and depending upon the level of earnings, management’s assessment of future capital needs and other factors to be considered by the Board of Directors.
The California General Corporation Law provides that neither a corporation nor any of its subsidiaries shall make a distribution to the corporation’s shareholders unless the board of directors has determined in good faith either of the following: (1) the amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. The good faith determination of the board of directors may be based upon (1) financial statements prepared on the basis of reasonable accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable under the circumstances; provided, that a distribution may not be made if the corporation or subsidiary making the distribution is, or is likely to be, unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. The term “preferential dividends arrears amount” means the amount, if any, of cumulative dividends in arrears on all shares having a preference with respect to payment of dividends over the class or series to which the applicable distribution is being made, provided that if the articles of incorporation provide that a distribution can be made without regard to preferential dividends arrears amount, then the preferential dividends arrears amount shall be zero. The term “preferential rights amount” means the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights, including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the shareholders receiving the distribution, provided that if the articles of incorporation provide that a distribution can be made without regard to any preferential rights, then the preferential rights amount shall be zero.
The Board of Governors of the Federal Reserve System generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The Federal Reserve Board policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition.
First National Bank of Northern California. As the Bank’s sole shareholder, the Company is entitled to receive dividends when and as declared by the Bank’s Board of Directors, out of funds legally available therefore, subject to the restrictions set forth in the National Bank Act.
The payment of cash dividends by the Bank may be subject to the approval of the Office of the Comptroller of the Currency, as well as restrictions established by federal banking law and the FDIC. Approval of the Office of the Comptroller of the Currency is required if the total of all dividends declared by the Bank’s Board of Directors in any calendar year will exceed the Bank’s net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock.
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Additionally, the FDIC and/or the Office of the Comptroller of the Currency, might, under some circumstances, place restrictions on the ability of a bank to pay dividends.
Competitive Data
In its market area, the Bank competes for deposit and loan customers with other banks (including those with much greater resources), thrifts and, to a lesser extent, credit unions, finance companies and other financial service providers.
Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns, along with significant investment banking, trust and insurance operations. The Bank has made arrangements with its correspondent banks and with others to provide some of these services for its customers.
For borrowers requiring loans in excess of the Bank’s legal lending limits, the Bank has offered, and intends to offer in the future, such loans on a participating basis with other insured financial institutions, retaining the portion of such loans which is within its lending limits. As of December 31, 2013, the Bank’s aggregate legal lending limits to a single borrower and such borrower’s related parties were $14,437,000 on an unsecured basis and $24,061,000 on a fully secured basis, based on regulatory Total Risk-Based Capital of $96,247,000. The Bank’s business is concentrated in its service area, which primarily encompasses San Mateo County and the City and County of San Francisco. The economy of the Bank’s service area is dependent upon government, manufacturing, tourism, retail sales, population growth and smaller service oriented businesses.
Based upon the most recent information made available by the FDIC Summary of Deposits at June 30, 2013, there were 29 commercial and savings banking institutions in San Mateo County with a total of $25,416,244,000 in deposits at June 30, 2013. The Bank had a total of 9 offices in the county with total deposits of $676,236,000 at the same date, or 2.66% of the San Mateo County totals. There were 52 banking and savings institutions in the County of San Francisco with a total of $186,573,327,000 in deposits at June 30, 2013. The Bank had a total of 4 offices in the county with total deposits of $126,984,000, or 0.07% of the County of San Francisco totals. Offices of First National Bank in San Mateo County and the City and County of San Francisco have averaged deposit growth of 6.01% over the last two years. Some of this growth was related to the Company’s acquisition of Oceanic Bank, which occurred in September, 2012.
General Competitive Factors
In order to compete with the financial institutions in their primary service areas, community banks use, to the fullest extent possible, the flexibility which is accorded by their independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by their respective officers, directors and employees. The Bank’s management and employees develop a thorough knowledge of local businesses and markets.
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They also seek to provide special services and programs for individuals in their primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture and tools of the trade or expansion of practices or businesses. In the event there are customers whose loan demands exceed their respective lending limits, they seek to arrange for such loans on a participation basis with other financial institutions. They also assist those customers requiring services not offered by either bank to obtain such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In general, the difference between the interest rate paid by a bank to obtain their deposits and other borrowings and the interest rate received by a bank on loans extended to customers and on securities held in a bank’s investment portfolio comprise the major portion of a bank’s earnings. The Bank competes with savings and loan associations, credit unions, other financial institutions and other entities for funds.
The Bank also competes for loans with savings and loan associations, credit unions, consumer finance companies, banking and other financial institutions, mortgage companies and other lending institutions.
The interest rate differentials of a bank, and therefore its earnings, are affected not only by general economic conditions, but also by statutes, as implemented by federal agencies. The Federal Reserve Board can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Banks. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on the Bank are not predictable.
Impact of Certain Legislation and Regulation
National banks that are well capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order may engage in activities related to banking through operating subsidiaries subject to an expedited application process. In addition, a national bank may apply to the Office of the Comptroller of the Currency to engage in an activity through a subsidiary in which the Bank itself may not engage.
The Gramm-Leach-Bliley Act of 1999 (the “Act”), eliminated most of the remaining depression-era “firewalls” between banks, securities firms and insurance companies which were established by the Banking Act of 1933, also known as the Glass-Steagall Act (“Glass-Steagall”). Glass-Steagall sought to insulate banks as depository institutions from the perceived risks of securities dealing and underwriting, and related activities. The Act repealed Section 20 of Glass-Steagall, which prohibited banks from affiliating with securities firms. Bank holding companies that can qualify as “financial holding companies” can now, among other matters, acquire securities firms or create them as subsidiaries, and securities firms can now acquire banks or start banking activities through a financial holding company. The Act includes provisions which permit national banks to conduct financial activities through a subsidiary that are permissible for a national bank to engage in directly, as well as certain activities authorized by statute, or that are financial in nature or incidental to financial activities to the same extent as permitted to a “financial holding company” or its affiliates. This liberalization of United States banking and financial services regulation applies both to domestic institutions and foreign institutions conducting business in the United States. Consequently, the common ownership of banks, securities firms and insurance is now possible, as is the conduct of commercial banking, merchant banking, investment management, securities underwriting and insurance within a single financial institution using a structure authorized by the Act.
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Prior to the Act, significant restrictions existed on the affiliation of banks with securities firms and related securities activities. Banks were also (with minor exceptions) prohibited from engaging in insurance activities or affiliating with insurers.
The Act removed these restrictions and substantially eliminated the prohibitions under the Bank Holding Company Act on affiliations between banks and insurance companies. Bank holding companies which qualify as financial holding companies can now, among other matters, insure, guarantee, or indemnify against loss, harm, damage, illness, disability, or death; issue annuities; and act as a principal, agent, or broker regarding such insurance services.
In order for a commercial bank to affiliate with a securities firm or an insurance company pursuant to the Act, its bank holding company must qualify as a financial holding company. A bank holding company will qualify if (i) its banking subsidiaries are “well capitalized” and “well managed” and (ii) it files with the Board of Governors a certification to such an effect and a declaration that it elects to become a financial holding company. The amendment of the Bank Holding Company Act now permits financial holding companies to engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to such financial activities.
Financial holding companies are also permitted to engage in activities that are complementary to financial activities if the Board of Governors determines that the activity does not pose a substantial risk to the safety or soundness of depository institutions or the financial system in general. These standards expand upon the list of activities “closely related to banking” which to date have defined the permissible activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act was to require that federal financial institution and securities regulatory agencies prescribe regulation to implement the policy that financial institutions must respect the privacy of their customers and protect the security and confidentiality of customers’ non-public personal information. These regulations require, in general, that financial institutions (1) may not disclose non-public information of customers to non-affiliated third parties without notice to their customers, who must have an opportunity to direct that such information not be disclosed; (2) may not disclose customer account numbers except to consumer reporting agencies; and (3) must give prior disclosure of their privacy policies before establishing new customer relationships.
Neither the Company nor the Bank has determined whether or when it may seek to acquire and exercise new powers or activities under the Act.
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Volker Rule
On December 10, 2013, the federal banking agencies jointly issued a final rule implementing the so-called “Volker Rule” (set forth in Section 619 of the Dodd-Frank Act). The Volker rule prohibits depository institutions, companies that control such institutions, bank holding companies, and the affiliates and subsidiaries of such banking entities, from engaging as principal for the trading account of the banking entity in any purchase or sale of one or more covered financial instruments (so-called “proprietary trading”) and imposes limitations upon retaining ownership interests in, sponsoring, investing in and transacting with certain investment funds, including hedge funds and private equity funds. Certain activities involving underwriting, risk mitigation hedging, and transactions on behalf of customers as a fiduciary or riskless principal are not prohibited proprietary trading, including purchases and sales of financial instruments which are either obligations of or issued or guaranteed by (i) the United States or agencies thereof; (ii) a State or political subdivision including municipal securities; or (iii) the FDIC. Notwithstanding these permissible activities, no such activities are permitted if they would (i) involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties; (ii) result, directly or indirectly, in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy; or (iii) pose a threat to the safety and soundness of the banking entity or the financial stability of the United States. The effective date of the final rule is delayed to July 21, 2015 in order to provide a transitional period for banking entities to conform their activities and policies to the final rule. Neither the Company nor the Bank engages in activities prohibited by the Volker Rule and management does not expect the Volker Rule to have a material impact upon the Company or the Bank.
The Patriot Act
On October 26, 2001, President Bush signed the USA Patriot Act (the “Patriot Act”), which included provisions pertaining to domestic security, surveillance procedures, border protection, and terrorism laws to be administered by the Secretary of the Treasury.
Title III of the Patriot Act entitled, “International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001”includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money laundering activities with particular emphasis upon international money laundering and terrorism financing activities through designated correspondent and private banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits any insured financial institution such as the Bank, from providing correspondent accounts to foreign banks which do not have a physical presence in any country (designated as “shell banks”), subject to certain exceptions for regulated affiliates of foreign banks. Section 313(a) also requires financial institutions to take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services to foreign shell banks, and Section 319(b) requires financial institutions to maintain records of the owners and agent for service of process of any such foreign banks with whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act created a requirement for special due diligence for correspondent accounts and private banking accounts. Under Section 312, each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances of money laundering through those accounts.
The Patriot Act contains various provisions in addition to Sections 313(a) and 312 that affect the operations of financial institutions by encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. The Company and the Bank are not currently aware of any account relationships between the Bank and any foreign bank or other person or entity as described above under Sections 313(a) or 312 of the Patriot Act.
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On March 9, 2006, after temporary extensions of the Patriot Act, President Bush signed the “USA Patriot Improvement and Reauthorization Act of 2005” and the “USA Patriot Act. Additional Reauthorizing Amendments Act of 2006,” which reauthorized all expiring provisions of the Act and extended certain provisions related to surveillance and production of business records until December 31, 2009. The extended deadline for those provisions was subsequently further extended at various times. On May 26, 2011, Congress approved a four–year extension of three expiring provisions, which are now set to expire June 1, 2015.
The effects which the Patriot Act and any amendments to the Patriot Act or any additional legislation enacted by Congress may have upon financial institutions is uncertain; however, such legislation could increase compliance costs and thereby potentially may have an adverse effect upon the Company’s results of operations.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”), legislation designed to address certain issues of corporate governance and accountability. The key provisions of the Act and the rules promulgated by the SEC pursuant to the Act include the following:
| ● | Created expanded oversight of the accounting profession by creating a new independent public company oversight board to be monitored by the SEC. |
| ● | Revised rules on auditor independence to restrict the nature of non-audit services provided to audit clients and to require such services to be pre-approved by the audit committee. |
| ● | Created mandatory listing standards relating to audit committees, certifications of periodic reports by the CEO and CFO and it made issuer interference with an audit a crime. |
| ● | Required enhanced financial disclosures, including periodic reviews for largest issuers and real time disclosure of material company information. |
| ● | Enhanced criminal penalties for a broad array of white collar crimes and increased the statute of limitations time period for filing securities fraud lawsuits. |
| ● | Required disclosure of whether a company has adopted a code of ethics that applies to the company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and disclosure of any amendments or waivers to such code of ethics. |
| ● | Required disclosure of whether a company’s audit committee of its board of directors has a member of the audit committee who qualifies as an “audit committee financial expert.” |
| ● | Created a prohibition on insider trading during pension plan black-out periods. |
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| ● | Mandated disclosure of off-balance sheet transactions. |
| ● | Created a prohibition on personal loans to directors and officers. |
| ● | Specified conditions related to the use of non-GAAP (generally accepted accounting principles) financial measures. |
| ● | Created standards of professional conduct for attorneys, requiring attorneys having an attorney-client relationship with a company, among other matters, to report “up the ladder” to the audit committee, to another board committee or to the entire board of directors regarding certain material violations. |
| ● | Created expedited filing requirements for Form 4 reports of changes in beneficial ownership of securities, reducing the filing deadline to within 2 business days of the date on which an obligation to report is triggered. |
| ● | Created accelerated filing requirements for reports on Forms 10-K and 10-Q by public companies which qualify as “accelerated filers,” with a phased-in reduction of the filing deadline for Form 10-K and Form 10-Q. |
| ● | Required disclosure concerning website access to reports on Forms 10-K, 10-Q and 8-K, and any amendments to those reports, by “accelerated filers” as soon as reasonably practicable after such reports and material are filed with or furnished to the SEC. |
| ● | Created rules requiring national securities exchanges and national securities associations to prohibit the listing of any security whose issuer does not meet audit committee standards established pursuant to the Act. |
The Company’s securities are not currently listed on any exchange. They are traded on the NASDAQ Other the Counter Bulletin Board (OTCBB). In the event of such a listing in the future, in addition to the rules promulgated by the SEC pursuant to the Act, the Company would be required to comply with the listing standards applicable to all exchange listed companies.
The Company has incurred and it is anticipated 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.
California Corporate Disclosure Act
Effective January 1, 2003, the California Corporate Disclosure Act (the “CCD Act”) required publicly traded corporations incorporated or qualified to do business in California to disclose information about their past history, auditors, directors and officers. Effective September 28, 2004, the CCD Act, as currently in effect and codified at California Corporations Code Section 1502.1, requires the Company to file with the California Secretary of State and disclose within 150 days after the end of its fiscal year certain information including the following:
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| ● | The name of the company’s independent auditor and a description of services, if any, performed for a company during the previous two fiscal years and the period from the end of the most recent fiscal year to the date of filing; |
| ● | The annual compensation paid to each director and the five most highly compensated non-director executive officers (including the CEO) during the most recent fiscal year, including all plan and non-plan compensation for all services rendered to a company as specified in Item 402 of Regulation S-K such as grants, awards or issuance of stock, stock options and similar equity-based compensation; |
| ● | A description of any loans made to a director or executive officer at a “preferential” loan rate during the company’s two most recent fiscal years, including the amount and terms of the loans; |
| ● | Whether any bankruptcy was filed by a company or any of its directors or executive officers within the previous 10 years; |
| ● | Whether any director or executive officer of a company has been convicted of fraud during the previous 10 years; and |
| ● | A description of any material pending legal proceedings other than ordinary routine litigation as specified in Item 103 of Regulation S-K and a description of such litigation where the company was found legally liable by a final judgment or order. |
Emergency Economic Stabilization Act of 2008
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the United States Department of the Treasury (the “U.S. Treasury”) was granted the authority to take a range of actions for the purpose of stabilizing and providing liquidity to the U.S. financial markets and has implemented several programs, including the purchase by the U.S. Treasury of certain troubled assets from financial institutions under the Troubled Asset Relief Program” (the “TARP”) and the direct purchase by the U.S. Treasury of equity securities of financial institutions under the Capital Purchase Program (the “CPP”).
American Recovery and Reinvestment Act of 2009
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was signed into law. Section 7001 of the ARRA amended Section 111 of the EESA in its entirety. While the U.S. Treasury was required to promulgate regulations to implement the restrictions and standards set forth in Section 7001, the ARRA, among other things, significantly expands the executive compensation restrictions previously imposed by the EESA. Such restrictions apply to any entity that has received or will receive financial assistance under the TARP, and shall generally continue to apply for as long as any obligation arising from financial assistance provided under the TARP, including preferred stock issued under the CPP, remains outstanding. These ARRA restrictions do not apply to any TARP recipient during such time when the federal government (i) only holds any warrants to purchase common stock of such recipient or (ii) holds no preferred stock or warrants to purchase common stock of such recipient. The Company no longer participates in the CPP, so the restrictions and standards set forth in Section 7001 of the ARRA are no longer applicable to the Company. (See “Small Business Jobs Act of 2010” below.)
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Small Business Jobs Act of 2010.
On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “SBJ Act”), which, among other matters, authorizes the U.S. Treasury to buy up to $30 billion in preferred stock or subordinated debt issued by community banks (or their bank holding companies provided 90% of the funds received are down-streamed to the bank subsidiary) with assets less that $10 billion pursuant to the Small Business Lending Fund (the “SBLF”) created under the SBJ Act. Funds received as capital investments will qualify as Tier 1 capital. The SBLF investments are intended to increase the availability of credit for small businesses and thereby induce the creation of jobs in support of economic recovery.
The participating banks (or bank holding companies) will pay an annual dividend on the preferred stock or subordinated debt purchased by the U.S. Treasury in an amount which ranges between 5% and 1% during the initial measurement period of approximately two years determined by reducing the dividend rate 1% for every 2.5% increase in the bank’s small business lending up to a lending increase of 10%. The dividend rate will be adjusted quarterly during the initial period. If a participant’s lending activity does not increase in the initial period, the dividend rate will increase thereafter to 7%. After 4.5 years, the dividend rate increases to 9% until the SBLF funds are repaid.
On December 23, 2010, the federal banking agencies jointly issued guidance on underwriting standards for small business loans originated under the SBLF which require adherence to safe and sound credit standards and risk management processes. It is uncertain whether the SBLF will have the intended effect of creating jobs in sufficient numbers to positively impact the economic recovery.
On September 15, 2011, as part of the Small Business Lending Fund (“SBLF”) program established under the Small Business Jobs Act of 2010, the Company entered into and consummated a SBLF Securities Purchase Agreement (the “Purchase Agreement”) with the Secretary of the Treasury (“Treasury”), pursuant to which the Company (i) issued and sold to Treasury a total of 12,600 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”), having a liquidation preference amount of $1,000 per share, for a purchase price of $12,600,000. The Series C Preferred Stock qualifies as Tier 1 capital.
All of the proceeds $12,600,000 from the Company’s sale of its Series C Preferred Stock were immediately applied to the Company’s repurchase of outstanding shares of preferred stock which were issued to the United States Department of the Treasury on February 27, 2009, pursuant to the TARP Capital Purchase Program authorized by the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. The aggregate redemption price for the outstanding shares of preferred stock was $12,654,500. The $54,500 price differential was paid by the Company in cash.
Subject to the prior approval of the appropriate Federal Banking Agency, the Series C Preferred Stock may be redeemed, in whole or in part, at any time at the option of the Company, at a redemption price of 100% of the liquidation preference amount plus any accrued and unpaid dividends for the then current period, to the date of redemption.
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On May 6, 2013, the Company redeemed 25% of the original issue $12,600,000 of Series C Preferred Stock for a cash payment of $3,150,000. Subsequently, on January 23, 2014, the remaining $9,450,000 of Series C Preferred Stock was redeemed, also in a cash transaction. See Note 23 to the Financial Statements incorporated in Item 8 below.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank act is intended to restructure the regulation of the financial services sector by, among other things, (i) establishing a framework to identify systemic risks in the financial system implemented by a newly created Financial Stability Oversight Council and other federal banking agencies; (ii) expanding the resolution authority of the federal banking agencies over troubled financial institutions; (iii) authorizing changes to capital and liquidity requirements; (iv) changing deposit insurance assessments; and (v) enhancing regulatory supervision to improve the safety and soundness of the financial services sector. The Dodd-Frank Act is expected to have a significant impact upon our business as its provisions are implemented over time. Below is a summary of certain provisions of the Dodd-Frank Act which, directly or indirectly, may affect the Company and the Bank.
Changes to Capital Requirements. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies which will not be lower and could be higher than current regulatory capital and leverage standards for insured depository institutions. Under these requirements, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. The Dodd-Frank Act requires capital requirements to be counter cyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction consistent with safety and soundness.
Enhanced Regulatory Supervision. The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.
Consumer Protection. The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve System. The CFPB is responsible for establishing and implementing rules and regulations under various federal consumer protection laws governing certain consumer products and services. The CFPB has primary enforcement authority over large financial institutions with assets of $10 billion or more, while smaller institutions will be subject to the CFPB’s rules and regulations through the enforcement authority of the federal banking agencies. States are permitted to adopt consumer protection laws and regulations that are more stringent than those laws and regulations adopted by the CFPB and state attorneys general are permitted to enforce consumer protection laws and regulations adopted by the CFPB.
Deposit Insurance. The Dodd-Frank Act permanently increases the deposit insurance limit for insured deposits to $250,000 per depositor and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. Other deposit insurance changes under the Dodd-Frank Act include (i) amendment of the assessment base used to calculate an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) by elimination of deposits and substitution of average consolidated total assets less average tangible equity during the assessment period as the revised assessment base; (ii) increasing the minimum designated reserve ratio (“DRR”) of the DIF from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits; (iii) eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds; and (iv) repeal of the prohibition upon the payment of interest on demand deposits to be effective one year after the date of enactment of the Dodd-Frank Act. In December 2010, pursuant to the Dodd-Frank Act, the FDIC increased the reserve ratio of the DIF to 2.0 percent effective January 1, 2011.
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Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.
Transactions with Insiders. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
Enhanced Lending Limitations. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
Debit Card Interchange Fees. The Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer.
Within nine months of enactment of the Dodd-Frank Act, the Federal Reserve Board was required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. The restrictions on interchange fees, however, do not apply to banks that, together with their affiliates, have assets of less than $10 billion.
Interstate Branching. The Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.
Charter Conversions. Effective one year after enactment of the Dodd-Frank Act, depository institutions that are subject to a cease and desist order or certain other enforcement actions issued with respect to a significant supervisory matter are prohibited from changing their federal or state charters, except in accordance with certain notice, application and other procedures involving the applicable regulatory agencies.
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Compensation Practices. The Dodd-Frank Act provides that the appropriate federal banking regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. In June 2010, prior to the enactment of the Dodd-Frank Act, the federal bank regulatory agencies jointly issued the Interagency Guidance on Sound Incentive Compensation Policies (“Guidance”), which requires that financial institutions establish metrics for measuring the risk to the financial institution of such loss from incentive compensation arrangements and implement policies to prohibit inappropriate risk taking that may lead to material financial loss to the institution. Together, the Frank-Dodd Act and the Guidance may impact the Company’s compensation policies and arrangements.
Corporate Governance. The Dodd-Frank Act will enhance corporate governance requirements to include (i) requiring publicly traded companies to give shareholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders; (ii) authorizing the SEC to promulgate rules that would allow shareholders to nominate their own candidates for election as directors using a company’s proxy materials; (iii) directing the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether or not the company is publicly traded; and (iv) authorizing the SEC to prohibit broker discretionary voting on the election of directors and on executive compensation matters.
Many of the requirements under the Dodd-Frank Act will be implemented over an extended period of time.
Therefore, the nature and extent of regulations that will be issued by various regulatory agencies and the impact such regulations will have on the operations of financial institutions such as ours is unclear. Such regulations resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
Future Legislation and Regulations
Certain legislative and regulatory proposals that could affect the Company, the Bank, and the banking business in general are periodically introduced before the United States Congress, the California State Legislature and federal and state government agencies. It is not known to what extent, if any, legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. It is likely, however, that such legislation could subject the Company and the Bank to increased regulation, disclosure and reporting requirements, competition, and costs of doing business.
In addition to legislative changes, the various federal and state financial institution regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such regulations may have on the Company and the Bank.
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In addition to the risks associated with the business of banking generally, as described above under Item 1 (Description of Business), the Company’s business, financial condition, operating results, future prospects and stock price can be adversely impacted by certain risk factors, as set forth below, any of which could cause the Company’s actual results to vary materially from recent results or from the Company’s anticipated future results.
Extensive Regulation of Banking. The Company’s operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. The Company believes that it is in substantial compliance in all material respects with laws, rules and regulations applicable to the conduct of its business. Because the Company’s business is highly regulated, the laws, rules and regulations applicable to it are subject to regular modification and change. There can be no assurance that these laws, rules and regulations, or any other laws, rules or regulations, will not be adopted in the future, which could make compliance much more difficult or expensive, restrict the Company’s ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by the Company, or otherwise adversely affect the Company’s results of operations, financial condition, or future prospects.
Governmental Fiscal and Monetary Policies. The business of banking is affected significantly by the fiscal and monetary policies of the federal government and its agencies. Such policies are beyond the control of the Company. The Company is particularly affected by the policies established by the Board of Governors of the Federal Reserve System in relation to the supply of money and credit in the United States, and the target federal funds rate.
The instruments of monetary policy available to the Board of Governors can be used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits, and this can and does have a material effect on the Company’s business, results of operations and financial condition. Federal monetary policy may also affect the longer-term inflation rate which directly affects the national and local economy.
The Effects of Legislation in Response to Current Credit Conditions. Legislation passed at the federal level and/or by the State of California in response to current conditions affecting credit markets could cause the Company to experience higher credit losses if such legislation reduces the amount that borrowers are otherwise contractually required to pay under existing loan contracts with the Bank. Such legislation could also result in the imposition of limitations upon the Bank’s ability to foreclose on property or other collateral or make foreclosure less economically feasible. Such events could result in increased loan losses and require a material increase in the allowance for loan losses and thereby adversely affect the Company’s results of operations, financial condition, future prospects, profitability and stock price.
Geographic Concentration. All of the banking offices of the Company are located in the Northern California Counties of San Mateo and San Francisco. The Bank also has a loan production facility in Santa ClaraCounty. The Company and the Bank conduct business primarily in the San Franciscobay area. As a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in this area. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets, and adverse economic conditions could reduce our growth rate, or affect the ability of our customers to repay their loans, and generally impact our financial condition and results of operations. Economic conditions in the State of California are subject to various uncertainties at this time, including the budgetary and fiscal difficulties facing the State government. The Company can provide no assurance that conditions in the California economy will not deteriorate further or that such deterioration will not adversely affect the Company.
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Competition. Increased competition in the market of the Bank may result in reduced loans and deposits. Ultimately, the Bank may not be able to compete successfully against current and future bank and non bank competitors. Many competitors offer the banking services that are offered by the Bank in its service area. These competitors include national and super-regional banks, finance companies, investment banking and brokerage firms, credit unions, government-assisted farm credit programs, other community banks and technology-oriented financial institutions offering online services. In particular, the Bank’s competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances, such as Internet-based banking services that cross traditional geographic bounds, enable more companies to provide financial services.
If the Bank is unable to attract and retain banking customers, it may be unable to continue its loan growth and level of deposits, which may adversely affect its and the Company’s results of operations, financial condition and future prospects.
The Effects of Changes to FDIC Insurance Coverage Limits and Assessments. FDIC insurance assessments are uncertain and increased premiums may adversely affect the Company’s earnings. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for bank failures. In such event, the FDIC would take control of failed banks and guarantee payment of deposits up to applicable insured limits from the Deposit Insurance Fund. Insurance premium assessments to insured financial institutions may increase as necessary to maintain adequate funding of the Deposit Insurance Fund.
The Emergency Economic Stabilization Act of 2008 included a provision for an increase in the amount of deposits insured by the FDIC to $250,000, which was scheduled to remain in effect through December 31, 2013. With enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the $250,000 per depositor insurance limit was made permanent and, among other matters, unlimited deposit insurance for non-interest bearing transaction accounts was extended through December 31, 2012. However, after December 31, 2012, deposits held in non-interest bearing transaction accounts are aggregated with any interest-bearing deposits the owner may hold in the same ownership category.
Despite the increase in deposit insurance, some depositors may reduce the amount of deposits held at the Bank if concerns regarding bank failures persist, which could affect the level and composition of the Bank’s deposit portfolio and thereby directly impact the Bank’s funding costs and net interest margin. The Bank’s funding costs may also be adversely affected in the event that activities of the Federal Reserve Board and the U.S. Treasury to provide liquidity for the banking system and improvement in capital markets are curtailed or are unsuccessful. Such events could reduce liquidity in the markets, thereby increasing funding costs to the Bank or reducing the availability of funds to the Bank to finance its existing operations and thereby adversely affect the Company’s results of operations, financial condition, future prospects, profitability and stock price.
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Interest Rate Risk. Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors outside our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System, which regulates the supply of money and credit in the United States. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and interest we pay on deposits and borrowings, but could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our mortgage-backed securities portfolio. Our portfolio of securities is subject to interest rate risk and will generally decline in value if market interest rates increase, and generally increase in value if market interest rates decline.
Technology and Technological Change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology will enable efficiency and meeting customers’ changing needs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to retain and compete for customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact of the long-term aspect of our business and, in turn, our financial condition and results of operations.
Dependence on Key Officers and Employees. We are dependent on the successful recruitment and retention of highly qualified personnel. Our ability to implement our business strategies is closely tied to the strengths of our executive officers who have extensive experience in the banking industry but who are not easily replaced. In addition, business banking, one of the Company’s principal lines of business, is dependent on relationship banking, in which the Bank personnel develop professional relationships with small business owners and officers of larger business customers who are responsible for the financial management of the companies they represent. If these employees were to leave the Bank and become employed by a local competing bank, we could potentially lose business customers. In addition, we rely on our customer service staff to effectively serve the needs of our consumer customers. We actively recruit for all open positions and management believes that its relations with employees are good.
Growth strategy. We have pursued and continue to pursue a growth strategy which depends primarily on generating an increasing level of loans and deposits at acceptable risk levels. We may not be able to sustain this growth strategy without establishing new branches or new products. We may attempt to expand in our current market by opening or acquiring branch offices or other financial institutions or branch offices or through a purchase, in whole or in part, of other financial institutions. This expansion may require significant investments in equipment, technology, personnel and site locations. We cannot assure you of our success in implementing our growth strategy either through expansion of our existing branch system or through mergers and acquisitions, and there may be significant increases in our noninterest expenses, without any corresponding balance sheet growth. Mergers and acquisitions may not add to the growth of the Bank’s loans, deposits or the Bank’s profitability due to integration problems, collateral differences, changes in business conditions, or other unforeseen circumstances.
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Commercial loans. As of December 31, 2013, approximately 9% of our loan portfolio consisted of commercial business loans, which could have a higher degree of risk than other types of loans. Commercial lending is dependent on borrowers making payments on their loans and lines of credit in accordance with the terms of their notes. Our current economic recession has made it difficult for many commercial borrowers to make their required loan payments. This credit risk is increased when there is a concentration of principal in a limited number of loans and borrowers, the mobility of collateral, the effect of general economic conditions and the increased difficulty of evaluating and monitoring these types of loans. The availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. In addition, unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. If the Bank is required to repossess equipment or pursue collection efforts under personal guarantees, there could be a substantial decrease in value of collateral, if any, increased legal costs, and an increased risk of loss on the amount outstanding.
Real Estate Values. A large portion of the loan portfolio of the Company is dependent on the performance of our real estate portfolio. At December 31, 2013, real estate (including construction loans) served as the principal source of collateral with respect to approximately 91% of the Company’s loan portfolio. The current substantial decline in the economy in general, coupled with a continued decline in real estate values in the Company’s primary operating market areas could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, and the value of real estate and other collateral securing loans. Real estate values have declined, due in part to reduced construction lending, tighter underwriting requirements, and reduced borrower ability to make payments. Real estate loans may pose collection problems, resulting in increased collection expenses, and delays in the ultimate collection of these loans.
In addition, acts of nature, including fires, earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company’s financial condition.
Allowance for Loan and Lease Losses. The Company maintains an allowance for loan losses to provide for inherent loan defaults and non-performance, but its allowance for loan losses may not be adequate to cover actual loan and lease losses. In addition, future provisions for loan and lease losses could materially and adversely affect the Company and therefore the Company’s operating results. The Company’s allowance for loan and lease losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Company’s control, and these losses current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Company’s loans and the allowance for loan and lease losses. Although we believe that the Company’s allowance for loan and lease losses is adequate to cover inherent future losses, we cannot assure you that we will not further increase the allowance for loan and lease losses or that the regulators will not require us to increase this allowance. Either of these occurrences could materially and adversely affect the Company’s earnings.
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Other Real Estate Owned (“OREO”). Real estate acquired through, or in lieu of, loan foreclosures is expected to be sold and is recorded at its fair value less estimated costs to sell (fair value). The amount, if any, by which the recorded amount of the loan exceeds the fair value (less estimated costs to sell) are charged to the allowance for loan or lease losses, if necessary. The Company’s earnings could be materially and adversely affected by various expenses associated with OREO, including legal expenses, personnel costs, insurance and taxes, completion and repair costs, valuation adjustments, and other expenses associated with property ownership. Also, any further decrease in market prices of real estate in our market areas may lead to additional OREO write downs, with a corresponding expense in our income statement. At December 31, 2013 and 2012, our OREO totaled $5,318,000 and $6,650,000, respectively.
Environmental Liabilities. In the course of our business, we may foreclose and take title to real estate, and could become subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigations or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we could become subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business prospects, financial condition, liquidity, results of operations and stock price could be materially and adversely affected.
Dilution of Common Stock. Shares of the Company’s common stock eligible for future sale could have a dilutive effect on the market for common stock and could adversely affect the market price.
The Articles of Incorporation of the Company authorize the issuance of 10,000,000 shares of common stock, of which 3,978,505 were outstanding at December 31, 2013. Pursuant to its 1997, 2002 and 2008 Stock Option Plans, at December 31, 2013, the Company had outstanding options to purchase a total of 496,429 shares of common stock. As of December 31, 2013, 133,657 shares of common stock remained available for grants under the 2008 Stock Option Plan. The issuance of substantial amounts of the Company’s newly issued common stock in the public market could adversely affect the market price of the Company’s common stock. The market for the Company’s common stock is limited, making the ability to raise funds in the future through a stock offering more difficult.
Operating Losses. The Company is subject to certain operations risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company’s internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company’s business, financial condition or results of operations. Additionally, the Company is dependent on network and computer systems. If these systems and their back-up systems were to fail or were breached, the Company could be adversely affected.
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Business Confidence Uncertainty. Terrorist activities in the future and the actions taken by the United States and its allies in combating terrorism on a worldwide basis could adversely impact the Company and the extent of such impact is uncertain. Even more so, the problems in the mortgage and credit markets, the government conservatorship of Fannie Mae and Freddie Mac, as well as large write-offs at some major financial institutions have had a negative impact on the entire financial services industry. Such events have had an adverse effect on the economy in the Company’s market areas. Such continued economic deterioration could adversely affect the Company’s future results of operations by, among other matters, reducing the demand for loans and the amounts required to be reserved for loan losses, reducing the value of collateral held as security for the Company’s loans, and causing a decline in the Company’s stock price.
Federal Home Loan Bank Risk. The failure of the Federal Home Loan Bank (“FHLB”) of San Francisco or the national Federal Home Loan Bank System may have a material negative impact on our earnings and liquidity.
Even though the FHLB of San Francisco has announced it does not anticipate that additional capital is immediately necessary, nor does it believe that its capital level is inadequate to support realized losses in the future, the FHLB of San Francisco could require its members, including the Bank, to contribute additional capital in order to return the FHLB of San Francisco to compliance with capital guidelines.
At December 31, 2013, we held $4.0 million of common stock in the FHLB of San Francisco. Should the FHLB of San Francisco fail, we anticipate that our investment in the FHLB’s common stock would be “other than temporarily” impaired and may have limited value.
At December 31, 2013, we maintained a line of credit with the FHLB of San Francisco with a maximum borrowing capacity of $287,000,000, of which $272,000,000 was available. Advances under the line of credit are secured by a blanket collateral agreement, a pledge of our FHLB common stock and certain other qualifying collateral, such as commercial and mortgage loans. We are highly dependent on the FHLB of San Francisco as the primary source of wholesale funding for immediate liquidity and borrowing needs. The failure of the FHLB of San Francisco or the FHLB system in general, may materially impair our ability to meet our growth plans or to meet short and long term liquidity demands.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
The Company does not own any real property. Since its incorporation on February 28, 2001, the Company has conducted its operations at the administrative offices of the Bank, located at 975 El Camino Real, South San Francisco, California 94080.
The Bank owns the land and building at 975 El Camino Real, South San Francisco, California 94080. The premises consist of a three-story building of approximately 15,000 square feet and off-street parking for employees and customers of approximately 45 vehicles.
The Buri Buri Branch Office of the Bank is located on the ground floor and administrative offices, including the offices of senior management and credit administration, occupy the second and third floors.
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The Bank owns the land and two-story building occupied by the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land and two-story building occupied by the Colma Branch Office (1300 El Camino Real, Colma, CA 94014); the land and two-story building occupied by the Redwood City Branch Office (700 El Camino Real, Redwood City, CA 94063); the land and two-story building occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA 94030); the land and single-story building occupied by the Half Moon Bay Branch Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA 94060). All properties include adequate vehicle parking for customers and employees.
The Bank owns approximately 30,900 square feet of land and an approximately 5,100 square foot one story building located at 425 South Mathilda Avenue, Sunnyvale, CA94086. The building is currently being used as a loan production office of the Bank.
The Bank leases premises at 1450 LindaMarShopping Center, Pacifica, California 94044, for its Linda Mar Branch Office. This ground floor space is approximately 4,100 square feet. The lease will expire on August 31, 2019.
The Bank leases premises at 6599 Portola Drive, San Francisco, CA 94127, for its Portola Office. The current lease expired June 30, 2012, and the premises are currently leased on a month-to-month basis. The location consists of approximately 1,325 square feet of street level space.
The Bank subleases premises at 2197 Chestnut Street, San Francisco, CA 94123, for its Chestnut Street Branch, which opened for business on April 4, 2011,and consists of 2,150 square feet at street level and approximately 2,000 square feet on the second floor. The sublease ends on July 15, 2024.
The Bank leases premises at 150 East Third Avenue, San Mateo, CA94401, for its San Mateo Branch Office. The Bank exercised the remaining option to extend the lease term to August 12, 2018. The location consists of approximately 4,000 square feet of ground floor usable commercial space.
The Bank leases premises at 130 Battery Street, San Francisco, CA, 94000, for its Battery Street Branch Office. The lease has been extended to February 28, 2018. It has an option remaining to extend the lease for a final five years. The location consists of approximately 13,000 square feet, consisting of ground floor, mezzanine and lower level.
The Bank leased a warehouse facility at 450 Cabot Road, South San Francisco, CA 94080. The lease expired February 28, 2011. The facility is currently leased on a month-to-month basis and consists of approximately 7,600 square feet of office/warehouse space.
The foregoing summary descriptions of leased premises are qualified in their entirety by reference to the full text of the lease agreements listed as exhibits to this report.
As of December 31, 2013, the Bank’s investment in premises and equipment totaled $12,512,000. See Note 8 to the Consolidated Financial Statements.
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There are no material legal proceedings adverse to the Company or the Bank to which any director, officer, affiliate of the Company, or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or the Bank.
From time to time, the Company and/or the 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 the 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 the Bank, taken as a whole.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since March 18, 2002, the common stock of the Company has been quoted on the OTC Bulletin Board under the trading symbol, “FNBG.” There has been limited trading in the shares of common stock of the Company. On February 28, 2012, the Company had approximately 700 shareholders of common stock of record.
The following table summarizes sales of the Common Stock of the Company during the periods indicated of which management has knowledge, including the approximate high and low bid prices during such periods and the per share cash dividends declared for the periods indicated. All information has been adjusted to reflect 5% stock dividends effected on December 28, 2012 and on December 23, 2013. The prices indicated below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| Bid Price of FNB Bancorp | Cash | |||||||||||
| Common Stock | Dividends | |||||||||||
| 2012 | High | Low | Declared (1) | |||||||||
| First Quarter | $ | 13.76 | 11.33 | $ | 0.06 | |||||||
| Second Quarter | 17.14 | 13.95 | 0.06 | |||||||||
| Third Quarter | 16.57 | 15.38 | 0.07 | |||||||||
| Fourth Quarter | 18.41 | 15.60 | 0.08 | |||||||||
| 2013 | ||||||||||||
| First Quarter | $ | 20.19 | 17.67 | $ | 0.08 | |||||||
| Second Quarter | 19.95 | 19.05 | 0.10 | |||||||||
| Third Quarter | 22.00 | 19.38 | 0.10 | |||||||||
| Fourth Quarter | 28.00 | 21.29 | 0.10 | |||||||||
| (1) | See Item 1, “Limitation on Dividends” (following “FDIC Insurance”)in Item 1 (above), for a description of the limitations applicable to the payment of dividends by the Company. |
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STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in the cumulative total return on the Company’s Common Stock with the cumulative total return of the SNL Securities Index of Pink Banks (asset size of over $500 million) and the Russell 2000 Index as of the end of each of the last five fiscal years.
The graph assumes that $100.00 was invested on December 31, 2008 in the Company’s Common Stock and each index, and that all dividends were reinvested. Returns have been adjusted for any stock dividends and stock splits declared by the Company. Shareholder returns over the indicated period should not be considered indicative of future shareholder returns.
FNB BANCORP
| Period Ending | ||||||||||||||||||||||||
| Index | 12/31/08 | 12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | ||||||||||||||||||
| FNB Bancorp | 100.00 | 74.58 | 102.37 | 132.62 | 216.83 | 349.45 | ||||||||||||||||||
| Russell 2000 | 100.00 | 127.17 | 161.32 | 154.59 | 179.86 | 249.69 | ||||||||||||||||||
| SNL Bank Pink > $500M | 100.00 | 85.50 | 90.32 | 88.80 | 97.92 | 119.01 | ||||||||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information that should be read in conjunction with the Company’s consolidated financial statements and notes thereto included under Item 8 - “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.”
| Dollar amounts in thousands, except | At and for the years ended December 31, | |||||||||||||||||||
| per share amounts and ratios | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
| STATEMENT OF EARNINGS DATA | ||||||||||||||||||||
| Total interest income | $ | 37,389 | $ | 33,588 | $ | 32,897 | $ | 34,428 | $ | 35,817 | ||||||||||
| Total interest expense | 2,395 | 2,727 | 3,327 | 5,383 | 9,011 | |||||||||||||||
| Net interest income | 34,994 | 30,861 | 29,570 | 29,045 | 26,806 | |||||||||||||||
| Provision for loan losses | 1,385 | 1,833 | 1,750 | 1,854 | 4,596 | |||||||||||||||
| Net interest income after provision for loan losses | 33,609 | 29,028 | 27,820 | 27,191 | 22,210 | |||||||||||||||
| Total noninterest income | 4,183 | 9,159 | 5,079 | 4,574 | 5,387 | |||||||||||||||
| Total noninterest expenses | 29,028 | 27,739 | 27,074 | 26,873 | 27,585 | |||||||||||||||
| Earnings before provision (benefit) for income taxes | 8,764 | 10,448 | 5,825 | 4,892 | 12 | |||||||||||||||
| Provision (benefit) for income taxes | 1,325 | 1,645 | 1,568 | 1,227 | (581 | ) | ||||||||||||||
| Net earnings | 7,439 | 8,803 | 4,257 | 3,665 | 593 | |||||||||||||||
| Dividends and discount accretion on preferred stock | 567 | 658 | 800 | 853 | 632 | |||||||||||||||
| Net earnings (loss) available to common shareholders | $ | 6,872 | $ | 8,145 | $ | 3,457 | $ | 2,812 | $ | (39 | ) | |||||||||
| PER SHARE DATA - see note (1) | ||||||||||||||||||||
| Net earnings per share: | ||||||||||||||||||||
| Basic | $ | 1.75 | $ | 2.10 | $ | 0.89 | $ | 0.73 | $ | (0.01 | ) | |||||||||
| Diluted | $ | 1.71 | $ | 2.07 | $ | 0.89 | $ | 0.73 | $ | (0.01 | ) | |||||||||
| Cash dividends per share | $ | 0.38 | $ | 0.17 | $ | 0.15 | $ | 0.17 | $ | 0.24 | ||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||
| Basic | 3,935,000 | 3,879,000 | 3,873,000 | 3,872,000 | 3,872,000 | |||||||||||||||
| Diluted | 4,024,000 | 3,943,000 | 3,893,000 | 3,872,000 | 3,893,000 | |||||||||||||||
| Shares outstanding at period end | 3,979,000 | 3,884,000 | 3,865,000 | 3,868,000 | 3,868,000 | |||||||||||||||
| Book value per common share | $ | 21.31 | $ | 21.31 | $ | 19.30 | $ | 17.73 | $ | 17.24 | ||||||||||
| BALANCE SHEET DATA | ||||||||||||||||||||
| Investment securities | 263,988 | 234,945 | 187,664 | 126,189 | 97,188 | |||||||||||||||
| Net loans | 552,343 | 541,563 | 443,721 | 474,828 | 494,349 | |||||||||||||||
| Allowance for loan losses | 9,879 | 9,124 | 9,897 | 9,524 | 9,829 | |||||||||||||||
| Total assets | 891,930 | 875,340 | 715,641 | 714,639 | 708,309 | |||||||||||||||
| Total deposits | 773,615 | 768,352 | 621,778 | 628,440 | 598,964 | |||||||||||||||
| Stockholders’ equity | 94,249 | 95,358 | 87,196 | 80,924 | 78,865 | |||||||||||||||
| SELECTED PERFORMANCE DATA | ||||||||||||||||||||
| Return on average assets | 0.76 | % | 1.03 | % | 0.48 | % | 0.39 | % | -0.01 | % | ||||||||||
| Return on average equity | 7.38 | % | 9.00 | % | 4.14 | % | 3.48 | % | -0.05 | % | ||||||||||
| Net interest margin | 4.31 | % | 4.52 | % | 4.88 | % | 4.80 | % | 4.47 | % | ||||||||||
| Average loans as a percentage of average deposits | 70.09 | % | 69.68 | % | 75.11 | % | 78.18 | % | 91.32 | % | ||||||||||
| Average total stockholders’ equity as a percentage of average total assets | 10.31 | % | 11.40 | % | 11.62 | % | 11.07 | % | 11.31 | % | ||||||||||
| Common dividend payout ratio | 15.34 | % | 8.19 | % | 16.52 | % | 22.97 | % | n/a | |||||||||||
| SELECTED ASSET QUALITY RATIOS | ||||||||||||||||||||
| Net loan charge-offs/ total loans | 0.11 | % | 0.47 | % | 0.30 | % | 0.45 | % | 0.37 | % | ||||||||||
| Allowance for loan losses/Total Loans | 1.76 | % | 1.66 | % | 2.18 | % | 1.97 | % | 1.95 | % | ||||||||||
| CAPITAL RATIOS (2) | ||||||||||||||||||||
| Total risk-based capital | 14.30 | % | 14.65 | % | 16.53 | % | 14.93 | % | 14.29 | % | ||||||||||
| Tier 1 risk-based capital | 13.05 | % | 13.40 | % | 15.27 | % | 13.67 | % | 13.04 | % | ||||||||||
| Tier 1 leverage capital | 9.81 | % | 9.75 | % | 11.21 | % | 10.52 | % | 10.77 | % | ||||||||||
(1) Per share data has been adjusted for stock dividends.
(2) Ratios disclosed are for those of the Company.
The Bank regulatory capital ratios are substantially equivalent.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FNB BANCORP AND SUBSIDIARY
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 policies 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 charge-offs and loan loss provisions.
Goodwill
Goodwill arises when the Company’s purchase price exceeds the fair value of 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.
| 34 |
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 municipalities in which it operates. The Company considers its income tax provision methodology to be critical, as the determination of current and deferred taxes based on complex analyses of many factors including interpretation of federal and state laws, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), estimates of amounts due or owed, the timing of reversals of temporary differences and current financial standards. Actual results could differ significantly from the estimates due to tax law interpretations used in determining the current and deferred income tax liabilities. Additionally, there can be no assurances that estimates and interpretations used in determining income tax liabilities may not be challenged by federal and state taxing authorities.
Fair Values of Financial Instruments
Certain assets and liabilities are either carried at fair value on a recurring or non-recurring basis or are required to be disclosed at fair value. Accounting principles have established a fair value measurement model which establishes a framework that quantifies fair value estimates by the level of pricing precision. The degree of judgment utilized in measuring the fair value of assets generally correlates to the level of pricing precision. Financial instruments rarely traded or not quoted will generally have a higher degree of judgment utilized in measuring fair value. Pricing precision is impacted by a number of factors including the type of asset or liability, the availability of the asset or liability, the market demand for the asset or liability, and other conditions that were considered at the time of the valuation.
Recent Accounting Pronouncements
In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of disclosures about Offsetting Assets and Liabilities. The Update clarifies that ASU 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting agreement or similar agreement are no longer subject to the disclosure requirements in ASU 2011-11. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of ASU did not have a material impact on the Company’s consolidated financial statements.
| 35 |
In February of 2013, the FASB issued ASU No.2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial statements.
In April 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740). This ASU requires an entity to present in the financial statements an unrecognized tax benefit as a liability and the unrecognized tax benefit should not be combined with deferred tax assets to the extent that a net operating loss carry-forward, tax loss or credit carry-forward is also not available at the reporting date. The amendment is to be applied prospectively to all unrecognized tax benefits and are effective for annual and interim reporting periods beginning after December 15, 2013. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
Management has reviewed the remaining Accounting Standards Updates (ASU; 2013-03 through 2013-10) and concluded that none are applicable to the Company’s current operations.
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan Through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reports beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU 2014-04 is not expected to have a material impact on the Company’s consolidated financial statements.
| 36 |
Oceanic Bank Acquisition
On September 21, 2012, FNB Bancorp completed its acquisition of all of the outstanding stock of Oceanic Bank Holding, Inc. and Oceanic Bank, a California banking corporation and the Company’s wholly owned subsidiary. Effective the same date, Oceanic Bank was merged into First National Bank of Northern California and Oceanic Bank Holding, Inc. was merged into FNB Bancorp.
The following table presents the Oceanic Bank acquisition presented at fair value as of the acquisition date, September 21, 2012:
| September 21, | ||||
| (Dollars in thousands) | 2012 | |||
| Assets acquired: | ||||
| Cash and due from banks | $ | (1,278 | ) | |
| Investment securities, available for sale | 13,387 | |||
| Loans | 103,194 | |||
| Premises and equipment, net | 12 | |||
| Core deposit intangible | 110 | |||
| Other assets | 2,504 | |||
| Total assets acquired | $ | 117,929 | ||
| Liabilities assumed: | ||||
| Noninterest-bearing deposits | 11,755 | |||
| Interest-bearing deposits | 95,914 | |||
| Borrowings | 6,097 | |||
| Accrued expenses and other liabilities | 497 | |||
| Total liabilities assumed | $ | 114,263 | ||
| Net assets acquired/Bargain purchase gain | $ | 3,666 | ||
The Company was able to record a bargain purchase gain related to this acquisition in the amount of $3,666,000. The bargain purchase gain is shown as a separate line item in the Company’s 2012 Consolidated Statement of Earnings.
Subsequent to the acquisition, the Bank closed the Oceanic Bank branch that operated on the island of Guam and also closed the San Francisco, CA branch that operated from Post Street. Additional space was leased to include all the downstairs space at the Battery Street location, and the Post Street operations were consolidated into the Battery Street branch location. These branch closures and consolidations reduced our branch facilities costs by approximately $30,000 per month beginning in August, 2013.
| 37 |
Earnings Analysis
Net earnings in 2013 were $7,439,000. Net earnings in 2012 were $8,803,000. 2011 net earnings were $4,257,000. Net earnings available to common stockholders were $6,872,000 in 2013, $8,145,000 in 2012, and $3,457,000 in 2011. The principal source of income is interest income on loans. The level of interest income can be affected by changes in interest rate, volume of loans outstanding, and the quality of the Bank’s loan portfolio. Loans that are 90 days or more past due are placed on non-accrual status. Income on such loans is then recognized only to the extent that cash is received, and where the future collection of principal is probable. All other loans accrue interest at the stated contract rate. During 2012, the Company recorded a bargain purchase gain of $3,666,000 related to its acquisition of Oceanic Bank.
Basic earnings per share were $1.75 in 2013, $2.10 in 2012, and $0.89 in 2011. Diluted earnings per share were $1.71 in 2013, $2.07 in 2012, and $0.89 in 2011.
Net interest income for 2013 totaled $34,994,000. Net interest income for 2012 totaled $30,861,000. Net interest income for 2011 totaled $29,570,000. Interest income was $37,389,000 in 2013, an increase of $3,801,000 or 11.3% over 2012. Interest income was $33,588,000 in 2012, an increase of $691,000 or 2.1% from 2011. Interest income on deposits at the Federal Reserve Bank of San Francisco totaled $36,000 in 2013, $95,000 in 2012, and $116,000 in 2011. The increase in net interest income in 2013 was attributable to an increase in loans and taxable securities, and a decrease in interest expense on deposits, coupled with a full year of loans acquired from Oceanic Bank in September 2012. The increase in net interest income in 2012 was primarily due to the Oceanic Bank acquisition. Most of the interest earning assets are tied to the prime lending rate, which did not change during 2011 through 2013. Total nonaccrual loans were $7,351,000 and $12,474,000 as of December 31, 2013 and 2012, respectively. Payments received for loans on nonaccrual status, where principal is believed to be fully collectible, are credited to interest income when they are received. Average interest earning assets were $828,375,000 in 2013, an increase of $130,858,000 or 18.8% over 2012. Average interest earning assets totaled $697,517,000 in 2012, an increase of $80,093,000 or 13.0% from 2011. The yield on interest earning assets decreased 32 basis points in 2013 compared to 2012, and decreased 51 basis points in 2012 compared to 2011. The principal earning assets were loans, and average loans outstanding increased $72,416,000 in 2013 compared to 2012, and $10,412,000 in 2012 compared to 2011. Their yield decreased 25 basis points in 2013 compared to 2012, and decreased 21 basis points in 2012 compared to 2011. With the Oceanic Bank acquisition, average loans outstanding increased during 2012 and 2013, reversing a downward trend that occurred in 2011. Loan origination volumes increased during 2013, but so did loan repayments.
Interest expense for 2013 totaled $2,395,000 compared to $2,727,000 in 2012 and $3,327,000 in 2011. The decrease in interest expense during 2013, 2012 and 2011 was caused primarily by rate decreases on deposits, as our rates followed the declines in prevailing short term market interest rates. During 2011 through 2013, the Federal Open Market Committee (“FOMC”) federal funds rate was maintained at a target rate of 0.25%. Average interest bearing liabilities were $610,796,000 in 2013, $528,861,000 in 2012 and$486,588,000 in 2011. This represented an increase of $81,935,000 in 2013 over 2012, and an increase of $42,273,000 in 2012 over 2011. The cost of these liabilities decreased 13 basis points in 2013 compared to 2012, and 16 basis points in 2012 compared to 2011. Time deposit costs decreased 14 basis points in 2013 compared to 2012, and decreased 16 basis points in 2012 compared to 2011. The Bank generally lowered rates paid on interest bearing liabilities throughout 2011 and continued these rate reductions during 2012 and 2013. Management believes that further rate reductions on interest bearing liabilities may be difficult to achieve given the low absolute levels of existing market interest rate.
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Net interest income
| TABLE 1 | Net Interest Income and Average Balances | |||||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | Interest | Average | Interest | Average | Interest | Average | ||||||||||||||||||||||||||||||
| Average | Income | Yield | Average | Income | Yield | Average | Income | Yield | ||||||||||||||||||||||||||||
| Balance | Expense | Cost | Balance | Expense | Cost | Balance | Expense | Cost | ||||||||||||||||||||||||||||
| INTEREST EARNING ASSETS | ||||||||||||||||||||||||||||||||||||
| Loans, gross (1) (2) | $ | 554,315 | $ | 31,937 | 5.76 | % | $ | 481,899 | $ | 28,942 | 6.01 | % | $ | 471,487 | $ | 29,320 | 6.22 | % | ||||||||||||||||||
| Taxable securities (3) | 191,543 | 3,283 | 1.71 | % | 138,629 | 2,541 | 1.83 | % | 95,075 | 1,910 | 2.01 | % | ||||||||||||||||||||||||
| Nontaxable securities (3) | 73,638 | 2,684 | 3.64 | % | 72,765 | 2,717 | 3.73 | % | 50,831 | 2,218 | 4.36 | % | ||||||||||||||||||||||||
| Federal funds sold | 20 | — | n/a | 27 | — | n/a | 31 | — | n/a | |||||||||||||||||||||||||||
| Interest on deposits | 8,859 | 156 | 1.76 | % | 4,197 | 65 | 1.55 | % | — | — | n/a | |||||||||||||||||||||||||
| Total interest earning assets | 828,375 | 38,060 | 4.59 | % | 697,517 | 34,265 | 4.91 | % | 617,424 | 33,448 | 5.42 | % | ||||||||||||||||||||||||
| NONINTEREST EARNING ASSETS: | ||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 28,484 | 53,081 | 60,811 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 12,690 | 12,939 | 13,494 | |||||||||||||||||||||||||||||||||
| Other assets | 34,276 | 30,176 | 27,792 | |||||||||||||||||||||||||||||||||
| Total noninterest earning assets | 75,450 | 96,196 | 102,097 | |||||||||||||||||||||||||||||||||
| TOTAL ASSETS | $ | 903,825 | $ | 793,713 | $ | 719,521 | ||||||||||||||||||||||||||||||
| INTEREST BEARING LIABILITIES: | ||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||
| Demand, interest bearing | $ | 76,754 | $ | 92 | 0.12 | % | $ | 67,708 | $ | 96 | 0.14 | % | $ | 61,136 | $ | 126 | 0.21 | % | ||||||||||||||||||
| Money market | 312,608 | 1,334 | 0.43 | % | 279,356 | 1,610 | 0.58 | % | 267,109 | 2,111 | 0.79 | % | ||||||||||||||||||||||||
| Savings | 63,418 | 98 | 0.15 | % | 54,611 | 109 | 0.20 | % | 47,059 | 109 | 0.23 | % | ||||||||||||||||||||||||
| Time deposits | 147,928 | 852 | 0.58 | % | 126,638 | 909 | 0.72 | % | 111,284 | 981 | 0.88 | % | ||||||||||||||||||||||||
| Fed Home Loan Bank advances | 10,088 | 19 | 0.19 | % | 548 | 3 | 0.55 | % | — | — | n/a | |||||||||||||||||||||||||
| Total interest bearing liabilities | 610,796 | 2,395 | 0.39 | % | 528,861 | 2,727 | 0.52 | % | 486,588 | 3,327 | 0.68 | % | ||||||||||||||||||||||||
| NONINTEREST BEARING LIABILITIES: | ||||||||||||||||||||||||||||||||||||
| Demand deposits | 190,134 | 163,255 | 141,113 | |||||||||||||||||||||||||||||||||
| Other liabilities | 9,729 | 11,132 | 8,241 | |||||||||||||||||||||||||||||||||
| Total noninterest bearing liabilities | 199,863 | 174,387 | 149,354 | |||||||||||||||||||||||||||||||||
| Total liabilities | 810,659 | 703,248 | 635,942 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 93,166 | 90,465 | 83,579 | |||||||||||||||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 903,825 | $ | 793,713 | $ | 719,521 | ||||||||||||||||||||||||||||||
| NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4) | $ | 35,665 | 4.31 | % | $ | 31,538 | 4.52 | % | $ | 30,121 | 4.88 | % | ||||||||||||||||||||||||
| (1) | Interest on non-accrual loans is recognized into income on a cash received basis if the loan has demonstrated performance and full collection is considered probable. | |
| (2) | Amounts of interest earned include loan fees of $1,159,000, $1,068,000 and $1,071,000 for the years ended December 31, 2013, 2012 and 2011, respectively. | |
| (3) | Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $671,000, $677,000 and $551,000 for the years ended December 31, 2013, 2012 and 2011, respectively, and 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. |
| 39 |
The following table analyzes the dollar amount of change in interest income and expense and the changes in dollar amounts attributable to (a) changes in volume (changes in volume at the current year rate), (b) changes in rate (changes in rate times the prior year’s volume) and (c) changes in rate/volume (changes in rate times changes in volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.
| TABLE 2 | Rate/Volume Variance Analysis | |||||||||||||||||||||||
| (Dollar amounts in thousands) | Year Ended December 31 | |||||||||||||||||||||||
| 2013 compared to 2012 | 2012 compared to 2011 | |||||||||||||||||||||||
| Increase (decrease) (2) | Increase (decrease) (2) | |||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||
| Income/ | Variance | Income/ | Variance | |||||||||||||||||||||
| Expense | Attributable To | Expense | Attributable To | |||||||||||||||||||||
| Variance | Rate | Volume | Variance | Rate | Volume | |||||||||||||||||||
| INTEREST EARNING ASSETS: | ||||||||||||||||||||||||
| Loans | $ | 2,995 | $ | (1,177 | ) | $ | 4,172 | $ | (378 | ) | $ | (1,003 | ) | $ | 625 | |||||||||
| Taxable securities | 742 | (228 | ) | 970 | 631 | (244 | ) | 875 | ||||||||||||||||
| Nontaxable securities (1) | (33 | ) | (66 | ) | 33 | 499 | (458 | ) | 957 | |||||||||||||||
| Int time dep-other fin institutions | 91 | 22 | 69 | 65 | 0 | 65 | ||||||||||||||||||
| Total | $ | 3,795 | $ | (1,449 | ) | $ | 5,244 | $ | 817 | $ | (1,705 | ) | $ | 2,522 | ||||||||||
| INTEREST BEARING LIABILITIES: | ||||||||||||||||||||||||
| Demand deposits | $ | 4 | $ | 17 | $ | (13 | ) | $ | 30 | $ | 44 | $ | (14 | ) | ||||||||||
| Money market | 276 | 418 | (142 | ) | 501 | 572 | (71 | ) | ||||||||||||||||
| Savings deposits | 11 | 25 | (14 | ) | 0 | 15 | (15 | ) | ||||||||||||||||
| Time deposits | 57 | 210 | (153 | ) | 72 | 207 | (135 | ) | ||||||||||||||||
| Federal Home Loan Bank advances | (16 | ) | 36 | (52 | ) | (3 | ) | — | (3 | ) | ||||||||||||||
| Total | $ | 332 | $ | 706 | $ | (374 | ) | $ | 600 | $ | 838 | $ | (238 | ) | ||||||||||
| NET INTEREST INCOME | $ | 4,127 | $ | (743 | ) | $ | 4,870 | $ | 1,417 | $ | (867 | ) | $ | 2,284 | ||||||||||
(1) Nontaxable securities in this Table are shown on a tax equivalent basis.
(2) Increases (decreases) shown are in relation to their effect on net interest income.
There were nominal amounts of federal funds sold in 2013, 2012 and 2011, respectively. Interest on deposits at other financial institutions was 1.76% in 2013, and 1.55% in 2012. These were deposits acquired in 2012 from Oceanic Bank. On the expense side, the market decline in income on interest-bearing assets was also followed by declines in competitive market rates offered on interest-bearing liabilities.
| 40 |
Allowance For Loan Losses
The Board of Directors has the ultimate oversight responsibility over the processes utilized in1assessing the overall risks in the Company’s loan portfolio, assessing the specific loss expectancy, and determining the adequacy of the loan loss reserve. The level of reserves is determined by management and documented with internally generated credit quality ratings, a review of the local economic conditions in the Bank’s market area, and consideration of the Bank’s historical loan loss experience. The Bank is committed to maintaining adequate reserves, identifying credit weaknesses through frequent loan reviews, and updating loan risk ratings and changing those risk ratings in a timely manner as circumstances change.
Real estate loans outstanding increased by $19,034,000 in 2013 compared to 2012, and increased by $85,196,000 in 2012 compared to 2011. Bank management maintained conservative underwriting standards during 2011 through 2013, which generally required borrowers to maintain at most a loan-to-value ratio of 70%; maintain a debt service coverage ratio of at least 1.25; and required borrowers to make monthly mortgage payments out of documented cash flows.
During 2011 through 2013, we priced our loans competitively, and we did not discount our pricing in order to attract new business. The loan loss reserve as a percentage of outstanding loans increased in 2011 and 2013, but decreased during 2012, primarily due to the Oceanic Bank acquisition, to levels designed to accurately reflect the credit risk involved in the loan portfolio.
The allowance for loan losses totaled $9,879,000, $9,124,000 and$9,897,000 in December 31, 2013, 2012 and 2011, respectively. This represented 1.76%, 1.66%, and 2.18%of total loans outstanding on those dates. The allowance for loan losses represented 2.02% of Bank originated loans, excluding loans acquired in the Oceanic Bank transaction, at December 31, 2013. These balances reflect amounts that, in management’s judgment, are adequate to provide for probable loan losses based on the considerations listed above. Management performs stress testing of our loan portfolio to gain a better understanding of the portfolio effects of additional declines in real estate values and expected cash values. Management also evaluates all commercial loans, secured and unsecured, at least quarterly.
Expected credit losses identified in the Oceanic Bank acquisition were accounted for at fair value, resulting in a discount at the time of the acquisition. If expected potential credit losses are actually incurred,they will be evaluated against the discount. Only those losses that occur after the acquisition date or exceed the amount of discount remaining on the acquired Oceanic Bank loan portfolio will be charged to the allowance for loan losses. At December 31, 2013 and 2012, the remaining discount related to the Oceanic Bank acquisition totaled $48,662 and$1,107,000, respectively.
| 41 |
| TABLE 3 | Allocation of the Allowance for Loan Losses | |||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
| Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||
| of loans | of loans | of loans | of loans | of loans | ||||||||||||||||||||||||||||||||||||
| in each | in each | in each | in each | in each | ||||||||||||||||||||||||||||||||||||
| category | category | category | category | category | ||||||||||||||||||||||||||||||||||||
| to total | to total | to total | to total | to total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
| Commercial real estate | $ | 5,763 | 57.8 | % | $ | 4,812 | 65.7 | % | $ | 4,745 | 56.8 | % | $ | 3,787 | 57.5 | % | $ | 4,168 | 54.3 | % | ||||||||||||||||||||
| Real estate construction | 734 | 6.1 | % | 857 | 3.4 | % | 1,171 | 6.2 | % | 1,999 | 5.7 | % | 3,110 | 9.4 | % | |||||||||||||||||||||||||
| Real estate multi family | 293 | 8.2 | % | — | n/a | 671 | 8.0 | % | 578 | 8.8 | % | 881 | 11.5 | % | ||||||||||||||||||||||||||
| Real estate 1 to 4 family | 1,788 | 19.0 | % | 1,516 | 20.5 | % | 1,592 | 19.0 | % | 971 | 14.7 | % | 832 | 10.8 | % | |||||||||||||||||||||||||
| Commercial & industrial | 1,237 | 8.6 | % | 1,875 | 10.1 | % | 1,618 | 9.5 | % | 2,102 | 12.7 | % | 809 | 13.5 | % | |||||||||||||||||||||||||
| Consumer loans | 64 | 0.3 | % | 64 | 0.3 | % | 100 | 0.5 | % | 87 | 0.6 | % | 29 | 0.5 | % | |||||||||||||||||||||||||
| Total | $ | 9,879 | 100.0 | % | $ | 9,124 | 100.0 | % | $ | 9,897 | 100.0 | % | $ | 9,524 | 100.0 | % | $ | 9,829 | 100.0 | % | ||||||||||||||||||||
Table 4 summarizes transactions in the allowance for loan losses and details the charge-offs, recoveries and net loan losses by loan category for each of the last five fiscal years ended December 31, 2013. The amount added to the provision and charged to operating expenses for each period is based on the risk profile of the loan portfolio.
| 42 |
| TABLE 4 | Allowance for Loan Losses | |||||||||||||||||||
| Historical Analysis | ||||||||||||||||||||
| (Dollar amounts in thousands) | For the year ended December 31, | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Balance at Beginning of Period | $ | 9,124 | $ | 9,897 | $ | 9,524 | $ | 9,829 | $ | 7,075 | ||||||||||
| Provision for Loan Losses | 1,385 | 1,833 | 1,750 | 1,854 | 4,596 | |||||||||||||||
| Charge-offs: | ||||||||||||||||||||
| Real Estate | (728 | ) | (1,216 | ) | (721 | ) | (1,376 | ) | (1,471 | ) | ||||||||||
| Commercial | (57 | ) | (1,706 | ) | (651 | ) | (812 | ) | (390 | ) | ||||||||||
| Consumer | (7 | ) | (11 | ) | (74 | ) | (34 | ) | (60 | ) | ||||||||||
| Total | (792 | ) | (2,933 | ) | (1,446 | ) | (2,222 | ) | (1,921 | ) | ||||||||||
| Recoveries: | ||||||||||||||||||||
| Real Estate | 88 | 182 | 41 | 50 | 61 | |||||||||||||||
| Commercial | 73 | 124 | 27 | 6 | 18 | |||||||||||||||
| Consumer | 1 | 21 | 1 | 7 | — | |||||||||||||||
| Total | 162 | 327 | 69 | 63 | 79 | |||||||||||||||
| Net Charge-offs | (630 | ) | (2,606 | ) | (1,377 | ) | (2,159 | ) | (1,842 | ) | ||||||||||
| Balance at End of Period | $ | 9,879 | $ | 9,124 | $ | 9,897 | $ | 9,524 | $ | 9,829 | ||||||||||
| Percentages | ||||||||||||||||||||
| Allowance for loan losses/total loans | 1.76 | % | 1.66 | % | 2.18 | % | 1.97 | % | 1.95 | % | ||||||||||
| Net charge-offs/real estate loans | 0.13 | % | 0.22 | % | 0.18 | % | 0.35 | % | 0.38 | % | ||||||||||
| Net charge-offs/commercial loans | -0.03 | % | 2.85 | % | 1.45 | % | 1.31 | % | 0.55 | % | ||||||||||
| Net charge-offs/consumer loans | 0.36 | % | -0.55 | % | 3.13 | % | 1.00 | % | 2.25 | % | ||||||||||
| Net charge-offs/total loans | 0.11 | % | 0.47 | % | 0.30 | % | 0.45 | % | 0.37 | % | ||||||||||
| Allowance for loan losses/non-performing loans | 134.39 | % | 73.14 | % | 51.82 | % | 56.99 | % | 38.41 | % | ||||||||||
The level of yearly charge-offs were primarily attributable to problems that were identified with specific borrowers rather than problems with a particular segment of the loan portfolio. In particular, borrowers who had exposure to real estate projects outside of San Mateo and San Francisco counties were identified as having a relatively higher risk profile than those operating solely within these two counties. If real estate values or lease rates continue to decline in the future, additional increases in our allowance for loan losses may be warranted.
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. The accrual of interest on non-accrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. For the years ended December 31, 2013, 2012 and 2011, had non-accrual loans performed as agreed, approximately $79,000,$807,000, and $872,000, respectively, would have been recognized in additional interest income.
Table 5 provides a summary of nonperforming assets for the most recent five years. Nonperforming loans were 1.3% of total loans at December 31, 2013, 2.4% of total loans at December 31, 2012, and 4.2% of total loans at December 31, 2011. Management believes the current list of past due loans as of December 31, 2013 are collectible and does not anticipate future significant losses that exceed the current allowance for loan losses.
| 43 |
| TABLE 5 | Analysis of Nonperforming Assets | |||||||||||||||||||
| (Dollar amounts in thousands) | December 31 | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Nonaccrual loans | $ | 7,351 | $ | 12,474 | $ | 19,098 | $ | 16,712 | $ | 25,592 | ||||||||||
| Other real estate owned | 5,318 | 6,650 | 2,747 | 6,680 | 7,320 | |||||||||||||||
| Total | $ | 12,669 | $ | 19,124 | $ | 21,845 | $ | 23,392 | $ | 32,912 | ||||||||||
There was no commitment to lend additional funds to any customer whose loan was classified as nonperforming at December 31, 2013, 2012 or 2011.
Nonaccrual loans at December 31, 2013 consist of several single family residence loans, commercial loans and some commercial real estate secured loans. The Bank is working with its borrowers to develop strategies that can give the borrowers time to work through their financial difficulties. The other real estate owned properties consist of two construction loans related to single-family home construction, a four-unit apartment building, a retail commercial real estate loan, and a land development parcel. The Bank is actively marketing these properties. However, given current market conditions, there can be no assurance that these properties can be sold in the near future. There were no loans that were over 90 days delinquent that were still accruing interest as of December 31, 2013, 2012 and 2011.
A troubled debt restructuring occurs when the Bank offers, at favorable terms, a modification of loan terms and conditions because management believes the borrower may not be able to make payments at their original note rate and terms. During the year ended December 31, 2013, the Bank restructuredten loans totaling $5,991,000 that were considered troubled debt restructurings. These ten loans consist of six commercial real estate loans totaling $4,566,000, onereal estate construction loan totaling $189,000, and three single family residence loans totaling $1,236,000. Total restructured loans outstanding as of December 31, 2013 and 2012 were $13,706,000 and $9,565,000 respectively.
Noninterest Income
The following table sets forth the principal components of noninterest income:
| TABLE 6 | Noninterest Income | Variance | Variance | |||||||||||||||||||||||||
| Years ended December 31, | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||||||||||||
| (Dollar amounts in thousands) | 2013 | 2012 | 2011 | Amount | Percent | Amount | Percent | |||||||||||||||||||||
| Service charges | $ | 2,630 | $ | 2,903 | $ | 3,107 | $ | (273 | ) | -9.4 | % | $ | (204 | ) | -6.6 | % | ||||||||||||
| Bargain purchase gain | — | 3,666 | — | (3,666 | ) | -100.0 | % | 3,666 | 0.0 | % | ||||||||||||||||||
| Credit card fees | — | 437 | 701 | (437 | ) | -100.0 | % | (264 | ) | -37.7 | % | |||||||||||||||||
| Net gain on available-for-sale securities | 324 | 958 | 479 | (634 | ) | -66.2 | % | 479 | 100.0 | % | ||||||||||||||||||
| Bank owned life insurance policy earnings | 366 | 769 | 325 | (403 | ) | -52.4 | % | 444 | 136.6 | % | ||||||||||||||||||
| Other income | 863 | 426 | 467 | 437 | 102.6 | % | (41 | ) | -8.8 | % | ||||||||||||||||||
| Total noninterest income | $ | 4,183 | $ | 9,159 | $ | 5,079 | $ | (4,976 | ) | -54.3 | % | $ | 4,080 | 80.3 | % | |||||||||||||
Total noninterest income consists mainly of service charges on deposits. The major change in noninterest income during 2012 was the bargain purchase gain of $3,666,000 resulting from the purchase of Oceanic Bank which was completed during September, 2012. The gain on sale of available-for-sale securities during 2013 was derived primarily from the sale of U. S. government and mortgage-backed securities, municipal securities and U. S. Treasury securities; during 2012 from the sale of municipal securities, U.S. government and mortgage-backed securities, and U. S. Treasury securities;and during 2011 from the sale of U. S. Government and mortgage-backed securities. The principal source of other income was dividends on equity securities, which were$262,000, $138,000 and$77,000 in the years 2013, 2012 and 2011, respectively, and, in 2013, 249,000 rental income on other real estate owned.
| 44 |
Noninterest Expenses
The following table sets forth the various components of noninterest expense:
| TABLE 7 | Noninterest Expenses | |||||||||||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||||||
| (Dollar amounts in thousands) | Years ended December 31, | 2013 vs. 2012 | 2012 vs. 2011 | |||||||||||||||||||||||||
| 2013 | 2012 | 2011 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||
| Salaries and employee benefits | $ | 17,156 | $ | 15,432 | $ | 13,726 | $ | 1,724 | 11.2 | % | $ | 1,706 | 12.4 | % | ||||||||||||||
| Occupancy expense | 3,166 | 2,608 | 2,331 | 558 | 21.4 | % | 277 | 11.9 | % | |||||||||||||||||||
| Equipment expense | 1,549 | 1,732 | 1,722 | (183 | ) | -10.6 | % | 10 | 0.6 | % | ||||||||||||||||||
| Professional fees | 1,661 | 1,585 | 1,668 | 76 | 4.8 | % | (83 | ) | -5.0 | % | ||||||||||||||||||
| FDIC assessment | 720 | 702 | 1,155 | 18 | 2.6 | % | (453 | ) | -39.2 | % | ||||||||||||||||||
| Acquisition related expense | — | 428 | — | (428 | ) | -100.0 | % | 428 | n/a | |||||||||||||||||||
| Telephone, postage, supplies | 1,220 | 1,138 | 1,149 | 82 | 7.2 | % | (11 | ) | -1.0 | % | ||||||||||||||||||
| Operating losses | 69 | 77 | 571 | (8 | ) | -10.4 | % | (494 | ) | -86.5 | % | |||||||||||||||||
| Advertising expense | 458 | 343 | 570 | 115 | 33.5 | % | (227 | ) | -39.8 | % | ||||||||||||||||||
| Bankcard expenses | (7 | ) | 442 | 658 | (449 | ) | -101.6 | % | (216 | ) | -32.8 | % | ||||||||||||||||
| Data processing expense | 616 | 571 | 560 | 45 | 7.9 | % | 11 | 2.0 | % | |||||||||||||||||||
| Low income housing expense | 438 | 294 | 278 | 144 | 49.0 | % | 16 | 5.8 | % | |||||||||||||||||||
| Surety insurance | 265 | 299 | 267 | (34 | ) | -11.4 | % | 32 | 12.0 | % | ||||||||||||||||||
| Directors expense | 252 | 252 | 216 | — | — | 36 | 16.7 | % | ||||||||||||||||||||
| Gain on sale of other real estate owned | (96 | ) | (6 | ) | (66 | ) | (90 | ) | 1500.0 | % | 60 | -90.9 | % | |||||||||||||||
| Loss on impairment of other real estate owned | 69 | 53 | 543 | 16 | 30.2 | % | (490 | ) | -90.2 | % | ||||||||||||||||||
| Other real estate owned expense | 249 | 315 | 439 | (66 | ) | -21.0 | % | (124 | ) | -28.2 | % | |||||||||||||||||
| Other | 1,243 | 1,474 | 1,287 | (231 | ) | -15.7 | % | 187 | 14.5 | % | ||||||||||||||||||
| Total noninterest expense | $ | 29,028 | $ | 27,739 | $ | 27,074 | $ | 1,289 | 4.6 | % | $ | 665 | 2.5 | % | ||||||||||||||
Salaries and employee benefits were $17,156,000 in 2013, $15,432,000 in 2012, and $13,726,000 in 2011. Salaries and employee benefits represented 59%,56%, and 51%of noninterest expense for the years 2013, 2012 and 2011, respectively. During 2012, an additional loan officer was added to our Sunnyvale loan production office. The increase in salary and benefits during 2012 was primarily attributable to the Oceanic Bank acquisition. There was a $500,000 operational loss in 2011 related to fraudulent foreign wire activity. During 2012, acquisition expenses were the result of investment banking fees of $250,000 and legal and accounting work in the Oceanic Bank acquisition. Occupancy expense increased $558,000 in 2013, due to the acquisition of Oceanic branches. It increased $277,000 in 2012, in part due to the acquisition of Oceanic Bank branches in the last quarter of the year. Bankcard expenses declined $216,000 in 2012, and $449,000 in 2013, when our card portfolio was sold. Reductions in our FDIC premiums during 2012 were the result of changes in the perceived risk levels inherent in the Bank on a year over year basis by the regulatory agencies.
| 45 |
The loss on impairment of other real estate owned expense was recorded primarily to reflect the decrease in valuation of our real estate owned properties since their value on the foreclosure date.
Provision for Loan Losses
The provision for loan loss in 2013, 2012 and 2011 was recorded at levels management believed reflected the additional loss exposure identified in the loan portfolio during the year. The allowance for loan losses was $9,879,000 or 1.76% of total gross loans at December 31, 2013. It was $9,124,000 or 1.66% of total gross loans at December 31, 2012, compared to$9,897,000 or 2.18% of total gross loans at December 31, 2011. The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses inherent in the loan portfolio. Management is taking steps necessary to work with borrowers and has granted modified loan terms to certain borrowers willing to make payments on loans secured by their primary residence, even though they were delinquent and/or the value of their home had declined substantially. The purchased Oceanic Bank loans have a fair value discount that was created at acquisition pursuant to acquisition accounting and representing, in part, expected credit losses inherent in the acquired loan portfolio. The fair value discount is not part of the allowance for loan losses.
Balance Sheet Analysis
Total assets of the Company at December 31, 2013 were $891,930,000, compared to $875,340,000 at December 31, 2012, and $715,641,000 at December 31, 2011. Assets averaged $903,825,000 in 2013, $793,713,000 in 2012, and $719,521,000 in 2011. Average earning assets represented 91.7% of total average assets in 2013, and represented 87.9% of total average assets in 2012.
Asset growth in 2013 and 2011 was derived by bringing in new business through our existing branch structure. Asset growth in 2012 was derived primarily from the Oceanic Bank acquisition.
Loans
The loan portfolio is the principal earning asset of the Bank. Gross loans outstanding (net of loan fees) at December 31, 2013 increased by $11,535,000 or 2.1% from December 31, 2012. December 31, 2012 increased by $97,069,000 or 21.4% from December 31, 2011. The effect of the last economic recession was a reduction in the number of applications received for credit during 2011 and 2012. New credit-worthy borrowers were difficult to identify during 2012, and most existing clients were not seeking additional loans, or increase in their credit lines. During 2013, loan volumes increased, but payoffs and reductions in credit line usage kept growth levels low.
Commercial real estate loans increased by $21,339,000 or 7.0% in 2013 compared to 2012. They increased by $46,447,000 or 18.0% in 2012 compared to 2011. Real estate construction loans increased by $15,372,000 in 2013; decreased by $9,283,000 in 2012 and increased by $652,000 in 2011, respectively. Real estate multi-family loans decreased by $11,861,000 in 2013 compared to 2012; and increased by $21,635,000 in 2012 compared to 2011. Real estate 1 to 4 family loans decreased by $5,816,000 in 2013 compared to 2012, and increased by $26,397,000 in 2012 compared to 2011. Commercial and industrial loans decreased by $7,060,000 in 2013 compared to 2012, and increased by $12,490,000 in 2012 compared to 2011, respectively. Consumer loans represent a nominal portion of total loans. They decreased by $174,000 in 2013, decreased by $511,000 in 2012, and decreased by $354,000 in 2011.
| 46 |
Table 8 presents a detailed analysis of loans outstanding at December 31, 2009 through December 31, 2013.
| TABLE 8 | Loan Portfolio | |||||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 325,199 | 58 | % | $ | 303,860 | 57 | % | $ | 257,413 | 56 | % | $ | 278,866 | 55 | % | $ | 273,981 | 54 | % | ||||||||||||||||||||
| Real estate construction | 34,318 | 6 | % | 18,946 | 6 | % | 28,229 | 6 | % | 27,577 | 6 | % | 47,189 | 9 | % | |||||||||||||||||||||||||
| Real estate multi family | 46,143 | 8 | % | 58,004 | 8 | % | 36,369 | 8 | % | 42,584 | 9 | % | 57,875 | 11 | % | |||||||||||||||||||||||||
| Real estate 1 to 4 family | 106,903 | 19 | % | 112,719 | 19 | % | 86,322 | 19 | % | 71,463 | 15 | % | 54,674 | 11 | % | |||||||||||||||||||||||||
| Commercial & industrial | 48,504 | 9 | % | 55,564 | 9 | % | 43,074 | 9 | % | 61,493 | 13 | % | 67,977 | 13 | % | |||||||||||||||||||||||||
| Consumer loans | 1,650 | 0 | % | 1,824 | 1 | % | 2,335 | 1 | % | 2,689 | 1 | % | 2,661 | 1 | % | |||||||||||||||||||||||||
| Sub total | 562,717 | 100 | % | 550,917 | 100 | % | 453,742 | 100 | % | 484,672 | 100 | % | 504,357 | 104 | % | |||||||||||||||||||||||||
| Net deferred loan fees | (495 | ) | 0 | % | (230 | ) | 0 | % | (124 | ) | 0 | % | (320 | ) | 0 | % | (179 | ) | 0 | % | ||||||||||||||||||||
| Total | $ | 562,222 | 100 | % | $ | 550,687 | 100 | % | $ | 453,618 | 100 | % | $ | 484,352 | 100 | % | $ | 504,178 | 104 | % | ||||||||||||||||||||
Loans that are not guaranteed by the U. S. Government contain some level of risk of principal repayment. Real estate and loans supported by UCC filing requirements contain less risk of loss than unsecured loans. By securing loans with various types of collateral, the Bank is able to better assure repayment, either from the liquidation of collateral or from the borrower. For commercial loans, both secured and unsecured, the Bank will generally require personal guarantees from our borrowers. These financial guarantees allow the Bank to initiate collection activity against the borrowers individually if the liquidation of collateral is insufficient to repay the loan. The underwriting policies of the Bank require our borrowers to document the source of repayment for their loans, maintain equity positions in any secured financings, and provide ongoing financial statement information. Current appraisals, financial statements, and tax returns allow Bank management to evaluate our borrower’s repayment ability on at least an annual basis. Commercial loans are generally variable rate in nature. Real estate loans more than five years to maturity generally contain variable interest rates. Loans that mature in five years or less may be either fixed or variable rate in nature, with fixed rate loans containing initial rates that are higher than those with variable rates. Borrower’s preference and interest rate risk tolerance will generally dictate whether they utilize fixed or variable rate financing.
| 47 |
The following table shows the Bank’s loan maturities and sensitivities to changes in interest rates as of December 31, 2013.
| TABLE 9 | Maturing | |||||||||||||||
| Maturing | After 1 | Maturing | ||||||||||||||
| (Dollar amounts in thousands) | Within | But Within | After 5 | |||||||||||||
| 1 Year | 5 Years | Years | Total | |||||||||||||
| Commercial real estate | $ | 142,235 | $ | 119,306 | $ | 63,658 | $ | 325,199 | ||||||||
| Real estate construction | 15,010 | 12,590 | 6,718 | 34,318 | ||||||||||||
| Real estate multi family | 20,182 | 16,928 | 9,033 | 46,143 | ||||||||||||
| Real estate 1 to 4 family | 46,756 | 39,219 | 20,928 | 106,903 | ||||||||||||
| Commercial & industrial | 21,214 | 17,794 | 9,496 | 48,504 | ||||||||||||
| Consumer loans | 722 | 605 | 323 | 1,650 | ||||||||||||
| Sub total | 246,119 | 206,442 | 110,156 | 562,717 | ||||||||||||
| Net deferred loan fees | (216 | ) | (182 | ) | (97 | ) | (495 | ) | ||||||||
| Total | $ | 245,903 | $ | 206,260 | $ | 110,059 | $ | 562,222 | ||||||||
| With predetermined fixed interest rates | $ | 63,540 | $ | 53,297 | $ | 28,440 | $ | 145,277 | ||||||||
| With floating interest rates | 182,363 | 152,963 | 81,619 | 416,945 | ||||||||||||
| Total | $ | 245,903 | $ | 206,260 | $ | 110,059 | $ | 562,222 | ||||||||
Investment Portfolio
The primary purpose of the Bank’s investment portfolio is to ensure the Bank has sufficient available funds to fund loans, or pay down our liabilities. The Company’s primary source of funds is the deposit base. If more funds are needed, investment maturities, calls and sales from the investment portfolio may be used. The Bank’s investment portfolio is composed primarily of debt securities of U. S. Government Agencies, mortgage-backed securities that have their principal guaranteed by U. S. Government Agencies, and in obligations of States and their political subdivisions. The Bank believes this provides for an appropriate liquidity level and minimal credit risk.
The following table sets forth the maturity distribution and interest rate sensitivity of investment securities at December 31, 2013:
| TABLE 10 | After | After | ||||||||||||||||||||||||||||||||||||||||||
| Due | 1 Year | 5 Years | Due | Maturity | ||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts | In 1 Year | Through | Through | After | Fair | In | Average | |||||||||||||||||||||||||||||||||||||
| in thousands) | Or Less | Yield | 5 Years | Yield | 10 Years | Yield | 10 Years | Yield | Value | Years | Yield | |||||||||||||||||||||||||||||||||
| U. S. Treasury securities | $ | — | — | % | $ | 3,027 | 1.09 | % | $ | — | — | % | $ | — | — | % | $ | 3,027 | 3.07 | 1.09 | % | |||||||||||||||||||||||
| U. S. Government Agencies | 8,123 | 1.46 | % | 54,359 | 1.29 | % | 10,837 | 1.61 | % | — | — | 73,319 | 3.33 | 1.35 | % | |||||||||||||||||||||||||||||
| Mortgage-backed securities | — | — | 2,057 | 2.19 | % | 48,981 | 2.00 | % | 26,822 | 2.67 | % | 77,860 | 9.65 | 2.23 | % | |||||||||||||||||||||||||||||
| States & Political Subdivisions | 1,866 | 2.41 | % | 18,068 | 2.82 | % | 51,866 | 2.92 | % | 10,876 | 3.19 | % | 82,676 | 7.01 | 2.92 | % | ||||||||||||||||||||||||||||
| Corporate Debt | 4,580 | 2.96 | % | 19,673 | 1.92 | % | 2,853 | 1.90 | % | — | — | 27,106 | 2.90 | 2.09 | % | |||||||||||||||||||||||||||||
| Total | $ | 14,569 | 2.05 | % | $ | 97,184 | 1.71 | % | $ | 114,537 | 2.37 | % | $ | 37,698 | 2.82 | % | $ | 263,988 | 6.33 | 2.18 | % | |||||||||||||||||||||||
| 48 |
The following table shows the securities portfolio mix at December 31, 2013, 2012 and 2011.
| TABLE 11 | Years Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||||||||||
| (Dollar amounts in thousands) | Amortized | Fair | Amortized | Fair | Amortized | Fair | ||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
| U. S. Treasury securities | $ | 3,069 | $ | 3,027 | $ | 7,145 | $ | 7,280 | $ | 12,371 | $ | 12,634 | ||||||||||||
| U.S. Government Agencies | 73,691 | 73,319 | 71,061 | 72,260 | 53,150 | 54,102 | ||||||||||||||||||
| Mortgage-backed securities | 79,873 | 77,860 | 53,934 | 55,180 | 32,606 | 33,435 | ||||||||||||||||||
| States & Political Subdivisions | 82,526 | 82,676 | 78,147 | 81,609 | 73,674 | 77,251 | ||||||||||||||||||
| Corporate debt | 26,958 | 27,106 | 18,103 | 18,616 | 10,314 | 10,242 | ||||||||||||||||||
| Total | $ | 266,117 | $ | 263,988 | $ | 228,390 | $ | 234,945 | $ | 182,115 | $ | 187,664 | ||||||||||||
Deposits
During 2013, average deposits were $790,842,000, an increase of $99,274,000 or 14.35% over 2012. During 2012, average deposits were $691,568,000, an increase of $63,867,000 or 10.17% over 2011. The prime lending rate was 3.25% on December 31, 2010, and remained unchanged through December 31, 2013. Time deposits lagged the prime rate changes because their rates changed only as certificates matured or new certificates were issued. Thus, interest-bearing demand costs averaged 0.21% in 2011, 0.14% in 2012 and 0.12% in 2013. Money market deposit costs averaged 0.79% in 2011, 0.58% in 2012 and 0.43% in 2013. Savings rates averaged 0.23% in 2011, 0.20% in 2012 and 0.15% in 2013. Average rates on time certificates of deposit of $100,000 or more was 0.75% in 2011, 0.64% in 2012 and 0.51% in 2013. On certificates under $100,000, average rates were 0.92% in 2011, 0.71% in 2012 and 0.56% in 2013.
The following table summarizes the distribution of average deposits and the average rates paid for them in the periods indicated:
| TABLE 12 | Average Deposits and Average Rates paid for the period ending December 31, | |||||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
| (Dollar amounts | Average | Average | % of total | Average | Average | % of total | Average | Average | % of total | |||||||||||||||||||||||||||
| in thousands) | Balance | Rate | Deposits | Balance | Rate | Deposits | Balance | Rate | Deposits | |||||||||||||||||||||||||||
| Interest-bearing demand | $ | 76,754 | 0.1 | % | 9.7 | $ | 67,708 | 0.1 | % | 8.6 | $ | 61,136 | 0.2 | % | 8.8 | |||||||||||||||||||||
| Money market | 312,608 | 43.0 | % | 39.5 | 279,356 | 0.6 | % | 35.3 | 267,109 | 0.8 | % | 38.6 | ||||||||||||||||||||||||
| Savings | 63,418 | 0.2 | % | 8.0 | 54,611 | 0.2 | % | 6.9 | 47,059 | 0.2 | % | 6.8 | ||||||||||||||||||||||||
| Time deposits $100,000 or more | 102,872 | 0.5 | % | 13.0 | 90,858 | 0.6 | % | 11.5 | 69,330 | 0.8 | % | 10.0 | ||||||||||||||||||||||||
| Time deposits under $100,000 | 45,056 | 0.6 | % | 5.7 | 35,780 | 0.7 | % | 4.5 | 41,954 | 0.9 | % | 6.1 | ||||||||||||||||||||||||
| Total interest bearing deposits | $ | 600,708 | 0.4 | % | 76.0 | $ | 528,313 | 0.5 | % | 66.8 | 486,588 | 0.7 | % | 70.4 | ||||||||||||||||||||||
| Demand deposits | 190,134 | — | 24.0 | 163,255 | — | 20.6 | 141,113 | — | 20.4 | |||||||||||||||||||||||||||
| Total deposits | $ | 790,842 | 0.3 | % | 100.0 | $ | 691,568 | 0.4 | % | 87.4 | $ | 627,701 | 0.5 | % | 90.8 | |||||||||||||||||||||
| 49 |
The following table indicates the maturity schedule of time deposits of $100,000 or more:
| TABLE 13 | Analysis of Time Deposits $100,000 or more at December 31, 2013 | |||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
| Over Three | Over Six | Over | ||||||||||||||||||
| Total Deposits of | Three Months | To Six | To Twelve | Twelve | ||||||||||||||||
| $100,000 Or More | Or Less | Months | Months | Months | ||||||||||||||||
| $ | 86,337 | $ | 34,145 | $ | 15,380 | $ | 19,135 | $17,677 | ||||||||||||
Capital
The increases in retained earnings were primarily attributable to retention of net income less cash dividends on preferred stock of $567,000 in 2013, $658,000 in 2012 and $545,000 in 2011; and cash dividends on common stock of $1,054,000 in 2013, $667,000 in 2012 and $568,000 in 2011. During 2012, $3,666,000 was added to capital through a bargain purchase gain related to the Oceanic Bank acquisition. During 2013, 25% or $3,150,000 of the Preferred Stock-Series C was redeemed, with the remainder redeemed in January, 2014.
Under regulatory capital guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. The Company’s Tier 1 capital consists of common shareholders’ equity and preferred stock issued to the U.S. Treasury during 2011. The Company’s Tier 2 capital consists of eligible reserves for possible loan losses. Total capital is the sum of Tier 1 plus Tier 2 capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance sheet assets and off-balance sheet obligations. The FDIC also requires the calculation of a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by quarterly average assets during the reporting period. This requirement established a minimum leverage ratio of 3.0% for the highest rated banks and ratios of 100 to 200 basis points higher for most other banks. To qualify as “well-capitalized” as defined by regulation, financial institutions must maintain risk-based Tier 1 and total capital ratios of at least 6.0% and 10.0% respectively. “Well-capitalized” financial institutions must also maintain a leverage ratio equal to or exceeding 5.0%.
On September 15, 2011 the Company issued 12,600 shares of Senior, Non-Cumulative, Perpetual Preferred Stock, Series C, to the U. S. Treasury as part of the Treasury’s Small Business Lending Fund (“SBLF”). The initial dividend rate payable on these shares was 5%. Depending on the volume of small business lending, it could have become as low as one percent. If lending did not increase in the first two years, the rate would have increased to seven percent. After 4.5 years, the rate was scheduled to increase to nine percent, assuming the Company had not redeemed the shares.
The SBLF program did not impose the various restrictions (including restrictions on the payment of dividends to holders of Common Stock) as were required under the U. S. Treasury Capital Purchase Program. The shares of Series A and B Preferred Stock, which contained a blended rate of 6.83% to the expected repayment date, were redeemed with the $12,600,000 in proceeds received from the issuance of Series C Preferred Stock.
On May 6, 2013, 25% or $3,150,000 of the original $12,600,000 was redeemed. On January 23, 2014, the remaining stock was redeemed.
| 50 |
The following table shows the risk-based capital ratios and the leverage ratios at December 31, 2013, 2012 and 2011 for the Bank. The Company’s capital ratios are substantially equivalent to those of the Bank.
| TABLE 14 | Minimum | |||||||||||||||
| “Well Capitalized” | ||||||||||||||||
| Regulatory Capital Ratios | 2013 | 2012 | 2011 | Requirements | ||||||||||||
| Total Capital | 14.12 | % | 14.56 | % | 16.44 | % | ≥ | 10.00 | % | |||||||
| Tier 1 Capital | 12.86 | % | 13.31 | % | 15.18 | % | ≥ | 6.00 | % | |||||||
| Leverage ratios | 9.67 | % | 9.68 | % | 11.15 | % | ≥ | 5.00 | % | |||||||
Liquidity
The Company’s primary source of liquidity on a stand-alone basis (see the discussion under “Limitation on Dividends”) is dividends from the Bank. The payment of dividends by the Bank is subject to regulatory restrictions. See the discussion under “Limitation on Dividends” in “Item 1-” Business” above.
Liquidity is a measure of the Company’s ability to convert assets into cash. Liquidity consists of cash and due from correspondent banks accounts, including time deposits, federal funds sold, and securities available for sale. The Company’s policy is to maintain a liquidity ratio of 5% or greater of total assets. As of December 31, 2013, the Company’s primary liquidity was 31.79%, compared to 31.53% in 2012, and compared to 31.60% in 2011. Total liquid assets were $283,538,000 in 2013, $276,022,000 in 2012, and $226,138,000 in 2011. The objective of liquidity management is to ensure that the Company has funds available to meet all present and future financial obligations and to take advantage of business opportunities as they occur. Financial obligations arise from withdrawals of deposits, repayment on maturity of purchased funds, extension of loans or other forms of credit, payment of operating expenses and payment of dividends.
Core deposits, which consist of all deposits other than time deposits, have provided the Company with a sizeable source of relatively stable low-cost funds. The Company’s average core deposits represented 79.3% of average total liabilities of $810,659,000 for the year ended December 31, 2013, 80.3% of average total liabilities of $703,248,000 for the year ended December 31, 2012, and 81.2% of average total liabilities of $635,942,000 for the year ended December 31, 2011.
As of December 31, 2013, the Company had contractual obligations and other commercial commitments totaling approximately $132,041,000. The following table sets forth the Company’s contractual obligations and other commercial commitments as of December 31, 2013. These obligations and commitments can be funded from other loan repayments, the Company’s liquidity sources such as cash and due from other banks, federal funds sold, securities available for sale, as well as from the Bank’s line of credit with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco.
| 51 |
| TABLE 15 | Payments Due by Period | |||||||||||||||||||
| (Dollar amounts in thousands) | 1 year | Over 1 to | Over 3 to | Over | ||||||||||||||||
| Contractual Obligations | Total | or less | 3 years | 5 years | 5 years | |||||||||||||||
| Operating Leases | $ | 6,058 | $ | 971 | $ | 2,000 | $ | 1,577 | $ | 1,510 | ||||||||||
| Salary Continuation Agreements | 2,332 | 130 | 310 | 270 | 1,622 | |||||||||||||||
| Total Contractual Cash Obligations | $ | 8,390 | $ | 1,101 | $ | 2,310 | $ | 1,847 | $ | 3,132 | ||||||||||
| Amount of Commitment Expirations Per Period | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| (Dollar amounts in thousands) | Amounts | 1 year | Over 1 to | Over 3 to | Over | |||||||||||||||
| Other Commercial Commitments | Committed | or less | 3 years | 5 years | 5 years | |||||||||||||||
| Lines of Credit | $ | 65,120 | $ | 46,488 | $ | 4,688 | $ | 13,554 | $ | 390 | ||||||||||
| Standby Letters of Credit | 6,199 | 6,199 | — | — | — | |||||||||||||||
| Other Commercial Commitments | 58,390 | 39,807 | 18,583 | — | — | |||||||||||||||
| Total Commercial Commitments | $ | 129,709 | $ | 92,494 | $ | 23,271 | $ | 13,554 | $ | 390 | ||||||||||
The largest component of the Company’s earnings is net interest income, which can fluctuate widely when significant interest rate movements occur. The prime lending rate was 3.25% at the end of 2009, and it remained at this level consistently through the reporting date of December 31, 2013.
The Company’s management is responsible for minimizing the Bank’s exposure to interest rate risk and assuring an adequate level of liquidity. By developing objectives, goals and strategies designed to enhance profitability and performance, management is also able to manage the Bank’s interest rate exposure.
In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company’s ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity is provided by the Company’s ability to attract deposits and obtain short term credit through established borrowing lines. The primary source of liability liquidity is the Bank’s customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. The Company has Federal Funds borrowing facilities for a total of $30,000,000, a Federal Home Loan Bank line of credit of up to 30% of total assets, and a Federal Reserve Bank of San Francisco borrowing facility of approximately $44,586,000. Management believes the Company’s liquidity sources at December 31, 2013 are adequate to meet its operating needs in 2014 and into the foreseeable future.
Effect of Changing Prices
The results of operations and financial conditions presented in this report are based on historical cost information and are not adjusted for the effects of inflation. Since the assets and liabilities of banks are primarily monetary in nature (payable in fixed, determinable amounts), the performance of the Company is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.
| 52 |
The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plant and inventories. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, increases in the price of goods and services will result in increased operating expenses.
The following table includes key ratios, including returns on average assets and equity.
| TABLE 16 | Return on Equity and Assets | |||||||||||
| (Key financial ratios are computed on average balances) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Return on average assets | 0.76 | % | 1.03 | % | 0.48 | % | ||||||
| Return on average equity | 7.38 | % | 9.00 | % | 4.14 | % | ||||||
| Dividend payout ratio | 15.34 | % | 8.19 | % | 16.52 | % | ||||||
| Average equity to assets ratio | 10.31 | % | 11.40 | % | 11.62 | % | ||||||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Closely related to the concept of liquidity is the concept of interest rate sensitivity (i. e., the extent to which assets and liabilities are sensitive to changes in interest rates). Management uses an asset/liability model that considers the relative sensitivities of the balance sheet, including the effect of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, management can model a net interest income simulation that is designed to address the probability of interest rate changes and behavioral response of the balance sheet to those changes. Market value of portfolio equity represents the fair value of the net present value of assets, liabilities and off-balance sheet items. The starting point (or “base case”) for the following table is the Company’s net portfolio at December 31, 2013, using current discount rates, and an estimate of net interest income for 2014 assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at December 31, 2013 levels.
The “rate shock” information in the table shows estimates of net portfolio value at December 31, 2013 and net interest income for 2014 assuming fluctuations or “rate shocks” of minus 100 and 200 basis points and plus 100 and 200 basis points. Rate shocks assume that current interest rates change immediately. The information set forth in the following table is based on significant estimates and assumptions, and constitutes a forward-looking statement within the meaning of that term set forth in Rule 175 under the Securities Act of 1933 and Rule 3b-6(c) of the Securities Exchange Act of 1934.
| 53 |
| TABLE 17 | Market Risk in Securities | |||||||||||||||||||
| (Dollar amounts in thousands) | Interest Rate Shock | |||||||||||||||||||
| At December 31, 2013 | ||||||||||||||||||||
| Available for Sale securities | ||||||||||||||||||||
| Rates Decline | Rates Increase | |||||||||||||||||||
| Rate change | (2%) | (1%) | Current | +1% | +2% | |||||||||||||||
| Unrealized gain (loss) | $ | 11,262 | $ | 4,456 | $ | (2,128 | ) | $ | (14,316 | ) | $ | (23,679 | ) | |||||||
| Change from current | $ | 13,390 | $ | 6,584 | $ | (12,188 | ) | $ | (21,551 | ) | ||||||||||
| Market Risk on Net Interest Income | ||||||||||||||||||||
| (Dollar amounts in thousands) | At December 31, 2013 | |||||||||||||||||||
| Rates Decline | Rates Increase | |||||||||||||||||||
| Rate change | (2%) | (1%) | Current | +1% | +2% | |||||||||||||||
| Change in net interest income | $ | 35,333 | $ | 35,436 | $ | 34,994 | $ | 33,829 | $ | 33,105 | ||||||||||
| Change from current | $ | 339 | $ | 442 | $ | (1,165 | ) | $ | (1,889 | ) | ||||||||||
| 54 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| 55 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FNB Bancorp
We have audited the accompanying consolidated balance sheets of FNB Bancorp and subsidiary (the "Company") as of December 31, 2013 and 2012, and the related consolidated statements of earnings, comprehensive earnings, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FNB Bancorp and subsidiary as of December 31, 2013 and 2012, and the consolidated results of its their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Portland, Oregon
March 28, 2014
| 56 |
FNB
BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2013 and 2012
| Assets | ||||||||
| (Dollar amounts in thousands) | 2013 | 2012 | ||||||
| Cash and due from banks | $ | 14,007 | $ | 27,861 | ||||
| Interest-bearing time deposits with financial institutions | 5,543 | 13,216 | ||||||
| Securities available-for-sale, at fair value | 263,988 | 234,945 | ||||||
| Other equity securities | 5,300 | 5,464 | ||||||
| Loans, net of deferred loan fees and allowance for loan losses of $9,879 and $9,124 on December 31, 2013 and December 31, 2012 | 552,343 | 541,563 | ||||||
| Bank premises, equipment, and leasehold improvements, net | 12,512 | 12,706 | ||||||
| Bank owned life insurance | 12,151 | 11,785 | ||||||
| Accrued interest receivable | 3,808 | 3,760 | ||||||
| Other real estate owned, net | 5,318 | 6,650 | ||||||
| Goodwill | 1,841 | 1,841 | ||||||
| Prepaid expenses | 701 | 1,372 | ||||||
| Other assets | 14,418 | 14,177 | ||||||
| Total assets | $ | 891,930 | $ | 875,340 | ||||
| Liabilities & Stockholders’ Equity | ||||||||
| Deposits | ||||||||
| Demand, noninterest bearing | $ | 198,523 | $ | 178,384 | ||||
| Demand, interest bearing | 80,746 | 75,465 | ||||||
| Savings and money market | 370,194 | 343,437 | ||||||
| Time | 124,152 | 171,066 | ||||||
| Total deposits | 773,615 | 768,352 | ||||||
| Federal Home Loan Bank advances | 15,000 | 1,220 | ||||||
| Accrued expenses and other liabilities | 9,066 | 10,410 | ||||||
| Total liabilities | 797,681 | 779,982 | ||||||
| Commitments and Contingencies (Note 12) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock - series C - no par value, authorized and outstanding 9,450 shares at December 31, 2013 and 12,600 shares at December 31, 2012 (liquidation preference of $1,000 per share) | 9,450 | 12,600 | ||||||
| Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 3,978,505 shares at December 31, 2013 and 3,883,543 shares at December 31, 2012 | 59,317 | 52,610 | ||||||
| Retained earnings | 26,738 | 26,280 | ||||||
| Accumulated other comprehensive (loss) earnings, net of tax | (1,256 | ) | 3,868 | |||||
| Total stockholders’ equity | 94,249 | 95,358 | ||||||
| Total liabilities and stockholders’ equity | $ | 891,930 | $ | 875,340 | ||||
See accompanying notes to consolidated financial statements
| 57 |
See accompanying notes to consolidated financial statements.
| 58 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
| (Dollar amounts in thousands) | Twelve months ended | |||||||||||
| December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net earnings | $ | 7,439 | $ | 8,803 | 4,257 | |||||||
| Other comprehensive income: | ||||||||||||
| Unrealized holding (loss) gain on available-for-sale securities net of tax benefit (expense) of $3,560, $(413), and $(2111) | (4,933 | ) | 1,159 | 3,320 | ||||||||
| Reclassification adjustment for gains recognized on available-for-sale securities sold, net of tax expense of $133, $393 and $196 | (191 | ) | (565 | ) | (283 | ) | ||||||
| Total other comprehensive (loss) earnings | (5,124 | ) | 594 | 3,037 | ||||||||
| Total comprehensive earnings | $ | 2,315 | $ | 9,397 | 7,294 | |||||||
See accompanying notes to consolidated financial statements.
| 59 |
Consolidated Statement of Changes in Stockholders’ Equity
Years ended December 31, 2013, 2012 and 2011
| Accumulated | ||||||||||||||||||||||||||||||||
| other | ||||||||||||||||||||||||||||||||
| compre- | ||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | Preferred Stock | hensive | ||||||||||||||||||||||||||||||
| Common stock | series | series | series | Retained | earnings | |||||||||||||||||||||||||||
| Shares | Amount | A | B | C | earnings | (loss) | Total | |||||||||||||||||||||||||
| Balance at December 31, 2010 | 3,338 | $ | 46,565 | $ | 11,747 | $ | 615 | $ | — | $ | 21,760 | $ | 237 | $ | 80,924 | |||||||||||||||||
| Preferred stock issued | 12,600 | 12,600 | ||||||||||||||||||||||||||||||
| Redemption of preferred stock | (12,017 | ) | (600 | ) | 17 | (12,600 | ) | |||||||||||||||||||||||||
| Net earnings | — | — | — | — | 4,257 | — | 4,257 | |||||||||||||||||||||||||
| Total comprehensive earnings | 3,037 | 3,037 | ||||||||||||||||||||||||||||||
| Dividends and accretion on preferred stock | — | 270 | (15 | ) | — | (800 | ) | — | (545 | ) | ||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | (568 | ) | — | (568 | ) | |||||||||||||||||||||||
| Cash in lieu of fractional shares | — | — | — | — | (2 | ) | — | (2 | ) | |||||||||||||||||||||||
| Dividend declared | — | — | — | — | (211 | ) | — | (211 | ) | |||||||||||||||||||||||
| Stock dividend of 5% | 167 | 2,026 | — | — | — | (2,026 | ) | — | — | |||||||||||||||||||||||
| Stock options exercised | 1 | 11 | — | — | — | — | — | 11 | ||||||||||||||||||||||||
| Stock-based compensation expense | 293 | — | — | — | — | — | 293 | |||||||||||||||||||||||||
| Balance at December 31, 2011 | 3,506 | 48,895 | — | — | 12,600 | 22,427 | 3,274 | 87,196 | ||||||||||||||||||||||||
| Net earnings | — | — | — | — | 8,803 | — | 8,803 | |||||||||||||||||||||||||
| Total comprehensive earnings | — | — | — | — | — | 594 | 594 | |||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (658 | ) | — | (658 | ) | |||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | (667 | ) | — | (667 | ) | |||||||||||||||||||||||
| Cash in lieu of fractional shares | — | — | — | — | (5 | ) | — | (5 | ) | |||||||||||||||||||||||
| Dividend declared | — | — | — | — | (296 | ) | — | (296 | ) | |||||||||||||||||||||||
| Stock dividend of 5% | 176 | 3,324 | — | — | — | (3,324 | ) | — | — | |||||||||||||||||||||||
| Stock options exercised | 17 | 151 | — | — | — | — | — | 151 | ||||||||||||||||||||||||
| Tax benefit-options exercised | 30 | — | — | — | — | — | 30 | |||||||||||||||||||||||||
| Stock-based compensation expense | 210 | — | — | — | — | — | 210 | |||||||||||||||||||||||||
| Balance at December 31, 2012 | 3,699 | 52,610 | — | — | 12,600 | 26,280 | 3,868 | 95,358 | ||||||||||||||||||||||||
| Redemption of preferred stock | — | — | — | (3,150 | ) | — | — | (3,150 | ) | |||||||||||||||||||||||
| Net earnings | — | — | — | — | 7,439 | — | 7,439 | |||||||||||||||||||||||||
| Total comprehensive losses | — | — | — | — | — | (5,124 | ) | (5,124 | ) | |||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (567 | ) | — | (567 | ) | |||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | (1,054 | ) | — | (1,054 | ) | |||||||||||||||||||||||
| Dividend declared | — | — | — | — | (398 | ) | — | (398 | ) | |||||||||||||||||||||||
| Stock dividend of 5% | 189 | 4,958 | — | — | — | (4,958 | ) | — | — | |||||||||||||||||||||||
| Stock options exercised | 91 | 1,067 | — | — | — | — | — | 1,067 | ||||||||||||||||||||||||
| Cash in lieu of fractional shares | — | — | — | — | (4 | ) | — | (4 | ) | |||||||||||||||||||||||
| Tax benefit-options exercised | 354 | — | — | — | — | — | 354 | |||||||||||||||||||||||||
| Stock-based compensation expense | 328 | — | — | — | — | — | 328 | |||||||||||||||||||||||||
| Balance at December 31, 2013 | 3,979 | $ | 59,317 | $ | — | $ | — | $ | 9,450 | $ | 26,738 | $ | (1,256 | ) | $ | 94,249 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
| 60 |
Consolidated Statements of Cash Flows
Years ended December 31, 2013, 2012 and 2011
| (Dollar amounts in thousands) | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net earnings | $ | 7,439 | $ | 8,803 | $ | 4,257 | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
| Depreciation, amortization and accretion | 3,708 | 3,493 | 2,803 | |||||||||
| Gain on sale of securities available-for-sale | (324 | ) | (958 | ) | (479 | ) | ||||||
| Gain on sale of other real estate owned | (96 | ) | (6 | ) | (66 | ) | ||||||
| Loss on impairment of other real estate owned | 69 | 53 | 543 | |||||||||
| Stock-based compensation expense | 328 | 210 | 293 | |||||||||
| Earnings on bank owned life insurance | (366 | ) | (769 | ) | (325 | ) | ||||||
| Provision for loan losses | 1,385 | 1,833 | 1,750 | |||||||||
| Bargain purchase gain | — | (3,666 | ) | — | ||||||||
| Deferred taxes | 341 | (271 | ) | (308 | ) | |||||||
| (Increase) decrease in accrued interest receivable | (48 | ) | 251 | 151 | ||||||||
| Decrease in prepaid expense | 671 | 735 | 736 | |||||||||
| (Increase) decrease in other assets | (278 | ) | (3,177 | ) | 1,832 | |||||||
| Increase (decrease) increase in accrued expenses and other liabilities | 1,818 | 2,537 | (925 | ) | ||||||||
| Net cash provided by operating activities | 14,647 | 9,068 | 10,262 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Cash paid for acquisition, net of cash acquired | — | (18,374 | ) | — | ||||||||
| Proceeds from matured/called/sold securities available-for-sale | 53,392 | 68,205 | 41,694 | |||||||||
| Purchases of securities available-for-sale | (93,256 | ) | (102,212 | ) | (98,861 | ) | ||||||
| Redemptions (purchases) of other equity securities | 164 | (856 | ) | 638 | ||||||||
| Redemption of time deposits of other banks | 7,673 | 3,880 | — | |||||||||
| Net (increase) decrease in loans | (12,115 | ) | (1,345 | ) | 28,738 | |||||||
| Increase in bank-owned life insurance | — | (1,879 | ) | — | ||||||||
| Proceeds from sale of other real estate owned | 1,384 | 932 | 4,078 | |||||||||
| Net investment in other real estate owned | (25 | ) | (31 | ) | (3 | ) | ||||||
| Proceeds from sales of bank premises, equipment, and leasehold improvements | 15 | — | 2 | |||||||||
| Purchases of bank premises, equipment, and leasehold improvements | (1,068 | ) | (850 | ) | (1,181 | ) | ||||||
| Net cash used in investing activities | (43,836 | ) | (52,530 | ) | (24,895 | ) | ||||||
See accompanying notes to consolidated financial statements.
| 61 |
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2013, 2012 and 2011
| 2013 | 2012 | 2011 | ||||||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase in demand and savings deposits | 52,177 | 60,284 | 9,887 | |||||||||
| Net decrease in time deposits | (46,914 | ) | (21,379 | ) | (16,549 | ) | ||||||
| Net advances (repayment) of FHLB borrowings | 13,780 | (4,877 | ) | — | ||||||||
| Cash dividends paid on common stock | (1,054 | ) | (667 | ) | (568 | ) | ||||||
| Cash in lieu of franctional shares | (4 | ) | (5 | ) | (3 | ) | ||||||
| Exercise of stock options | 1,067 | 151 | 11 | |||||||||
| Cash dividends paid of preferred stock series A and B | — | — | (545 | ) | ||||||||
| Redemption of preferred stock series A and B | — | — | (12,600 | ) | ||||||||
| Issuance (redemption) of preferred stock series C | (3,150 | ) | — | 12,600 | ||||||||
| Cash dividends paid on preferred stock series C | (567 | ) | (658 | ) | — | |||||||
| Net cash provided (used in) by financing activities | 15,335 | 32,849 | (7,767 | ) | ||||||||
| Net decrease in cash and cash equivalents | (13,854 | ) | (10,613 | ) | (22,400 | ) | ||||||
| Cash and cash equivalents at beginning of year | 27,861 | 38,474 | 60,874 | |||||||||
| Cash and cash equivalents at end of year | $ | 14,007 | $ | 27,861 | $ | 38,474 | ||||||
| Additional cash flow information: | ||||||||||||
| Interest paid | $ | 2,519 | $ | 2,676 | $ | 3,345 | ||||||
| Income taxes paid | 1,235 | 1,907 | 1,955 | |||||||||
| Non-cash investing and financing activities: | ||||||||||||
| Accrued dividends | 398 | 296 | 210 | |||||||||
| Change in fair value of available-for-sale securities, net of tax effect | (5,124 | ) | 594 | 3,037 | ||||||||
| Loans transferred to other real estate owned | — | 4,863 | 619 | |||||||||
| Deemed dividends on preferred stock | — | — | 255 | |||||||||
| Acquisition: | ||||||||||||
| Assets acquired | — | 117,929 | — | |||||||||
| Liabilities assumed | — | 114,263 | — | |||||||||
See accompanying notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
December 31, 2013, 2012 and 2011
| (1) | The Company and Summary of Significant Accounting Policies | |
| FNB Bancorp (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on February 28, 2001. The consolidated financial statements include the accounts of FNB Bancorp and its wholly-owned subsidiary, First National Bank of Northern California (the “Bank”). The Bank provides traditional banking services in San Mateo and San Francisco counties, and operates a loan production office in Santa Clara county. | ||
| The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. For the Bank, the significant accounting estimates are the allowance for loan losses, the valuation of goodwill, the valuation of the allowance for deferred tax assets and fair value determinations such as OREO and impaired loans. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. | ||
| (a) | Basis of Presentation | |
| The accounting and reporting policies of the Company and its wholly-owned subsidiary are in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated. | ||
| (b) | Cash and Cash Equivalents | |
| Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. The cash equivalents are readily convertible to known amounts of cash and present insignificant risk of changes in value due to original maturity dates of 90 days or less. Included in cash and cash equivalents are restricted balances at the Federal Reserve Bank of San Francisco which relate to a minimum cash reserve requirement of approximately $1,278,000 and $1,461,000 at December 31, 2013 and 2012, respectively. | ||
| (c) | Investment Securities | |
| Investment securities consist of U.S. Treasury securities, U.S. agency securities, obligations of states and political subdivisions, obligations of U.S. corporations, mortgage-backed securities and other securities. At the time of purchase of a security, the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs, and intent to hold. The Company classifies securities as held to maturity only if and when it has the positive intent and ability to hold the security to maturity. The Company does not purchase securities with the intent to engage in trading activity. Held to maturity securities are recorded at amortized cost, adjusted for amortization of premiums or accretion of discounts. The Company did not have any investments in the held-to-maturity portfolio at December 31, 2013 or 2012. Securities available-for-sale are recorded at fair value with unrealized holding gains or losses, net of the related tax effect, reported as a separate component of stockholders’ equity until realized. | ||
| 63 |
| An impairment charge will be recorded if the Company has the intent to sell a security that is currently in an unrealized loss position or where the Company may be required to sell a security that is currently in an unrealized loss position. A decline in the market value of any security available-for-sale or held-to-maturity below cost that is deemed other than temporary will cause a charge to earnings to be recorded and the corresponding establishment of a new cost basis for the security. Amortization of premiums and accretion of discounts on debt securities are included in interest income over the life of the related security held-to-maturity or available-for-sale using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. | ||
| Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary. This assessment includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other than temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive earnings. | ||
| (d) | Derivatives | |
| All derivatives contracts and instruments are recognized as either assets or liabilities in the balance sheet and measured at fair value. The Company did not hold any derivative contracts at December 31, 2013 or 2012. | ||
| (e) | Loans | |
| Loans are reported at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. An unearned discount on installment loans is recognized as income over the terms of the loans by the interest method. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield, are deferred and amortized over the contractual term of the loan using the interest method. |
| 64 |
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
A loan is considered impaired if, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. An impaired loan is measured based upon the present value of future cash flows discounted at the loan’s effective rate, the loan’s observable market price, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by a charge to the allowance for loan losses. Large groups of smaller balance loans are collectively evaluated for impairment.
Restructured loans are loans on which concessions in terms have been granted because of the borrowers’ financial difficulties. Interest is generally accrued on such loans in accordance with the new terms, once the borrower has demonstrated a history of at least six months repayment. A loan is considered to be a troubled debt restructuring when the Bank, for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that makes it easier for the debtor to make their required loan payments. The concession may take the form of a temporary reduction in the interest rate or monthly payment amount due or may extend the maturity date of the loan. Other financial concessions may be agreed to as conditions warrant. Troubled debt restructured loans are accounted for as impaired loans. For an impaired loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement.
| 65 |
Loans acquired in business combinations are recorded on a loan-by-loan basis at their estimated fair value. The Company uses third party valuation specialists to determine the estimated fair value on all acquired loans. The Company acquires both performing and impaired loans (loans acquired with evidence of credit quality deterioration at the time of purchase) in its acquisitions. For acquired performing loans, any discount or premium related to fair value adjustments at the time of purchase is recognized as interest income over the estimated life of the loan using the effective yield method. Loans acquired with evidence of credit quality deterioration, at the time of purchase, are accounted for under ASC 310-30. Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30 Loans”). For ASC 310-30 Loans, the excess of cash flows expected to be collected over a loan’s carrying value is considered to be the accreteable yield and is recognized as interest income over the estimated life of the loan using the effective yield method. The acquisition date estimates of accreteable yield may subsequently change due to changes in management’s estimates of timing and amounts of expected cash flows. The excess of the contractual amounts due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the Company’s estimate of the credit losses expected to occur and is considered in determining the fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at acquisition date in excess of fair value are adjusted through an increase to the accreteable yield on a prospective basis. Any subsequent decreases in cash flows attributable to credit deterioration are recognized by recording additional provision for loan losses.
| (f) | Allowance for Loan Losses | |
| The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses inherent in existing loans, standby letters of credit, overdrafts, and commitments to extend credit based on evaluations of collectability and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans and current and anticipated economic conditions that may affect the borrowers’ ability to pay. While management uses these evaluations to determine the level of the allowance for loan losses, future provisions may be necessary based on changes in the factors used in the evaluations. Material estimates relating to the determination of the allowance for loan losses are particularly susceptible to significant change in the near term. Management believes that the allowance for loan losses is adequate as of December 31, 2013. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, and our borrowers’ ability to pay. In addition, the banking regulators, as an integral part of its examination process, periodically review the Bank’s allowance for loan losses. The banking regulators may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. | ||
| (g) | Premises and Equipment | |
| Premises and equipment are reported at cost less accumulated depreciation using the straight-line method over the estimated service lives of related assets ranging from 3 to 50 years. Leasehold improvements are amortized over the estimated lives of the respective leases or the service lives of the improvements, whichever is shorter. |
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| (h) | Other Real Estate Owned |
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of the carrying amount of the loan or fair value of the property at the date of foreclosure less selling costs. Subsequent to foreclosure, valuations are periodically performed, and any subsequent revisions in the estimate of fair value are reported as an adjustment to the carrying value of the real estate, provided the adjusted carrying amount does not exceed the original amount at foreclosure. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. The Company may make loans to facilitate the sale of foreclosed real estate. Gains and losses on financed sales are recorded in accordance with the appropriate accounting standard, taking into account the buyer’s initial and continuing investment in the property, potential subordination and transfer of ownership.
| (i) | Goodwill and Other Intangible Assets |
Goodwill is recognized in a business acquisition transaction when the acquisition purchase price exceeds the fair market value of identified tangible and intangible assets and liabilities. Goodwill is subsequently evaluated for possible impairment at least annually. If impairment is determined to exist, it is recorded in the period it is identified. The Company evaluated goodwill at December 31, 2013, and found no impairment.
Other intangible assets consist of core deposit and customer intangible assets that are initially recorded at fair value and subsequently amortized over their estimated useful lives, usually no longer than a seven year period.
| (j) | Cash Dividends |
The Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from the Bank. The Bank’s ability to pay cash dividends is also subject to restrictions imposed under the National Bank Act and regulations promulgated by the Office of the Comptroller of the Currency.
| (k) | Stock Dividend |
On October 28, 2013, the Company announced that its Board of Directors had declared a five percent (5%) stock dividend which resulted in 189,218 shares, payable at the rate of one share of Common Stock for every twenty (20) shares of Common Stock owned. The stock dividend was paid on December 23, 2013, to stockholders of record on December 2, 2013. The earnings per share data for all periods presented has been adjusted for stock dividends, except for the Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Earnings, which shows the historical rollforward of stock dividends declared.
| (l) | Other Income |
Other income includes the following major items:
| 2013 | 2012 | 2011 | ||||||||||
| Dividend income-other equity securities | 262 | 138 | 77 | |||||||||
| Rental Income-other real estate owned | 249 | 48 | 97 | |||||||||
| All other smaller items | 352 | 240 | 293 | |||||||||
| Total other income | 863 | 426 | 467 | |||||||||
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| (m) | Other Expense |
Other expense includes the following major items:
| 2013 | 2012 | 2011 | ||||||||||
| dues and memberships | 109,000 | 111,000 | 104,000 | |||||||||
| real estate appraisals | 129,000 | 72,000 | 83,000 | |||||||||
| Training and seminars | 86,000 | 82,000 | 79,000 | |||||||||
| Amortization of deposit premium | 68,000 | 100,000 | 98,000 | |||||||||
| Mastercard | 98,000 | 97,000 | 100,000 | |||||||||
| Dunbar courier | 113,000 | 107,000 | 104,000 | |||||||||
| OCC Assessment | 215,000 | 171,000 | 261,000 | |||||||||
| All other smaller items | 425,000 | 734,000 | 458,000 | |||||||||
| Total other expense | 1,243,000 | 1,474,000 | 1,287,000 | |||||||||
| (n) | Income Taxes |
Deferred income taxes are determined using the asset and liability method. Under this method, the net deferred tax asset or liability is recognized for tax consequences of temporary differences by applying current tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is established through the provision for income taxes for any deferred tax assets where the utilization of the asset is in doubt. During 2013, the Company recorded a reversal of the deferred tax asset valuation allowance of $934,000 for tax credit carry-forwards from the Bank’s investment in low income housing real estate partnerships. As changes in tax laws or rates are enacted, or as significant changes financial projections, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Company had unrecognized tax benefits of $718,000 and $725,000 as of December 31, 2013 and 2012, respectively. These unrecognized tax benefits are related to income tax uncertainties surrounding the Bank’s Enterprise Zone net interest deduction. The Bank is currently being audited by the Franchise Tax Board for the years ended December 31, 2005 through 2008, and the outcome of these audits is uncertain.
The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2013 and 2012, the Company believes that any penalties and interest penalties that may exist are not material and the Company has not accrued for them.
At December 31, 2013, the Bank had a $1,806,000 investment in six partnerships, which own low-income affordable housing projects that generate tax benefits in the form of federal and state housing tax credits. As a limited partner investor in these partnerships, the Company receives tax benefits in the form of tax deductions from partnership operating losses and federal and state income tax credits. The federal and state income tax credits are earned over a 10-year period as a result of the investment properties meeting certain criteria and are subject to recapture for noncompliance with such criteria over a 15-year period. The expected benefit resulting from the low-income housing tax credits is recognized in the period for which the tax benefit is recognized in the Company’s consolidated tax returns. These investments are accounted for using the historical cost method less depreciation and amortization and are recorded in other assets on the balance sheet. The Company recognizes tax credits as they are allocated and amortizes the initial cost of the investments over the period that tax credits are allocated to the Company. There is no residual value for the investment at the end of the tax credit allocation period. Cash received from operations of the limited partnership or sale of the properties, if any, will be included in earnings when realized.
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| (o) | Earnings per Share |
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding, adjusted for stock dividends and splits. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. There were 179,624, 271,655, and 342,030 anti-dilutive shares in the years ended December 31, 2013, 2012 and 2011, respectively, which were not included in the calculation. Reconciliation of weighted average shares used in computing basic and diluted earnings per share is as follows:
| (Number of shares in thousands) | 2013 | 2012 | 2011 | |||||||||
| Weighted average common shares outstanding-used in computing basic earnings per share | 3,935 | 3,879 | 3,873 | |||||||||
| Dilutive effect of stock options outstanding, using the treasury stock method | 89 | 64 | 20 | |||||||||
| Shares used in computing diluted earnings per share | 4,024 | 3,943 | 3,893 | |||||||||
| (p) | Stock Option Plans |
Measurement of the cost of stock options granted is based on the grant-date fair value of each stock option granted using the Black-Scholes valuation model. The cost is then amortized to expense on a straight-line basis over each option’s requisite service period. The amortized expense of the stock option’s fair value has been included in salaries and employee benefits expense for the three years ended December 31, 2013, 2012 and 2011. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S. Treasury yield curve in effect at the time of the grant. The Company’s stock has limited liquidity and limited trading activity. Volatility was calculated using historical price changes on a monthly basis over the expected life of the option.
| 69 |
| (q) | Fair Values of Financial Instruments |
The accounting standards provide for a fair value measurement framework that quantifies fair value estimates by the level of pricing precision. The degree of judgment utilized in measuring the fair value of assets generally correlates to the level of pricing precision. Financial instruments rarely traded or not quoted will generally have a higher degree of judgment utilized in measuring fair value. Pricing precision is impacted by a number of factors including the type of asset or liability, the availability of the asset or liability, the market demand for the asset or liability, and other conditions that were considered at the time of the valuation.
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.
| (r) | Bank Owned Life Insurance |
The Company purchased insurance on the lives of certain executives. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as the deferred compensation plan. Changes in the cash surrender value are recorded as other noninterest income in the consolidated statements of earnings.
| (s) | Federal Home Loan Bank Borrowings |
The Bank maintains a collateralized line of credit with the Federal Home Loan Bank (“FHLB”) of San Francisco. Under this line, the Bank may borrow on a short term or a long term (over one year) basis. FHLB advances are recorded and carried at their historical cost. FHLB advances are not transferable and may contain prepayment penalties. In addition to the collateral pledged, the Company is required to hold prescribed amounts of FHLB stock that vary with the usage of FHLB borrowings.
| (t) | Reclassifications |
Certain prior year information has been reclassified to conform to current year presentation. The reclassifications had no impact on consolidated net earnings or retained earnings.
| (u) | Recent Accounting Pronouncements |
In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of disclosures about Offsetting Assets and Liabilities. The Update clarifies that ASU 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting agreement or similar agreement are no longer subject to the disclosure requirements in ASU 2011-11. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of ASU did not have a material impact on the Company’s consolidated financial statements.
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In February of 2013, the FASB issued ASU No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial statements.
In April 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740). This ASU requires an entity to present in the financial statements an unrecognized tax benefit as a liability and the unrecognized tax benefit should not be combined with deferred tax assets to the extent that a net operating loss carry-forward, tax loss or credit carry-forward is also not available at the reporting date. The amendment is to be applied prospectively to all unrecognized tax benefits and are effective for annual and interim reporting periods beginning after December 15, 2013. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
Management has reviewed the remaining Accounting Standards Updates (ASU; 2013-03 through 2013-10) and concluded that none are applicable to the Company’s current operations.
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan Through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reports beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU 2014-04 is not expected to have a material impact on the Company’s consolidated financial statements.
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| 2) | Oceanic Bank Acquisition |
On September 21, 2012, FNB Bancorp completed its acquisition of all of the outstanding stock of Oceanic Bank Holding, Inc. And Oceanic Bank, a California banking corporation and the Company’s wholly-owned subsidiary. Effective the same date, Oceanic Bank was merged into First National Bank of Northern California and Oceanic Bank Holding, Inc. was merged into FNB Bancorp.
The following table presents the Oceanic Bank acquisition presented at fair value as of the acquisition date, September 21, 2012:
| September 21, | ||||
| (Dollars in thousands) | 2012 | |||
| Assets acquired: | ||||
| Cash and due from banks | $ | (1,278 | ) | |
| Investment securities, available for sale | 13,387 | |||
| Loans | 103,194 | |||
| Premises and equipment, net | 12 | |||
| Core deposit intangible | 110 | |||
| Other assets | 2,504 | |||
| Total assets acquired | $ | 117,929 | ||
| Liabilities assumed: | ||||
| Noninterest-bearing deposits | 11,755 | |||
| Interest-bearing deposits | 95,914 | |||
| Borrowings | 6,097 | |||
| Accrued expenses and other liabilities | 497 | |||
| Total liabilities assumed | $ | 114,263 | ||
| Net assets acquired/Bargain purchase gain | $ | 3,666 | ||
The Company was able to record a bargain purchase gain related to this acquisition in the amount of $3,666,000. The bargain purchase gain is shown as a separate line item in the Company’s 2012 Consolidated Statement of Earnings. On a pro forma basis, the earnings of Oceanic Bank would not have been material to the Company for the year ended December 31, 2012.
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Subsequent to the acquisition, the Bank closed the Oceanic Bank branch that operated on the Island of Guam and also closed the San Francisco, CA branch that operated from Post Street. Additional space was leased to include all the downstairs space at the Battery Street location and the Post Street operations were consolidated into the Battery Street branch location. These branch closures and consolidations reduced our branch facilities costs by approximately $30,000 per month beginning in August, 2013.
| (3) | Restricted Cash Balance |
Cash and due from banks includes balances with the Federal Reserve Bank of San Francisco (the FRB). The Bank is required to maintain specified minimum average balances with the FRB, based primarily upon the Bank’s deposit balances. As of December 31, 2013 and 2012, the Bank maintained deposits in excess of the FRB reserve requirement, which was $1,278,000 and $1,461,000, respectively.
| (4) | Securities Available-for-Sale |
The amortized cost and carrying values of securities available-for-sale are as follows:
| (Dollar amounts in thousands) | Amortized | Unrealized | Unrealized | Carrying | ||||||||||||
| cost | gains | losses | value | |||||||||||||
| December 31, 2013: | ||||||||||||||||
| U.S. Treasury securities | $ | 3,069 | $ | 12 | $ | (54 | ) | $ | 3,027 | |||||||
| Obligations of U.S. government agencies | 73,691 | 488 | (860 | ) | 73,319 | |||||||||||
| Mortgage-backed securities | 79,873 | 360 | (2,373 | ) | 77,860 | |||||||||||
| Obligations of states and political subdivisions | 82,526 | 1,467 | (1,317 | ) | 82,676 | |||||||||||
| Corporate debt | 26,958 | 330 | (182 | ) | 27,106 | |||||||||||
| $ | 266,117 | $ | 2,657 | $ | (4,786 | ) | $ | 263,988 | ||||||||
| December 31, 2012: | ||||||||||||||||
| U.S. Treasury securities | $ | 7,145 | $ | 135 | $ | — | $ | 7,280 | ||||||||
| Obligations of U.S. government agencies | 71,061 | 1,206 | (7 | ) | 72,260 | |||||||||||
| Mortgage-backed securities | 53,934 | 1,383 | (137 | ) | 55,180 | |||||||||||
| Obligations of states and political subdivisions | 78,147 | 3,515 | (53 | ) | 81,609 | |||||||||||
| Corporate debt | 18,103 | 535 | (22 | ) | 18,616 | |||||||||||
| $ | 228,390 | $ | 6,774 | $ | (219 | ) | $ | 234,945 | ||||||||
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An analysis of gross unrealized losses within the available-for-sale investment securities portfolio as of December 31, 2013 and December 31, 2012 follows:
| Total | < 12 Months | Total | 12 Months or > | Total | Total | |||||||||||||||||||
| December 31, 2013: | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| (Dollar amounts in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
| U. S. Treasury securities | 2,002 | (54 | ) | — | — | 2,002 | (54 | ) | ||||||||||||||||
| Obligations of U.S. government agencies | 40,108 | (860 | ) | — | — | 40,108 | (860 | ) | ||||||||||||||||
| Mortgage-backed securities | 51,419 | (2,015 | ) | 5,664 | (358 | ) | 57,083 | (2,373 | ) | |||||||||||||||
| Obligations of states and political subdivisions | 33,265 | (1,248 | ) | 1,083 | (69 | ) | 34,348 | (1,317 | ) | |||||||||||||||
| Corporate debt | 10,857 | (180 | ) | 498 | (2 | ) | 11,355 | (182 | ) | |||||||||||||||
| Total | $ | 137,651 | $ | (4,357 | ) | $ | 7,245 | $ | (429 | ) | $ | 144,896 | $ | (4,786 | ) | |||||||||
| Total | < 12 Months | Total | 12 Months or > | Total | Total | |||||||||||||||||||
| December 31, 2012: | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| (Dollar amounts in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
| Obligations of U.S. government agencies | 4,093 | (7 | ) | — | — | 4,093 | (7 | ) | ||||||||||||||||
| Mortgage-backed securities | 8,580 | (137 | ) | — | — | 8,580 | (137 | ) | ||||||||||||||||
| Obligations of states and political subdivisions | 8,492 | (53 | ) | — | — | 8,492 | (53 | ) | ||||||||||||||||
| Corporate debt | — | — | 478 | (22 | ) | 478 | (22 | ) | ||||||||||||||||
| Total | $ | 21,165 | $ | (197 | ) | $ | 478 | $ | (22 | ) | $ | 21,643 | $ | (219 | ) | |||||||||
At December 31, 2013, there were five securities in an unrealized loss position for greater than 12 consecutive months. At December 31, 2012, there was one security in an unrealized loss position for greater than 12 consecutive months. Management periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. Management has determined that no investment security is other-than-temporarily impaired at December 31, 2013 and 2012. 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 resulting from interest rate declines prior to the earliest of forecasted recovery or the maturity of the underlying investment security.
The amortized cost and carrying value of debt securities as of December 31, 2013, 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 | ||||||
| Cost | Value | |||||||
| Available-for-sale: | ||||||||
| Due in one year or less | $ | 14,443 | $ | 14,569 | ||||
| Due after one through five years | 96,703 | 97,184 | ||||||
| Due after five years through ten years | 116,484 | 114,537 | ||||||
| Due after ten years | 38,487 | 37,698 | ||||||
| $ | 266,117 | $ | 263,988 | |||||
| 74 |
At December 31, 2013 and 2012, securities with an amortized cost of $70,678,000 and $81,978,000, and fair value of $70,640,000 and $84,399,000, respectively, were pledged as collateral for public deposits and for other purposes required by law.
As of December 31, 2013 and 2012, the Bank had investments in Federal Home Loan Bank stock classified as other equity security in the accompanying balance sheets of $3,988,000 and $4,154,000, respectively. As of December 31, 2013 and 2012, the Bank had investments in FRB of $1,062,000, also carried among other equity securities. These investments are carried at cost, and evaluated periodically for impairment. Federal Home Loan Bank and FRB stock can be redeemed at par by the government agencies. These securities cannot be sold to other investors. Management reviews the financial statements, credit rating and other pertinent financial information of these entities in order to determine if impairment has occurred. So long as there is sufficient evidence to support the ability of these entities to continue to redeem their stock, management believes these securities are not impaired.
| (5) | Loans |
Loans are summarized as follows at December 31:
| Total | ||||||||||||||||
| FNB | Balance | |||||||||||||||
| Bancorp | December 31 | |||||||||||||||
| (Dollar amounts in thousands) | Originated | PNCI | PCI | 2013 | ||||||||||||
| Commercial real estate | $ | 285,938 | $ | 37,936 | $ | 1,325 | $ | 325,199 | ||||||||
| Real estate construction | 31,290 | 3,028 | — | 34,318 | ||||||||||||
| Real estate multi-family | 34,357 | 11,786 | — | 46,143 | ||||||||||||
| Real estate 1 to 4 family | 98,196 | 8,707 | — | 106,903 | ||||||||||||
| Commercial & industrial | 38,287 | 10,217 | — | 48,504 | ||||||||||||
| Consumer loans | 1,650 | — | — | 1,650 | ||||||||||||
| Gross loans | 489,718 | 71,674 | 1,325 | 562,717 | ||||||||||||
| Net deferred loan fees | (495 | ) | — | — | (495 | ) | ||||||||||
| Allowance for loan losses | (9,869 | ) | (10 | ) | — | (9,879 | ) | |||||||||
| Net loans | $ | 479,354 | $ | 71,664 | $ | 1,325 | $ | 552,343 | ||||||||
| Total | ||||||||||||||||
| FNB | Balance | |||||||||||||||
| Bancorp | December 31 | |||||||||||||||
| (Dollar amounts in thousands) | Originated | PNCI | PCI | 2012 | ||||||||||||
| Commercial real estate | $ | 254,449 | $ | 48,009 | $ | 1,402 | $ | 303,860 | ||||||||
| Real estate construction | 14,866 | 3,594 | 486 | 18,946 | ||||||||||||
| Real estate multi-family | 39,176 | 18,828 | — | 58,004 | ||||||||||||
| Real estate 1 to 4 family | 97,329 | 15,390 | — | 112,719 | ||||||||||||
| Commercial & industrial | 42,847 | 12,717 | — | 55,564 | ||||||||||||
| Consumer loans | 1,824 | — | — | 1,824 | ||||||||||||
| Gross loans | 450,491 | 98,538 | 1,888 | 550,917 | ||||||||||||
| Net deferred loan fees | (230 | ) | — | — | (230 | ) | ||||||||||
| Allowance for loan losses | (9,124 | ) | — | — | (9,124 | ) | ||||||||||
| Net loans | $ | 441,137 | $ | 98,538 | $ | 1,888 | $ | 541,563 | ||||||||
| 75 |
A summary of impaired loans, the related allowance for loan losses, average investment and income recognized on impaired loans follows. The following tables include originated and purchased non-credit impaired loans.
| Allowance for Loan Losses | ||||||||||||||||||||||||||||
| As of and For the Year Ended December 31, 2013 | ||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
| Real | Real | |||||||||||||||||||||||||||
| Estate | Estate | |||||||||||||||||||||||||||
| Commercial | Commercial | Real Estate | Multi | 1 to | ||||||||||||||||||||||||
| & industrial | Real estate | Construction | family | 4 family | Consumer | Total | ||||||||||||||||||||||
| Allowance for credit losses | ||||||||||||||||||||||||||||
| Beginning balance | $ | 1,875 | $ | 4,812 | $ | 857 | $ | — | $ | 1,516 | $ | 64 | $ | 9,124 | ||||||||||||||
| Charge-offs | (57 | ) | (262 | ) | (81 | ) | — | (385 | ) | (7 | ) | (792 | ) | |||||||||||||||
| Recoveries | 73 | 35 | 50 | — | 3 | 1 | 162 | |||||||||||||||||||||
| Provision | (654 | ) | 1,178 | (92 | ) | 293 | 654 | 6 | 1,385 | |||||||||||||||||||
| Ending balance | $ | 1,237 | $ | 5,763 | $ | 734 | $ | 293 | $ | 1,788 | $ | 64 | $ | 9,879 | ||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 176 | $ | 165 | $ | — | $ | — | $ | 254 | $ | — | $ | 595 | ||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 1,061 | $ | 5,598 | $ | 734 | $ | 293 | $ | 1,534 | $ | 64 | $ | 9,284 | ||||||||||||||
| Real | Real | |||||||||||||||||||||||||||
| Estate | Estate | |||||||||||||||||||||||||||
| Commercial | Commercial | Real Estate | Multi | 1 to | ||||||||||||||||||||||||
| & industrial | Real Estate | Construction | family | 4 family | Consumer | Total | ||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||
| Ending balance | $ | 48,504 | $ | 323,874 | $ | 34,318 | $ | 46,143 | $ | 106,903 | $ | 1,650 | $ | 561,392 | ||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 2,497 | $ | 17,974 | $ | 189 | $ | 375 | $ | 4,077 | $ | — | $ | 25,112 | ||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 46,007 | $ | 305,900 | $ | 34,129 | $ | 46,143 | $ | 102,826 | $ | 1,650 | $ | 536,655 | ||||||||||||||
There has been no additional impairment recognized on purchased credit impaired loans subsequent to acquisition.
| 76 |
| Allowance for Loan Losses | ||||||||||||||||||||||||||||
| As of and For the Year Ended December 31, 2012 | ||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
| Real | Real | |||||||||||||||||||||||||||
| Estate | Estate | |||||||||||||||||||||||||||
| Commercial | Commercial | Real Estate | Multi | 1 to | ||||||||||||||||||||||||
| & industrial | Real estate | Construction | family | 4 family | Consumer | Total | ||||||||||||||||||||||
| Allowance for credit losses | ||||||||||||||||||||||||||||
| Beginning balance | $ | 1,618 | $ | 4,745 | $ | 1,171 | $ | 671 | $ | 1,592 | $ | 100 | $ | 9,897 | ||||||||||||||
| Charge-offs | (1,706 | ) | (738 | ) | (54 | ) | (242 | ) | (182 | ) | (11 | ) | (2,933 | ) | ||||||||||||||
| Recoveries | 124 | 171 | — | — | 11 | 21 | 327 | |||||||||||||||||||||
| Provision | 1,839 | 634 | (260 | ) | (429 | ) | 95 | (46 | ) | 1,833 | ||||||||||||||||||
| Ending balance | $ | 1,875 | $ | 4,812 | $ | 857 | $ | — | $ | 1,516 | $ | 64 | $ | 9,124 | ||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 384 | $ | 415 | $ | 232 | $ | — | $ | 306 | $ | — | $ | 1,337 | ||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 1,491 | $ | 4,397 | $ | 625 | $ | — | $ | 1,210 | $ | 64 | $ | 7,787 | ||||||||||||||
| Loans: | ||||||||||||||||||||||||||||
| Ending balance | $ | 55,564 | $ | 302,458 | $ | 18,460 | $ | 58,004 | $ | 112,719 | $ | 1,824 | $ | 549,029 | ||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 4,167 | $ | 16,099 | $ | 681 | $ | — | $ | 4,771 | $ | — | $ | 25,718 | ||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 51,397 | $ | 286,359 | $ | 18,460 | $ | 58,004 | $ | 107,948 | $ | 1,824 | $ | 523,992 | ||||||||||||||
| 77 |
The following tables provide information pertaining to impaired loans originated and PNCI loans as of and for the years ended December 31, 2013 and 2012.
| As of and for the year ended December 31, 2013 | ||||||||||||||||||||
| Unpaid | Average | |||||||||||||||||||
| (Dollar amounts in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| With no related allowance recorded | ||||||||||||||||||||
| Commercial and industrial | $ | 1,059 | $ | 1,232 | $ | — | $ | 1,204 | $ | 66 | ||||||||||
| Commercial real estate construction | — | — | — | — | — | |||||||||||||||
| Commercial real estate | 12,397 | 13,535 | — | 11,445 | 565 | |||||||||||||||
| Real estate multi family | 375 | 375 | — | 384 | 25 | |||||||||||||||
| Residential- 1 to 4 family | 1,163 | 1,284 | — | 1,009 | 37 | |||||||||||||||
| Total | 14,994 | 16,426 | — | 14,042 | 693 | |||||||||||||||
| With an allowance recorded | ||||||||||||||||||||
| Commercial and industrial | $ | 1,438 | $ | 1,871 | $ | 166 | $ | 1,710 | $ | 15 | ||||||||||
| Commercial real estate construction | 189 | 196 | 10 | 198 | 18 | |||||||||||||||
| Commercial real estate | 5,577 | 5,588 | 165 | 4,972 | 254 | |||||||||||||||
| Residential- 1 to 4 family | 2,914 | 2,923 | 254 | 2,989 | 115 | |||||||||||||||
| Total | 10,118 | 10,578 | 595 | 9,869 | 402 | |||||||||||||||
| Total | ||||||||||||||||||||
| Commercial and industrial | $ | 2,497 | $ | 3,103 | $ | 166 | $ | 2,914 | $ | 81 | ||||||||||
| Commercial real estate construction | 189 | 196 | 10 | 198 | 18 | |||||||||||||||
| Commercial real estate | 17,974 | 19,123 | 165 | 16,417 | 819 | |||||||||||||||
| Real estate multi family | 375 | 375 | — | 384 | 25 | |||||||||||||||
| Residential - 1 to 4 family | 4,077 | 4,207 | 254 | 3,998 | 152 | |||||||||||||||
| Grand total | $ | 25,112 | $ | 27,004 | $ | 595 | $ | 23,911 | $ | 1,095 | ||||||||||
| 78 |
| As of and for the year ended December 31, 2012 | ||||||||||||||||||||
| Unpaid | Average | |||||||||||||||||||
| (Dollar amounts in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| With no related allowance recorded | ||||||||||||||||||||
| Commercial and industrial | $ | 2,202 | $ | 2,338 | $ | — | $ | 2,298 | $ | 120 | ||||||||||
| Commercial real estate construction | — | — | — | 6,187 | 333 | |||||||||||||||
| Commercial real estate | 10,666 | 11,580 | — | 4,874 | 86 | |||||||||||||||
| Residential- 1 to 4 family | 1,052 | 1,147 | — | 1,065 | 55 | |||||||||||||||
| Total | 13,920 | 15,065 | — | 14,424 | 594 | |||||||||||||||
| With an allowance recorded | ||||||||||||||||||||
| Commercial and industrial | $ | 1,965 | $ | 2,427 | $ | 384 | $ | 2,328 | $ | 30 | ||||||||||
| Commercial real estate construction | 681 | 798 | 232 | 798 | 4 | |||||||||||||||
| Commercial real estate | 5,433 | 5,433 | 415 | 5,685 | 240 | |||||||||||||||
| Residential- 1 to 4 family | 3,719 | 3,722 | 306 | 3,283 | 150 | |||||||||||||||
| Total | 11,798 | 12,380 | 1,337 | 12,094 | 424 | |||||||||||||||
| Total | ||||||||||||||||||||
| Commercial and industrial | $ | 4,167 | $ | 4,765 | $ | 384 | $ | 4,626 | $ | 150 | ||||||||||
| Commercial real estate construction | 681 | 798 | 232 | 6,985 | 337 | |||||||||||||||
| Commercial real estate | 16,099 | 17,013 | 415 | 10,559 | 326 | |||||||||||||||
| Residential - 1 to 4 family | 4,771 | 4,869 | 306 | 4,348 | 205 | |||||||||||||||
| Grand total | $ | 25,718 | $ | 27,445 | $ | 1,337 | $ | 26,518 | $ | 1,018 | ||||||||||
Nonaccrual loans totaled $7,351,000 and $12,474,000 as of December 31, 2013 and 2012. Not all impaired loans are in a non-accrual status. The difference between impaired loans and nonaccrual loans is primarily due to loans that have been restructured, that were performing under modified loan agreements. Interest on these loans is accrued in accordance with the modified loan terms.
| Loans on Nonaccrual Status as of | ||||||||
| (Dollar amounts in thousands) | December 31, | December 31, | ||||||
| 2013 | 2012 | |||||||
| Commercial & industrial | $ | 2,046 | $ | 2,618 | ||||
| Real estate - construction | 189 | 1,898 | ||||||
| Commercial real estate | 4,290 | 6,251 | ||||||
| Real estate 1 to 4 family | 826 | 1,707 | ||||||
| Total | $ | 7,351 | $ | 12,474 | ||||
Interest income on impaired loans of $1,095,000, $1,018,000 and $1,143,000 was recognized based upon cash payments received in 2013, 2012, and 2011, respectively. The amount of interest on impaired loans not collected in 2013, 2012 and 2011, was $656,000, $1,358,000 and $1,137,000, respectively. The cumulative amount of unpaid interest on impaired loans was $3,430,000, $2,774,000 and $1,967,000 at December 31, 2013, 2012 and 2011, respectively.
| 79 |
The following is a summary of the number and principal amounts outstanding for troubled debt restructurings added during the years ended December 31, 2013 and 2012.
| Modifications | ||||||||||||
| For the Year Ended December 31, 2013 | ||||||||||||
| Pre- | Post- | |||||||||||
| Modification | Modification | |||||||||||
| Outstanding | Outstanding | |||||||||||
| Number of | Recorded | Recorded | ||||||||||
| Contracts | Investment | Investment | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
| Real Estate-construction | 1 | $ | 189 | $ | 189 | |||||||
| Real estate 1 to 4 family | 3 | 1,236 | 1,236 | |||||||||
| Commercial real estate | 6 | 4,566 | 4,566 | |||||||||
| Total | 10 | $ | 5,991 | $ | 5,991 | |||||||
| Modifications | ||||||||||||
| For the Year Ended December 31, 2012 | ||||||||||||
| Pre- | Post- | |||||||||||
| Modification | Modification | |||||||||||
| Outstanding | Outstanding | |||||||||||
| Number of | Recorded | Recorded | ||||||||||
| Contracts | Investment | Investment | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
| Commercial & industrial | 7 | $ | 2,723 | $ | 2,723 | |||||||
| Real estate 1 to 4 family | 3 | 1,446 | 1,446 | |||||||||
| Commercial real estate | 3 | 1,409 | 1,409 | |||||||||
| Total | 13 | $ | 5,578 | $ | 5,578 | |||||||
During the years ended December 31, 2013 and 2012, no loans defaulted within twelve months following the date of restructure. All restructurings were a modification of interest rate and/or payment. There were no principal reductions granted.
| 80 |
The following is a summary of the number and principal amounts outstanding for troubled debt restructurings at December 31, 2013 and 2012.
| Total troubled debt restructurings outstanding at year end | ||||||||||||||||||||||||
| (dollars in thousands) | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
| Non- | Non- | |||||||||||||||||||||||
| Accrual | accrual | Total | Accrual | accrual | Total | |||||||||||||||||||
| status | status | modifications | status | status | modifications | |||||||||||||||||||
| Commercial & industrial | $ | 461 | $ | 1,951 | $ | 2,412 | $ | 1,216 | $ | 2,308 | $ | 3,524 | ||||||||||||
| Real Estate construction | — | 189 | 189 | — | — | — | ||||||||||||||||||
| Real estate 1 to 4 family | 2,121 | 529 | 2,650 | 333 | 1,113 | 1,446 | ||||||||||||||||||
| Commercial real estate | 6,315 | 2,140 | 8,455 | 2,614 | 1,981 | 4,595 | ||||||||||||||||||
| Total | $ | 8,897 | $ | 4,809 | $ | 13,706 | $ | 4,163 | $ | 5,402 | $ | 9,565 | ||||||||||||
| Age Analysis of Past Due Loans | ||||||||||||||||||||||||||||
| As of December 31, 2013 | ||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
| 30-59 | 60-89 | Recorded | ||||||||||||||||||||||||||
| Days | Days | Over | Total | Investment > | ||||||||||||||||||||||||
| Past | Past | 90 | Past | Total | 90 Days and | |||||||||||||||||||||||
| Originated | Due | Due | Days | Due | Current | Loans | Accruing | |||||||||||||||||||||
| Commercial real estate | $ | 1,403 | $ | — | $ | 2,349 | $ | 3,752 | $ | 282,186 | $ | 285,938 | — | |||||||||||||||
| Real estate construction | — | — | — | — | 31,290 | 31,290 | — | |||||||||||||||||||||
| Real estate multi family | — | — | — | — | 34,357 | 34,357 | ||||||||||||||||||||||
| Real estate 1 to 4 family | 161 | 75 | 826 | 1,062 | 97,134 | 98,196 | — | |||||||||||||||||||||
| Commercial & industrial | 563 | 210 | 2,046 | 2,819 | 35,468 | 38,287 | ||||||||||||||||||||||
| Consumer | 116 | 19 | — | 135 | 1,515 | 1,650 | — | |||||||||||||||||||||
| Total | $ | 2,243 | $ | 304 | $ | 5,221 | $ | 7,768 | $ | 481,950 | $ | 489,718 | $ | — | ||||||||||||||
| Purchased | ||||||||||||||||||||||||||||
| Not credit impaired | ||||||||||||||||||||||||||||
| Commercial real estate | $ | — | $ | — | $ | 616 | $ | 616 | $ | 37,320 | $ | 37,936 | ||||||||||||||||
| Real estate construction | — | — | 189 | 189 | 2,839 | 3,028 | ||||||||||||||||||||||
| Real estate multi-family | — | — | — | — | 11,786 | 11,786 | ||||||||||||||||||||||
| Real estate 1 to 4 family | — | — | — | — | 8,707 | 8,707 | ||||||||||||||||||||||
| Commercial & industrial | — | — | — | — | 10,217 | 10,217 | ||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 805 | $ | 805 | $ | 70,869 | $ | 71,674 | ||||||||||||||||
| Purchased | ||||||||||||||||||||||||||||
| Credit impaired | ||||||||||||||||||||||||||||
| Commercial real estate | $ | — | $ | — | $ | 1,325 | $ | 1,325 | $ | — | $ | 1,325 | ||||||||||||||||
| Real estate construction | — | — | — | — | — | — | ||||||||||||||||||||||
| Real estate multi-family | — | — | — | — | — | — | ||||||||||||||||||||||
| Real estate 1 to 4 family | — | — | — | — | — | — | ||||||||||||||||||||||
| Commercial & industrial | — | — | — | — | — | — | ||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 1,325 | $ | 1,325 | $ | — | $ | 1,325 | ||||||||||||||||
All nonaccrual loans are included among loans that are over 90 days past due.
| 81 |
| Age Analysis of Past Due Loans | ||||||||||||||||||||||||||||
| As of December 31, 2012 | ||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
| 30-59 | 60-89 | Recorded | ||||||||||||||||||||||||||
| Days | Days | Over | Total | Investment > | ||||||||||||||||||||||||
| Past | Past | 90 | Past | Total | 90 Days and | |||||||||||||||||||||||
| Originated | Due | Due | Days | Due | Current | Loans | Accruing | |||||||||||||||||||||
| Commercial real estate | $ | 3,942 | — | 2,525 | 6,467 | 247,982 | 254,449 | — | ||||||||||||||||||||
| Real estate construction | — | — | — | — | 14,866 | 14,866 | — | |||||||||||||||||||||
| Real estate multi family | — | — | — | — | 39,176 | 39,176 | — | |||||||||||||||||||||
| Real estate 1 to 4 family | 806 | 168 | 1,210 | 2,184 | 95,145 | 97,329 | — | |||||||||||||||||||||
| Commercial & industrial | 18 | 44 | 2,619 | 2,681 | 40,166 | 42,847 | — | |||||||||||||||||||||
| Consumer | — | — | — | — | 1,824 | 1,824 | — | |||||||||||||||||||||
| Total | $ | 4,766 | $ | 212 | $ | 6,354 | $ | 11,332 | $ | 439,159 | $ | 450,491 | $ | — | ||||||||||||||
| Recorded | ||||||||||||||||||||||||||||
| Investment > | ||||||||||||||||||||||||||||
| Purchased | 90 Days and | |||||||||||||||||||||||||||
| Not credit impaired | Accruing | |||||||||||||||||||||||||||
| Commercial real estate | $ | 690 | $ | — | $ | 2,212 | $ | 2,902 | $ | 45,107 | $ | 48,009 | — | |||||||||||||||
| Real estate construction | — | — | 1,411 | 1,411 | 2,183 | 3,594 | — | |||||||||||||||||||||
| Real estate multi-family | 75 | — | — | 75 | 18,753 | 18,828 | — | |||||||||||||||||||||
| Real estate 1 to 4 family | — | 119 | — | 119 | 15,271 | 15,390 | — | |||||||||||||||||||||
| Commercial & industrial | 50 | — | — | 50 | 12,667 | 12,717 | — | |||||||||||||||||||||
| Total | $ | 815 | $ | 119 | $ | 3,623 | $ | 4,557 | $ | 93,981 | $ | 98,538 | $ | — | ||||||||||||||
| Recorded | ||||||||||||||||||||||||||||
| Investment > | ||||||||||||||||||||||||||||
| Purchased | 90 Days and | |||||||||||||||||||||||||||
| Credit impaired | Accruing | |||||||||||||||||||||||||||
| Commercial real estate | $ | — | $ | — | $ | 1402 | $ | 1402 | $ | — | $ | 1,402 | — | |||||||||||||||
| Real estate construction | — | — | 486 | 486 | — | 486 | — | |||||||||||||||||||||
| Total | $ | — | $ | — | $ | 1,888 | $ | 1,888 | $ | — | $ | 1,888 | $ | — | ||||||||||||||
All nonaccrual loans are included among loans that are over 90 days past due.
Risk rating system
Loans to borrowers graded as pass or pooled loans represent loans to borrowers of acceptable or better credit quality. They demonstrate sound financial positions, repayment capacity and credit history. They have an identifiable and stable source of repayment.
Special mention loans have potential weaknesses that deserve management’s attention. If left uncorrected these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. These assets are “not adversely classified” and do not expose the Bank to sufficient risk to warrant adverse classification.
| 82 |
Substandard loans are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans are normally classified as Substandard when there are unsatisfactory characteristics causing more than acceptable levels of risk. A substandard loan normally has one or more well-defined weakness that could jeopardize the repayment of the debt. For example, a) cash flow deficiency, which may jeopardize future payments; b) sale of non-collateral assets has become primary source of repayment; c) the borrower is bankrupt; or d) for any other reason, future repayment is dependent on court action.
Doubtful loans represent credits with weakness inherent in the Substandard classification and where collection or liquidation in full is highly questionable. To be classified Doubtful, there must be specific pending factors which prevent the Loan Review Officer from determining the amount of loss contained in the credit. When the amount of loss can be reasonably estimated, that amount is classified as “loss” and the remainder is classified as Substandard.
Commercial Real Estate Loans – Multi-Family
Our multi-family commercial real estate loans are secured by multi-family properties located primarily in San Mateo and San Francisco Counties. These loans are made to investors where the primary source of loan repayment is from cash flows generated by the properties, through rent collections. The borrowers’ promissory notes are secured with recorded liens on the underlying properties. The borrowers would normally also be required to personally guarantee repayment of the loans. The bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have multiple sources of income, so if cash flow generated from the property declines, at least in the short term, the borrowers can normally cover these short term cash flow deficiencies from their available cash reserves. Risk of loss to the Bank is increased when there are cash flow decreases sufficiently large and for such a prolonged period of time that loan payments can no longer be made by the borrowers.
Commercial Real Estate Loans – Other
Commercial Real Estate loans consist of loans secured by non-farm, non-residential properties, including, but not limited to industrial, hotel, assisted care, retail, office and mixed use buildings.
Our commercial real estate loans are made primarily to investors or small businesses where our primary source of repayment is from cash flows generated by the properties, either through rent collection or business profits. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have multiple sources of income, so if cash flow generated from the property declines, at least in the short term, the borrowers can normally cover these short term cash flow deficiencies from their available cash reserves. Risk of loss to the Bank is increased when there are cash flow decreases sufficiently large and for such a prolonged period of time that loan payments can no longer be made by the borrowers.
| 83 |
Real Estate Construction Loans
Our real estate construction loans are generally made to borrowers who are rehabilitating a building, converting a building use from one type of use to another, or developing land and building residential or commercial structures for sale or lease. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have sufficient resources to make the required construction loan payments during the construction and absorption or lease-up period. After construction is complete, the loans are normally paid off from proceeds from the sale of the building or through a refinance to a commercial real estate loan. Risk of loss to the Bank is increased when there are material construction cost overruns, significant delays in the time to complete the project and/or there has been a material drop in the value of the projects in the marketplace since the inception of the loan.
Residential Real Estate Loans
Our residential real estate loans are generally made to borrowers who are buying or refinancing their primary personal residence or a rental property of 1-4 single family residential units. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers lose their primary source of income and/or property values decline significantly.
Commercial and Industrial Loans
Our commercial and industrial loans are generally made to small businesses to provide them with at least some of the working capital necessary to fund their daily business operations. These loans are generally either unsecured or secured by fixed assets, accounts receivable and/or inventory. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when our small business customers experience a significant business downturn, incur significant financial losses, or file for relief from creditors through bankruptcy proceedings.
Consumer and installment Loans
Our consumer and installment loans generally consist of personal loans, credit card loans, automobile loans or other loans secured by personal property. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers lose their primary source of income, or file for relief from creditors through bankruptcy proceedings.
| 84 |
| Credit Quality Indicators | ||||||||||||||||||||
| As of December 31, 2013 | ||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
| Special | Sub- | Total | ||||||||||||||||||
| Originated | Pass | mention | standard | Doubtful | loans | |||||||||||||||
| Commercial real estate | $ | 280,356 | $ | 2,330 | $ | 3,252 | $ | — | $ | 285,938 | ||||||||||
| Real estate construction | 29,673 | 573 | 1,044 | — | 31,290 | |||||||||||||||
| Real estate multi-family | 34,357 | — | — | — | 34,357 | |||||||||||||||
| Real estate 1 to 4 family | 97,514 | — | 429 | 253 | 98,196 | |||||||||||||||
| Commercial & industrial | 36,837 | — | 1,439 | 11 | 38,287 | |||||||||||||||
| Consumer loans | 1,631 | — | 19 | — | 1,650 | |||||||||||||||
| Totals | $ | 480,368 | $ | 2,903 | $ | 6,183 | $ | 264 | $ | 489,718 | ||||||||||
| Purchased | ||||||||||||||||||||
| Not credit impaired | ||||||||||||||||||||
| Commercial real estate | $ | 28,342 | $ | 4,951 | $ | 4,643 | $ | — | $ | 37,936 | ||||||||||
| Real estate construction | 1,520 | — | 1,508 | — | 3,028 | |||||||||||||||
| Real estate multi-family | 11,786 | — | — | — | 11,786 | |||||||||||||||
| Real estate 1 to 4 family | 8,299 | — | 408 | — | 8,707 | |||||||||||||||
| Commercial & industrial | 10,217 | — | — | — | 10,217 | |||||||||||||||
| Total | $ | 60,164 | $ | 4,951 | $ | 6,559 | $ | — | $ | 71,674 | ||||||||||
| Purchased | ||||||||||||||||||||
| Credit impaired | ||||||||||||||||||||
| Commercial real estate | $ | 1,325 | ||||||||||||||||||
| Total | $ | 1,325 | ||||||||||||||||||
Purchased credit impaired loans are accounted as a pool and are not included in the Company’s risk-rated methodology.
| 85 |
| Credit Quality Indicators | ||||||||||||||||||||
| As of December 31, 2012 | ||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
| Special | Sub- | Total | ||||||||||||||||||
| Originated | Pass | mention | standard | Doubtful | loans | |||||||||||||||
| Commercial real estate | $ | 249,991 | $ | 2,372 | $ | 2,086 | $ | — | $ | 254,449 | ||||||||||
| Real estate construction | 13,266 | — | 1,600 | — | 14,866 | |||||||||||||||
| Real estate multi-family | 39,176 | — | — | — | 39,176 | |||||||||||||||
| Real estate 1 to 4 family | 95,579 | — | 1,470 | 280 | 97,329 | |||||||||||||||
| Commercial & industrial | 39,446 | — | 2,564 | 837 | 42,847 | |||||||||||||||
| Consumer loans | 1,824 | — | — | — | 1,824 | |||||||||||||||
| Totals | $ | 439,282 | $ | 2,372 | $ | 7,720 | $ | 1,117 | $ | 450,491 | ||||||||||
| Purchased | ||||||||||||||||||||
| Not credit impaired | ||||||||||||||||||||
| Commercial real estate | $ | 30,600 | $ | 7,902 | $ | 9,507 | $ | — | $ | 48,009 | ||||||||||
| Real estate construction | — | 39 | 3,555 | — | 3,594 | |||||||||||||||
| Real estate multi-family | 18,828 | — | — | — | 18,828 | |||||||||||||||
| Real estate 1 to 4 family | 14,850 | — | 540 | — | 15,390 | |||||||||||||||
| Commercial & industrial | 12,717 | — | — | — | 12,717 | |||||||||||||||
| Total | $ | 76,995 | $ | 7,941 | $ | 13,602 | $ | — | $ | 98,538 | ||||||||||
| Purchased | ||||||||||||||||||||
| Credit impaired | ||||||||||||||||||||
| Commercial real estate | $ | 1,402 | ||||||||||||||||||
| Real estate construction | 486 | |||||||||||||||||||
| Total | $ | 1,888 | ||||||||||||||||||
| (6) | Foreclosed Assets |
A summary of the activity in the balance of foreclosed assets follows:
| Year ended December 31, | ||||||||||||
| (Dollar amounts in thousands) | 2013 | 2012 | 2011 | |||||||||
| Beginning balance, net | $ | 6,650 | $ | 2,747 | $ | 6,680 | ||||||
| Additions/transfers from loans | 25 | 4,894 | 622 | |||||||||
| Disposition/sales | (1,288 | ) | (932 | ) | (4,012 | ) | ||||||
| Valuation adjustments | (69 | ) | (59 | ) | (543 | ) | ||||||
| Ending balance, net | $ | 5,318 | $ | 6,650 | $ | 2,747 | ||||||
| Ending valuation allowance | $ | (122 | ) | $ | (1,965 | ) | $ | (2,041 | ) | |||
| Ending number of foreclosed assets | 4 | 5 | 4 | |||||||||
| Proceeds from sale of foreclosed assets | $ | 1,288 | $ | 932 | $ | 4,078 | ||||||
| Gain on sale of foreclosed assets | $ | 96 | $ | 6 | $ | 66 | ||||||
| 86 |
| (7) | Related Party Transactions |
In the ordinary course of business, the Bank made loans and advances under lines of credit to directors, officers, and their related interests. The Bank’s policies require that all such loans be made at substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk or unfavorable features. The following summarizes activities of loans to such parties at December 31:
| (Dollar amounts in thousands) | 2013 | 2012 | ||||||
| Balance, beginning of year | $ | 10,225 | $ | 21,573 | ||||
| Additions | 6,990 | 6,358 | ||||||
| Repayments | (6,133 | ) | (17,706 | ) | ||||
| Balance, end of year | $ | 11,082 | $ | 10,225 | ||||
| 2013 | 2012 | |||||||
| Related party deposits | $ | 3,491 | $ | 2,682 | ||||
| (8) | Bank Premises, Equipment, and Leasehold Improvements |
Bank premises, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization, and are summarized as follows at December 31:
| (Dollar amounts in thousands) | 2013 | 2012 | ||||||
| Buildings | $ | 10,460 | $ | 10,453 | ||||
| Equipment & furniture | 8,722 | 9,543 | ||||||
| Leasehold improvements | 1,714 | 1,519 | ||||||
| 20,896 | 21,515 | |||||||
| Accumulated depreciation and amortization | (13,712 | ) | (14,137 | ) | ||||
| 7,184 | 7,378 | |||||||
| Land | 5,328 | 5,328 | ||||||
| $ | 12,512 | $ | 12,706 | |||||
Depreciation and amortization expense for the years ended December 31, 2013, 2012, and 2011 was $1,250,000, $1,415,000 and $1,487,000, respectively.
| (9) | Deposits |
The aggregate amount of jumbo time certificates, each with a minimum denomination of $100,000 or more, was $86,337,000 and $122,734,000 at December 31, 2013 and 2012, respectively. At December 31, 2013, the scheduled maturities of all time certificates of deposit are as follows:
| Year ending December 31: | ||||
| (Dollar amounts in thousands) | ||||
| 2014 | $ | 96,881 | ||
| 2015 | 12,946 | |||
| 2016 | 10,745 | |||
| 2017 | 3,462 | |||
| 2018 | 118 | |||
| $ | 124,152 | |||
| 87 |
| (10) | Federal Home Loan Bank Advances |
As of December 31, 2013, there were $15,000,000 Federal Home Loan Bank borrowings outstanding, consisting of $2,000,000 at 0.06% due January 2, 2014 and $13,000,000 at 0.20% due January 10, 2014. At December 31, 2012, there were $1,220,000 Federal Home Loan Bank (“FHLB”) borrowings outstanding, consisting of $500,000 at 1.05% due January 31, 2013; $330,000 at 1.85% due January 22, 2013, and $390,000 at 4.99% due January 31, 2013.
At December 31, 2013, the Bank had a maximum borrowing capacity under Federal Home Loan Bank advances of $271,829,000, of which the entire amount was available. The Federal Home Loan Bank advances are secured by a blanket collateral agreement pledge of FHLB stock and certain other qualifying collateral, such as commercial and mortgage loans. Interest rates are at the prevailing rate when advances are made.
| (11) | Commitments and Contingencies |
Operating Lease Commitments
The Bank leases a portion of its facilities and equipment under non-cancelable operating leases expiring at various dates through 2024. Some of these leases provide that the Bank pay taxes, maintenance, insurance, and other occupancy expenses applicable to leased premises. Generally, the leases provide for renewal for various periods at stipulated rates. The minimum rental commitments under the operating leases as of December 31, 2013 are as follows:
| Year ending December 31: | ||||
| (Dollars in thousands) | ||||
| 2014 | $ | 971 | ||
| 2015 | 990 | |||
| 2016 | 1,010 | |||
| 2017 | 1,021 | |||
| 2018 | 556 | |||
| Thereafter | 1,510 | |||
| $ | 6,058 | |||
Total rent expense for operating leases was $1,339,000, $1,025,000 and $846,000, in 2013, 2012, and 2011, respectively.
Legal Commitments
The Bank is engaged in various lawsuits either as plaintiff or defendant in the ordinary course of business and, in the opinion of management, based upon the advice of counsel, the ultimate outcome of these lawsuits does not expect to have a material effect on the Bank’s financial condition or results of operations.
| (12) | Salary Deferral Plan |
The Bank maintains a salary deferral 401(k) plan covering substantially all employees, known as the FNB Bancorp Savings Plan (the “Plan”). The Plan allows employees to make contributions to the Plan up to a maximum allowed by law, and the Bank’s contribution is discretionary. Beginning in 2008, the Board approved a safe harbor election related to the Plan which requires the Company to contribute 3% of qualifying employees wages as a profit sharing contribution. The Bank’s accrued contribution to the Plan for the years ended December 31, 2013, 2012, and 2011 was $398,000, $371,000, and $308,000, respectively.
| 88 |
| (13) | Salary Continuation and Deferred Compensation Plans |
The Bank maintains a Salary Continuation Plan for certain Bank officers. Officers participating in the Salary Continuation Plan are entitled to receive a monthly payment for a period of fifteen to twenty years upon retirement. The Company accrues such post-retirement benefits over the individual’s employment period. The Salary Continuation Plan expense for the years ended December 31, 2013, 2012, and 2011 was $401,879, $371,000, and $250,000, respectively. Accrued compensation payable under the salary continuation plan totaled $2,332,000 and $2,060,000 at December 31, 2013 and 2012, respectively.
The Deferred Compensation Plan allows eligible officers to defer annually their compensation up to a maximum 80% of their base salary and 100% of their cash bonus. The officers are entitled to receive distribution upon reaching a specified age, passage of at least five years or termination of employment. As of December 31, 2013 and 2012, the related liability included in accrued expenses and other liabilities was $1,214,000 and $785,000, respectively.
| (14) | Preferred Stock |
On September 15, 2011, the Company issued Preferred Stock as part of the Treasury’s Small Business Lending Fund (“SBLF”) as Preferred Stock – Series C – Non-Cumulative. The initial dividend rate is five percent. Depending on the volume of our small business lending, the dividend rate can be reduced to as low as one percent. If lending does not increase in the first two years, the dividend rate will increase to seven percent. After 4.5 years, the dividend rate will increase to nine percent if the Company has not repaid the SBLF funding.
On May 6, 2013, 25% or $3,150,000 of the original $12,600,000 was redeemed. Subsequent to December 31, 2013, the remaining SBLF obligation of $9,450,000 was paid in full.
| (15) | Income Taxes |
The provision (benefit) for income taxes for the years ended December 31, consists of the following:
| (Dollar amounts in thousands) | 2013 | 2012 | 2011 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 697 | $ | 467 | $ | 1,201 | ||||||
| State | 287 | 1,449 | 675 | |||||||||
| $ | 984 | $ | 1,916 | $ | 1,876 | |||||||
| Deferred: | ||||||||||||
| Federal | $ | 197 | $ | 420 | $ | (75 | ) | |||||
| State | 144 | (691 | ) | (233 | ) | |||||||
| 341 | (271 | ) | (308 | ) | ||||||||
| Total provision for taxes | $ | 1,325 | $ | 1,645 | $ | 1,568 | ||||||
| 89 |
The reason for the differences between the statutory federal income tax rate and the effective tax rates for the years ending December 31, are summarized as follows:
| 2013 | 2012 | 2011 | ||||||||||
| Statutory rates | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
| Increase (decrease) resulting from: | ||||||||||||
| Tax exempt Income for federal purposes | -9.1 | % | -9.0 | % | -11.3 | % | ||||||
| State taxes on income, net of federal benefit | 3.3 | % | 4.1 | % | 5.0 | % | ||||||
| Benefits from low income housing credits | -1.0 | % | -0.9 | % | -4.8 | % | ||||||
| Tax benefits related to an acquisition | — | -13.5 | % | — | ||||||||
| True-up of prior year provision | -4.3 | % | — | — | ||||||||
| Increase in the valuation reserve | -9.9 | % | 0.8 | % | — | |||||||
| Other, net | 2.1 | % | 0.2 | % | 4.1 | % | ||||||
| Effective tax rate | 15.1 | % | 15.7 | % | 27.0 | % | ||||||
The tax effect of temporary differences giving rise to the Bank’s net deferred tax asset are as follows:
| December 31, | ||||||||||||
| (Dollar amounts in thousands) | 2013 | 2012 | 2011 | |||||||||
| Deferred tax assets | ||||||||||||
| Allowance for loan losses | $ | 4,449 | $ | 4,081 | $ | 4,378 | ||||||
| Accrued salaries and officers compensation | 1,492 | 1,276 | 1,399 | |||||||||
| Capitalized interest on buildings | 11 | 14 | — | |||||||||
| Expenses accrued on books, not yet deductible in tax return | 1,480 | 2,065 | 2,039 | |||||||||
| Depreciation | 405 | 501 | 565 | |||||||||
| Net operating loss carryforward | 89 | 334 | 408 | |||||||||
| Tax credit carryforwards | 878 | 1,185 | 820 | |||||||||
| Acquisition accounting differences | 885 | 1,620 | — | |||||||||
| Unrealized depreciation on available-for-sale securities | 876 | — | — | |||||||||
| 10,565 | 11,076 | 9,609 | ||||||||||
| Deferred tax liabilities | ||||||||||||
| Unrealized appreciation on available-for-sale securities | $ | — | $ | 2,698 | $ | 2,283 | ||||||
| State income taxes | 668 | 766 | 668 | |||||||||
| Core deposit intangible | 61 | 91 | 87 | |||||||||
| Expenses and credits deducted on tax return, not on books | 122 | 99 | 98 | |||||||||
| Total deferred tax liabilities | 851 | 3,654 | 3,136 | |||||||||
| Net deferred tax asset before valuation allowance | 9,714 | 7,422 | 6,473 | |||||||||
| Valuation allowance | — | (934 | ) | (820 | ) | |||||||
| Net deferred tax assets (included in other assets) | $ | 9,714 | $ | 6,488 | 5,653 | |||||||
| 90 |
As of December 31, 2013, management believes that it is more likely than not that the deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. In assessing the Company’s ability to realize the tax benefits of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the recorded benefits of these deductible differences. The Bank has federal net operating loss carry-forwards resulting from the acquisition of Sequoia National Bank which expire on December 31, 2020, totaling $262,000 as of December 31, 2013. These losses are limited to approximately $469,000 per year under IRS regulations. All operating loss carry-forwards are expected to be utilized prior to their expiration.
| (16) | Financial Instruments |
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The Bank’s exposure to credit loss is represented by the contractual amount of those instruments and is usually limited to amounts funded or drawn. The contract or notional amounts of these agreements, which are not included in the balance sheets, are an indicator of the Bank’s credit exposure. Commitments to extend credit generally carry variable interest rates and are subject to the same credit standards used in the lending process for on-balance-sheet instruments. Additionally, the Bank periodically reassesses the customer’s creditworthiness through ongoing credit reviews. The Bank generally requires collateral or other security to support commitments to extend credit. The following table provides summary information on financial instruments whose contract amounts represent credit risk as of December 31:
| (Dollars amounts in thousands) | December 31 | |||||||
| 2013 | 2012 | |||||||
| Financial instruments whose contract amounts represent credit risk: | ||||||||
| Undisbursed loan commitments | $ | 52,398 | $ | 32,529 | ||||
| Lines of credit | 65,120 | 62,616 | ||||||
| Mastercard/Visa lines | 5,992 | 4,998 | ||||||
| Letters of credit | 6,199 | 2,409 | ||||||
| $ | 129,709 | $ | 102,552 | |||||
| 91 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis, following normal lending policies. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial and residential properties. Equity reserves and unused credit card lines are additional commitments to extend credit. Many of these customers are not expected to draw down their total lines of credit, and therefore, the total contract amount of these lines does not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Bank issues both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. As of December 31, 2013, there were financial standby letters of credit of $5,318,000 issued. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. As of December 31, 2013 there were performance letters of credit of $881,000 issued. The terms of the guarantees will expire in 2014. The Bank has experienced no draws on these letters of credit, and does not expect to in the future. However, should a triggering event occur, the Bank either has collateral in excess of the letters of credit or embedded agreements of recourse from the customer.
| (17) | Fair Value Measurements |
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012, and indicates the fair value techniques used by the Company to determine such fair value.
| Fair Value Measurements | ||||||||||||||||
| (Dollar amounts in thousands) | at December 31, 2013, Using | |||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | ||||||||||||||||
| Markets | Other | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Fair Value | Assets | Inputs | Inputs | |||||||||||||
| Description | 12/31/2013 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| U. S. Treasury securities | $ | 3,027 | $ | 3,027 | $ | — | $ | — | ||||||||
| Obligations of U.S. Government agencies | 73,319 | — | 73,319 | — | ||||||||||||
| Mortgage-backed securities | 77,860 | — | 77,860 | — | ||||||||||||
| Obligations of states and political subdivisions | 82,676 | — | 82,676 | — | ||||||||||||
| Corporate debt | 27,106 | — | 27,106 | — | ||||||||||||
| Total assets measured at fair value | $ | 263,988 | $ | 3,027 | $ | 260,961 | $ | — | ||||||||
| 92 |
| Fair Value Measurements | ||||||||||||||||
| (Dollar amounts in thousands) | at December 31, 2012, Using | |||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | ||||||||||||||||
| Markets | Other | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Fair Value | Assets | Inputs | Inputs | |||||||||||||
| Description | 12/31/2012 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| U. S. Treasury securities | $ | 7,280 | $ | 7,280 | $ | — | $ | — | ||||||||
| Obligations of U.S. Government agencies | 72,260 | — | 72,260 | — | ||||||||||||
| Mortgage-backed securities | 55,180 | — | 55,180 | — | ||||||||||||
| Obligations of states and political subdivisions | 81,609 | — | 81,609 | — | ||||||||||||
| Corporate debt | 18,616 | — | 18,616 | — | ||||||||||||
| Total assets measured at fair value | $ | 234,945 | $ | 7,280 | $ | 227,665 | $ | — | ||||||||
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. The following table presents the recorded amount of assets measured at fair value on a non-recurring basis:
| Fair Value Measurements | ||||||||||||||||
| (Dollar amounts in thousands) | at December 31, 2013, Using | |||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Other | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Fair Value | Assets | Inputs | Inputs | |||||||||||||
| Description | 12/31/2013 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Impaired loans | $ | 4,810 | $ | — | $ | — | $ | 4,810 | ||||||||
| Other real estate owned | 1,771 | — | — | 1,771 | ||||||||||||
| Total impaired assets measured at fair value | $ | 6,581 | $ | — | $ | — | $ | 6,581 | ||||||||
| Fair Value Measurements | ||||||||||||||||
| (Dollar amounts in thousands) | at December 31, 2012, Using | |||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Other | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Fair Value | Assets | Inputs | Inputs | |||||||||||||
| Description | 12/31/2012 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Impaired loans | $ | 2,494 | $ | — | $ | — | $ | 2,494 | ||||||||
| Other real estate owned | 4,710 | — | — | 4,710 | ||||||||||||
| Total impaired assets measured at fair value | $ | 7,204 | $ | — | $ | — | $ | 7,204 | ||||||||
| 93 |
The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments that are not carried at fair value on either a recurring or non-recurring basis:
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.
Federal Home Loan Bank and Federal Reserve Bank stock.
Federal Home Loan Bank and Federal Reserve Bank stock can only be issued and redeemed at par by these entities. These securities cannot be sold in open market transactions. Fair value is estimated to be their carrying value.
Loans Receivable.
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. 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, net of expenses.
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 reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are based on discounted cash flows.
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.
| 94 |
The following table provides summary information on the estimated fair value of financial instruments at December 31, 2013 and 2012:
| December 31, 2013 | Carrying | Fair | Fair value measurements | |||||||||||||||||
| (Dollar amounts in thousands) | amount | value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 14,007 | $ | 14,007 | $ | 14,007 | ||||||||||||||
| Interest-bearing time deposits with financial institutions | $ | 5,543 | $ | 5,543 | $ | 5,543 | ||||||||||||||
| Securities available for sale | $ | 263,988 | $ | 263,988 | $ | 3,027 | $ | 260,961 | ||||||||||||
| Loans | $ | 562,717 | $ | 563,325 | $ | 563,325 | ||||||||||||||
| Other equity securities | $ | 5,300 | $ | 5,300 | $ | 5,300 | ||||||||||||||
| Accrued interest receivable | $ | 3,808 | $ | 3,808 | $ | 3,808 | ||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | $ | 773,615 | $ | 774,012 | $ | 774,012 | ||||||||||||||
| Federal Home Loan Bank advances | $ | 15,000 | $ | 15,000 | $ | 15,000 | ||||||||||||||
| Accrued interest payable | $ | 224 | $ | 224 | $ | 224 | ||||||||||||||
| Off-balance-sheet liabilities: | ||||||||||||||||||||
| Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit | — | $ | 1,297 | $ | 1,297 | |||||||||||||||
| December 31, 2012 | Carrying | Fair | Fair value measurements | |||||||||||||||||
| (Dollar amounts in thousands) | amount | value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 27,861 | $ | 27,861 | $ | 27,861 | ||||||||||||||
| Interest-bearing time deposits with financial institutions | $ | 13,216 | $ | 13,216 | $ | 13,216 | ||||||||||||||
| Securities available for sale | $ | 234,945 | $ | 234,945 | $ | 7,280 | $ | 227,665 | ||||||||||||
| Loans | $ | 550,917 | $ | 547,740 | $ | 547,740 | ||||||||||||||
| Other equity securities | $ | 5,464 | $ | 5,464 | $ | 5,464 | ||||||||||||||
| Accrued interest receivable | $ | 3,760 | $ | 3,760 | $ | 3,760 | ||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | $ | 768,352 | $ | 769,043 | $ | 769,043 | ||||||||||||||
| Federal Home Loan Bank advances | $ | 1,220 | $ | 1,221 | $ | 1,221 | ||||||||||||||
| Accrued interest payable | $ | 349 | $ | 349 | $ | 349 | ||||||||||||||
| Off-balance-sheet liabilities: | ||||||||||||||||||||
| Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit | — | $ | 1,026 | $ | 1,026 | |||||||||||||||
| 95 |
| (18) | Significant Group Concentrations of Credit Risk |
Most of the Bank’s business activity is with customers located within San Mateo and San Francisco counties. Generally, loans are secured by assets of the borrowers. Loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers. The Bank does not have significant concentrations of loans to any one industry, but does have loan concentrations in commercial real estate loans that are considered high by regulatory standards. The Bank has mitigated this concentration to a large extent by utilizing underwriting standards that are more conservative than regulatory guidelines, and performing stress testing on this segment of the portfolio to insure that the commercial real estate loan portfolio will perform within management expectations given an additional downturn in commercial lease rates and commercial real estate valuations. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers. The contractual amounts of credit-related financial instruments such as commitments to extend credit, credit-card arrangements, and letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.
| (19) | Regulatory matters |
The Company, as a bank holding company, is subject to regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative judgments by the regulators about asset groupings, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2013, that the Company and the Bank have met all regulatory capital requirements.
As of December 31, 2013, the most recent notification from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s categories.
| 96 |
The consolidated actual capital amounts and ratios of the Company and the Bank are also presented in the following table:
| December 31, 2013: | To be well | |||||||||||||||||||||||
| For capital | capitalized under | |||||||||||||||||||||||
| adequacy | prompt corrective | |||||||||||||||||||||||
| (Dollar amounts in thousands) | Actual | purposes | action provisions | |||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| Total risk-based capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated Company | $ | 97,491 | 14.30 | % | $ | 5,454,042 | ≥ | 8.00 | % | $ | 68,164 | ≥ | n/a | |||||||||||
| Bank | $ | 96,247 | 14.12 | % | $ | 52,883 | ≥ | 8.00 | % | $ | 68,164 | ≥ | 10.00 | % | ||||||||||
| Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated Company | $ | 88,949 | 13.05 | % | $ | 2,726,406 | ≥ | 4.00 | % | $ | 40,920 | ≥ | n/a | |||||||||||
| Bank | $ | 87,705 | 12.86 | % | $ | 26,358 | ≥ | 4.00 | % | $ | 40,920 | ≥ | 6.00 | % | ||||||||||
| Tier 1 leverage capital (to total average assets) | ||||||||||||||||||||||||
| Consolidated Company | $ | 88,949 | 9.81 | % | $ | 3,626,871 | ≥ | 4.00 | % | $ | 45,349 | ≥ | n/a | |||||||||||
| Bank | $ | 87,705 | 9.67 | % | $ | 3,627,921 | ≥ | 4.00 | % | $ | 45,349 | ≥ | 5.00 | % | ||||||||||
| December 31, 2012: | To be well | |||||||||||||||||||||||
| For capital | capitalized under | |||||||||||||||||||||||
| adequacy | prompt corrective | |||||||||||||||||||||||
| (Dollar amounts in thousands) | Actual | purposes | action provisions | |||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| Total risk-based capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated Company | $ | 94,556 | 14.65 | % | $ | 5,163,468 | ≥ | 8.00 | % | $ | 64,537 | ≥ | n/a | |||||||||||
| Bank | $ | 93,966 | 14.56 | % | $ | 51,630 | ≥ | 8.00 | % | $ | 64,537 | ≥ | 10.00 | % | ||||||||||
| Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated Company | $ | 86,476 | 13.40 | % | $ | 2,581,373 | ≥ | 4.00 | % | $ | 38,716 | ≥ | n/a | |||||||||||
| Bank | $ | 85,886 | 13.31 | % | $ | 25,811 | ≥ | 4.00 | % | $ | 38,716 | ≥ | 6.00 | % | ||||||||||
| Tier 1 leverage capital (to total average assets) | ||||||||||||||||||||||||
| Consolidated Company | $ | 86,476 | 9.75 | % | $ | 3,547,733 | ≥ | 4.00 | % | $ | 44,363 | ≥ | n/a | |||||||||||
| Bank | $ | 85,886 | 9.68 | % | $ | 3,549,008 | ≥ | 4.00 | % | $ | 44,363 | ≥ | 5.00 | % | ||||||||||
| (20) | Stock Option Plans |
In 1997, the Board of Directors of the Bank adopted the First National Bank of Northern California 1997 stock option plan. Pursuant to the holding company reorganization effective March 15, 2002, the Bank stock option plan became the FNB Bancorp stock option Plan. In 2002, the Company adopted an incentive employee stock option plan known as the 2002 FNB Bancorp plan. In 2008, the Company adopted an incentive employee stock option plan known as the 2008 FNB Bancorp stock option plan. The plans allow the Company as of December 31, 2013 to grant options to employees covering 133,657 shares.
| 97 |
Incentive stock options currently outstanding become exercisable in one to five years from the grant date, based on a vesting schedule of 20% per year and expire 10 years after the grant date. Nonqualified options to directors become vested on the date of grant. The options exercise price is the fair value of the per share price of the underlying stock options at the grant date.
The amount of compensation expense for options recorded in the years ended December 31, 2013, 2012, and 2011 was $328,000, $210,000, and $293,000, respectively. There was an income tax benefit related to stock option exercises for the years ended December 31, 2013 and 2012 of $354,000 and $30,000, respectively, but no tax benefit for 2011.
The amount of total unrecognized compensation expense related to non-vested options at December 31, 2013 was $910,000, and the weighted average period it will be amortized over is 4.0 years. The assumptions for options granted in 2013 were as follows: dividend yield of 1.35% for the year; risk-free interest rate of 2.55%; expected volatility of 24.71%; expected life of 9.3 years. This resulted in a weighted average fair value of $7.81 per share. There were no options granted in 2012.
A summary of option activity, adjusted for stock dividends, issued under the 2008 FNB Bancorp Plan as of December 31, 2013 and changes during the year then ended is presented below.
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| 2008 FNB Bancorp Plan | Weighted | Remaining | Aggregate | |||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Exercise | Term | Value | ||||||||||||||
| Options | Shares | Price | (in years) | (000) | ||||||||||||
| Outstanding at January 1, 2013 | 216,800 | $ | 8.76 | |||||||||||||
| Granted | 136,704 | $ | 22.86 | |||||||||||||
| Exercised | (51,914 | ) | $ | 8.27 | $ | 637 | ||||||||||
| Forfeited or expired | — | — | ||||||||||||||
| Outstanding at December 31, 2013 | 301,590 | $ | 15.23 | 7.7 | $ | 3,851 | ||||||||||
| Exercisable at December 31, 2013 | 130,230 | $ | 10.57 | 6.3 | $ | 2,270 | ||||||||||
| 98 |
The following supplemental information applies to the three years ended December 31:
| 2008 FNB Bancorp Plan | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Options outstanding | 301,590 | 216,800 | 232,019 | |||||||||
| Range of exercise prices | $ | 6.14-$26.60 | $ | 6.14-$11.83 | $ | 6.14-$11.83 | ||||||
| Weighted average remaining contractual life | 7.7 | 7.0 | 8.0 | |||||||||
| Fully vested options | 130,230 | 120,609 | 94,228 | |||||||||
| Weighted average exercise price | $ | 10.57 | $ | 8.18 | $ | 7.93 | ||||||
| Aggregate intrinsic value | $ | 2,270,122 | $ | 1,144,601 | $ | 292,526 | ||||||
| Weighted average remaining contractual life (in years) | 6.3 | 6.6 | 7.4 | |||||||||
A summary of option activity under the 2002 FNB Bancorp Plan as of December 31, 2012 and changes during the year then ended is presented below.
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| 2002 FNB Bancorp Plan | Weighted | Remaining | Aggregate | |||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Exercise | Term | Value | ||||||||||||||
| Options | Shares | Price | (in years) | (000) | ||||||||||||
| Outstanding at January 1, 2013 | 220,010 | $ | 20.11 | |||||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | (52,630 | ) | $ | 15.87 | ||||||||||||
| Forfeited or expired | (2,653 | ) | $ | 14.62 | ||||||||||||
| Outstanding at December 31, 2013 | 164,727 | $ | 21.56 | 1.9 | $ | 1,061 | ||||||||||
| Exercisable at December 31, 2013 | 164,727 | $ | 21.56 | 1.9 | $ | 1,061 | ||||||||||
The following supplemental information applies to the three years ended December 31:
| 2002 FNB Bancorp Plan | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Options outstanding | 164,727 | 220,010 | 257,454 | |||||||||
| Range of exercise prices | $ | 15.31-$24.54 | $ | 14.62-$24.54 | $ | 14.62-$24.54 | ||||||
| Weighted average remaining contractual life | 1.9 | 2.4 | 3.0 | |||||||||
| Fully vested options | 164,727 | 220,010 | 252,079 | |||||||||
| Weighted average exercise price | $ | 21.56 | $ | 20.11 | $ | 19.36 | ||||||
| Aggregate intrinsic value | $ | 1,061,071 | $ | 132,051 | $ | 0 | ||||||
| Weighted average remaining contractual life (in years) | 1.9 | 2.4 | 2.9 | |||||||||
| 99 |
A summary of option activity under the 1997 FNB Bancorp Plan as of December 31, 2013 and changes during the year then ended is presented below.
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| 1997 First National Bank Plan | Weighted | Remaining | Aggregate | |||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Exercise | Term | Value | ||||||||||||||
| Options | Shares | Price | (in years) | (000) | ||||||||||||
| Outstanding at January 1, 2013 | 30,112 | $ | 21.68 | |||||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited or expired | — | — | ||||||||||||||
| Outstanding at December 31, 2013 | 30,112 | $ | 21.68 | 3.5 | $ | 190 | ||||||||||
| Exercisable at December 31, 2013 | 30,112 | $ | 21.68 | 3.5 | $ | 190 | ||||||||||
The following supplemental information applies to the three years ended December 31:
| 1997 FNB Bancorp Plan | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Options outstanding | 30,112 | 30,112 | 30,112 | |||||||||
| Range of exercise prices | $ | 21.68-$21.68 | $ | 21.68-$21.58 | $ | 21.68-$21.58 | ||||||
| Weighted average remaining contractual life | 3.5 | 4.5 | 5.5 | |||||||||
| Fully vested options | 30,112 | 30,112 | 24,087 | |||||||||
| Weighted average exercise price | $ | 21.68 | $ | 21.68 | $ | 21.68 | ||||||
| Aggregate intrinsic value | $ | 190,437 | $ | 0 | $ | 0 | ||||||
| Weighted average remaining contractual life (in years) | 3.5 | 4.5 | 5.5 | |||||||||
| 100 |
| (21) | Quarterly Data (Unaudited) |
| 2013 | ||||||||||||||||
| (Dollars in thousands) | First | Second | Third | Fourth | ||||||||||||
| Interest income | $ | 9,397 | $ | 9,358 | $ | 9,259 | $ | 9,375 | ||||||||
| Interest expense | 682 | 639 | 560 | 514 | ||||||||||||
| Net interest income | 8,715 | 8,719 | 8,699 | 8,861 | ||||||||||||
| Provision for loan losses | 600 | 510 | 225 | 50 | ||||||||||||
| Net interest income, after provision for loan losses | 8,115 | 8,209 | 8,474 | 8,811 | ||||||||||||
| Non-interest income | 976 | 1,092 | 978 | 1,137 | ||||||||||||
| Non-interest expense | 7,739 | 7,385 | 6,950 | 6,954 | ||||||||||||
| Income before income taxes | 1,352 | 1,916 | 2,502 | 2,994 | ||||||||||||
| Provision (benefit) for income taxes | 422 | 537 | (629 | ) | 995 | |||||||||||
| Net earnings | 930 | 1,379 | 3,131 | 1,999 | ||||||||||||
| Dividends and discount accretion on preferred stock | 158 | 172 | 118 | 119 | ||||||||||||
| Net earnings available to common shareholders | $ | 772 | $ | 1,207 | $ | 3,013 | $ | 1,880 | ||||||||
| Basic earnings per share | $ | 0.20 | $ | 0.31 | $ | 0.76 | $ | 0.47 | ||||||||
| Diluted earnings per share | $ | 0.19 | $ | 0.30 | $ | 0.75 | $ | 0.46 | ||||||||
| 2012 | ||||||||||||||||
| (Dollars in thousands) | First | Second | Third | Fourth | ||||||||||||
| Interest income | $ | 7,882 | $ | 7,878 | $ | 8,361 | $ | 9,467 | ||||||||
| Interest expense | 684 | 653 | 663 | 727 | ||||||||||||
| Net interest income | 7,198 | 7,225 | 7,698 | 8,740 | ||||||||||||
| Provision for loan losses | 400 | 400 | 400 | 633 | ||||||||||||
| Net interest income, after provision for loan losses | 6,798 | 6,825 | 7,298 | 8,107 | ||||||||||||
| Non-interest income | 1,920 | 1,415 | 4,764 | 1,060 | ||||||||||||
| Non-interest expense | 7,053 | 6,498 | 6,631 | 7,557 | ||||||||||||
| Income before income taxes | 1,665 | 1,742 | 5,431 | 1,610 | ||||||||||||
| Provision for income taxes | 377 | 514 | 490 | 264 | ||||||||||||
| Net earnings | 1,288 | 1,228 | 4,941 | 1,346 | ||||||||||||
| Dividends and discount accretion on preferred stock | 186 | 157 | 158 | 157 | ||||||||||||
| Net earnings available to common shareholders | $ | 1,102 | $ | 1,071 | $ | 4,783 | $ | 1,189 | ||||||||
| Basic earnings per share | $ | 0.28 | $ | 0.28 | $ | 1.23 | $ | 0.31 | ||||||||
| Diluted earnings per share | $ | 0.28 | $ | 0.27 | $ | 1.21 | $ | 0.30 | ||||||||
| 101 |
| (22) | Condensed Financial Information of Parent Company |
The parent company-only condensed balance sheets, condensed statements of earnings, and condensed statements of cash flows information are presented as of and for the years ended December 31, as follows:
| FNB Bancorp | Condensed balance sheets | |||||||||||
| (Dollars in thousands) | 2013 | 2012 | ||||||||||
| Assets: | ||||||||||||
| Cash and due from banks | $ | 981 | $ | 512 | ||||||||
| Investments in subsidiary | 93,005 | 94,768 | ||||||||||
| Income tax receivable from subsidiary | 49 | 49 | ||||||||||
| Dividend receivable from subsidiary | 398 | 296 | ||||||||||
| Other assets | 242 | 50 | ||||||||||
| Total assets | $ | 94,675 | $ | 95,675 | ||||||||
| Liabilities: | ||||||||||||
| Dividend declared | $ | 398 | $ | 296 | ||||||||
| Other liabilities | 28 | 21 | ||||||||||
| Total liabilities | 426 | 317 | ||||||||||
| Stockholders’ equity | 94,249 | 95,358 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 94,675 | $ | 95,675 | ||||||||
| FNB Bancorp | Condensed statements of earnings | |||||||||||
| (Dollars in thousands) | 2013 | 2012 | 2011 | |||||||||
| Income: | ||||||||||||
| Dividends from subsidiary | $ | 3,955 | $ | 1,279 | $ | 1,269 | ||||||
| Total income | 3,955 | 1,279 | 1,269 | |||||||||
| Expense: | ||||||||||||
| Other expense | 111 | 85 | 64 | |||||||||
| Total expense | 111 | 85 | 64 | |||||||||
| Income before income taxes and equity in undistributed earnings of subsidiary | 3,844 | 1,194 | 1,205 | |||||||||
| Income tax expense/(benefit) | — | (41 | ) | (2 | ) | |||||||
| Income before equity in undistributed earnings of subsidiary | 3,844 | 1,235 | 1,207 | |||||||||
| Equity in undistributed earnings of subsidiary | 3,595 | 7,568 | 3,050 | |||||||||
| Net earnings | 7,439 | 8,803 | 4,257 | |||||||||
| Dividends and discount accretion on preferred stock | 567 | 658 | 800 | |||||||||
| Net earnings available to common shareholders | $ | 6,872 | $ | 8,145 | $ | 3,457 | ||||||
| 102 |
| FNB Bancorp | Condensed statement of cash flows | |||||||||||
| (Dollars in thousands) | 2013 | 2012 | 2011 | |||||||||
| Net earnings | $ | 7,439 | $ | 8,803 | $ | 4,257 | ||||||
| Income tax (receivable from) subsidiary | — | (42 | ) | 1 | ||||||||
| Options expense (payable to) receivable from subsidiary | — | — | (215 | ) | ||||||||
| Net increase in other assets | (192 | ) | (31 | ) | — | |||||||
| Net increase in other liabilities | 404 | 11 | — | |||||||||
| Undistributed earnings of subsidiary | (3,595 | ) | (7,568 | ) | (3,050 | ) | ||||||
| Stock-based compensation expense | 328 | 210 | 293 | |||||||||
| Cash flows from operating activities | 4,384 | 1,383 | 1,286 | |||||||||
| Repayment of capital purchase program | (3,150 | ) | — | (12,600 | ) | |||||||
| Small Business Lending Fund funds received | — | — | 12,600 | |||||||||
| Stock options exercised, including tax benefits of $191 in 2013, $30 in 2012, and none in 2011 | 1,258 | 181 | 11 | |||||||||
| Dividends on common stock | (1,456 | ) | (968 | ) | (568 | ) | ||||||
| Cash dividends on preferred stock series A, B, C | (567 | ) | (658 | ) | (545 | ) | ||||||
| Cash flows provided by financing activities | (3,915 | ) | (1,445 | ) | (1,102 | ) | ||||||
| Net (decrease) increase in cash | 469 | (62 | ) | 184 | ||||||||
| Cash, beginning of year | 512 | 574 | 390 | |||||||||
| Cash, end of year | $ | 981 | $ | 512 | $ | 574 | ||||||
| (23) | Subsequent Event |
On Thursday, January 23, 2014, FNB Bancorp (the “Company”) redeemed all the remaining outstanding preferred shares that had been issued to the United States Treasury Department through the Small Business Lending Fund (“SBLF”) in a cash redemption transaction. Subsequent to this redemption, the United States Treasury Department no longer has any equity interest in the Company of any kind.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting. The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2013. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 103 |
Management’s Report on Internal Control over Financial Reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It includes those policies and procedures that:
| a) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company; | |
| b) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of a company are being made only in accordance with authorizations of management and the board of directors of the company, and |
| c) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on its financial statements. |
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management has used the criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has selected the COSO framework for its evaluation as it is a control framework recognized by the SEC and the Public Company Accounting Oversight Board, that is free from bias, permits reasonably consistent qualitative and quantitative measurement of the Company’s internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting.
Based on our assessment, management has concluded that our internal control over financial reporting, based on criteria established in “Internal Control-Integrated Framework” issued in 1992 by COSO.
Date: March 28, 2014
| /s/ Thomas C. McGraw | /s/ David A. Curtis | ||
| Thomas C. McGraw | David A. Curtis | ||
| Chief Executive Officer | Chief Financial Officer |
| 104 |
This annual report does not include an attestation report of the company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K is incorporated by reference to the applicable information contained in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to the applicable information contained in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
| 105 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference to the applicable information contained in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference to the applicable information contained in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference to the applicable information contained in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
| Exhibit Number |
Document Description | |
| **2.1 | (deleted) | |
| 2.2 | Acquisition Agreement dated November 5, 2004, signed among First National Bank of Northern California, Sequoia National Bank and Hemisphere National Bank (incorporated by reference from Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the Commission on November 9, 2004). | |
| 2.3 | First Addendum to Acquisition Agreement, dated December 13, 2004, signed among First National Bank of Northern California, Sequoia National Bank, Hemisphere National Bank and Privee Financial, Inc. (incorporated by reference from Exhibit 2.5 to the Company’s Current Report on Form 8-K filed with the Commission on December 17, 2004) |
| 106 |
| 2.4 | Second Addendum to Acquisition Agreement. Dated as of April 15, 2005, signed among First National Bank Of Northern California, Sequoia National Bank, Hemisphere National Bank and Privee Financial, Inc. (incorporated by reference from Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the Commission on May 2, 2005) | |
| **3.1 | Articles of Incorporation of FNB Bancorp | |
| 3.2 | Certificate of Determination of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), of FNB Bancorp (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 3.3 | Certificate of Determination of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”), of FNB Bancorp (incorporated by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 3.4 | Bylaws of FNB Bancorp (as amended through October 28, 2011) incorporated by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on October 28, 2011) | |
| 3.5 | Certificate of Determination of Senior Non-Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”) incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 19, 2011) | |
| **4.1 | Specimen of the Registrant’s common stock certificate. | |
| 4.2 | Form of Certificate for the Series A Preferred Stock (incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 4.3 | Warrant for Purchase of Shares of Series B Preferred Stock (“Warrant”) (incorporated by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 4.4 | Form of Certificate for the Series B Preferred Stock (incorporated by reference from Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 4.5 | Form of Certificate for the Series C Preferred Stock (incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 19, 2011) | |
| **10.1 | Lease agreement dated April 24, 1995, as amended, for Eureka Square Branch Office of First National Bank of Northern California at EurekaSquareShopping Center, Pacifica, California | |
| **10.2 | (deleted) | |
| 10.3 | (deleted) | |
| 10.4 | (deleted) | |
| 10.5 | (deleted) | |
| 10.6 | (deleted) | |
| 10.7 | (deleted) | |
| 10.8(a) | (deleted) | |
| 10.8(b) | (deleted) |
| 107 |
| **10.9 | First National Bank Profit Sharing and 401(k) Plan dated August 26, 1969.* | |
| **10.10 | First National Bank Deferred compensation Plan dated November 1, 1997.* | |
| **10.11 | Salary Continuation Agreement between First National Bank of Northern California and Michael R. Wyman, dated December 20, 1996.* | |
| **10.12 | Salary Continuation Agreement between First National Bank of Northern California and Paul B. Hogan dated December 20, 1996.* | |
| **10.13 | Salary Continuation Agreement between First National Bank of Northern California and James B. Ramsey, dated December 23, 1999.* | |
| **10.14 | Form of Management Continuity Agreement signed on July 20, 2000, between First National Bank of Northern California and Jim D. Black, Charles R. Key and Anthony J. Clifford.* | |
| 10.15 | (deleted) | |
| **10.16 | Communications Site Lease Agreement as amended dated March 30, 1999, between First National Bank of Northern California, as Lessor and Nextel of California, Inc., as Lessee, with respect to Redwood City Branch Office. | |
| 10.17 | (deleted) | |
| **10.18 | Separation Agreement between First National Bank of Northern California and Paul B. Hogan, dated December 5, 2001.* | |
| ***10.19 | First Amendment to Separation Agreement between First National Bank of Northern California and Paul B. Hogan, dated March 22, 2002.* | |
| ****10.20 | FNB Bancorp Stock Option Plan (effective March 15, 2002).* | |
| ****10.21 | FNB Bancorp Stock Option Plan, Form of Incentive Stock Option Agreement.* | |
| ****10.22 | FNB Bancorp Stock Option Plan, Form of Nonstatutory Stock Option Agreement.* | |
| *****10.23 | FNB Bancorp 2002 Stock Option Plan (adopted June 28, 2002).* | |
| *****10.24 | FNB Bancorp 2002 Stock Option Plan, Form of Incentive Stock Option Agreement.* | |
| *****10.25 | FNB Bancorp 2002 Stock Option Plan, Form of Nonstatutory Stock option Agreement.* | |
| ******10.26 | Lease Agreement dated August 13, 2003, for San Mateo Branch Office of First National Bank of Northern California, located at 150 East Third Avenue, San Mateo, California. | |
| 10.27 | Salary Continuation Agreement and Split-Dollar Agreement for Jim D. Black (incorporated by reference from Exhibit 10.27 to the Company’s Current Report on Form 8-K filed with the Commission on September 10, 2004).* | |
| 10.28 | Salary Continuation Agreement and Split-Dollar Agreement for Anthony J. Clifford (incorporated by reference from Exhibit 10.28 to the Company’s Current Report on Form 8-K filed with the Commission on September 10, 2004).* | |
| 10.29 | Amended and Restated Salary Continuation and Split-Dollar Agreement for James B. Ramsey (incorporated by reference from Exhibit 10.29 o the company’s current Report on Form 8-K filed with the Commission on September 10, 2004).* | |
| *******10.30 | Lease Agreement dated May 1, 2003 as amended by Assignment, Assumption and Consent Agreement for the Financial District Branch of First National Bank of Northern California located at 65 Post Street, San Francisco, California. | |
| *******10.31 | Lease Agreement dated July 1, 1999, as amended by Assignment, Assumption and Consent for the Portola Branch Office of First National Bank of Northern California located at 699 Portola Drive, San Francisco, California. |
| 108 |
| 10.32 | Amendment to Salary Continuation Agreement for Jim D. Black (incorporated by reference from Exhibit 99.37 to the Company’s Current Report on Form 8-K filed with the Commission on July 26, 2006).* | |
| 10.33 | Amendment to Salary Continuation Agreement for Anthony J. Clifford (incorporated by reference from Exhibit 99.38 to the Company’s Current Report on Form 8-K filed with the Commission on July 26, 2006).* | |
| 10.34 | Amendment to Amended and Restated Salary Continuation Agreement for James B. Ramsey (incorporated by reference from Exhibit 99.39 to the Company’s Current report on Form 8-K filed with the Commission on July 26, 2006).* | |
| 10.35 | Lease Agreement dated February 3, 2006, for warehouse facility of First National Bank of Northern California (incorporated by reference from Exhibit 10.35 to the company’s Annual Report on Form 10-K filed with the Commission on March 13, 2008). | |
| 10.36 | First National Bank Deferred Compensation Plan dated December 1, 2007 (incorporated by reference from Exhibit 10.36 to the Company’s Annual Report on Form 10-K filed with the Commission on March 13, 2008).* | |
| 10.37 | Amendment No. 5 to the First National Bank Profit Sharing and 401(k) Plan dated December 1, 2007 (incorporated by reference from Exhibit 10.37 to the Company’s Annual Report on Form 10-K filed with the Commission on March 13, 2008).* | |
| 10.38 | Executive Supplemental Compensation Agreement between First National Bank of Northern California and David A. Curtis dated March 3, 2008 (incorporated by reference from Exhibit 10.38 to the Company’s Current Report on Form 8-K filed with the Commission on March 6, 2008).* | |
| 10.39 | Split-Dollar Life Insurance Agreement between First National Bank of Northern California and David A. Curtis dated March 3, 2008 (incorporated by reference from Exhibit 10.39 to the Company’s Current Report on Form 8-K filed with the Commission on March 6, 2008).* | |
| ********10.40 | FNB Bancorp 2008 Stock Option Plan (adopted February 22, 2008).* | |
| 10.41 | Second 409A Amendment to the Salary Continuation Agreement for Jim D. Black (incorporated by reference from Exhibit 99.66 to the Company’s Current Report on Form 8-K filed with the Commission on December 22, 2008).* | |
| 10.42 | Second 409A Amendment to the Salary Continuation Agreement for Anthony J. Clifford (incorporated by reference from Exhibit 99.67 to the Company’s Current Report on Form 8-K filed with the Commission on December 22, 2008).* | |
| 10.43 | Amendment to the Executive Supplemental Compensation Agreement for David A. Curtis (incorporated by reference from Exhibit 99.68 to the Company’s Current Report on Form 8-K filed with the Commission on December 22, 2008).* | |
| 10.44 | Letter Agreement dated February 27, 2009, between FNB Bancorp and United States Department of the Treasury pertaining to the election of directors by the holder(s) of the Series A and Series B Preferred Stock (incorporated by reference from Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 10.45 | Letter Agreement, including Schedule A and Securities Purchase Agreement Standard Terms, dated February 27, 2009, between FNB Bancorp and United States Department of the Treasury, with respect to to the issuance and sale of the Series A and Series B Preferred Stock and the Warrant (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 10.46 | Letter Agreement dated February 27, 2009, between FNB Bancorp and United States Department of the Treasury pertaining to the American Recovery and Reinvestment Act of 2009 (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) |
| 109 |
| 10.47 | Letter Agreement dated February 27, 2009, between FNB Bancorp and United States Department of the Treasury amending certain sections of the Securities Purchase Agreement Standard Terms (incorporated by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009) | |
| 10.48 | Form of Compensation Modification Agreement and Waiver, dated February 27, 2009, executed by each of: | |
| Thomas C. McGraw | ||
| Chief Executive Officer | ||
| FNB Bancorp and First National Bank of Northern California | ||
| Jim D. Black, President | ||
| FNB Bancorp and First National Bank of Northern California | ||
| Anthony J. Clifford | ||
| Executive Vice President and Chief Operating Officer | ||
| FNB Bancorp and First National Bank of Northern California | ||
| David A. Curtis | ||
| Senior Vice President and Chief Financial Officer | ||
| FNB Bancorp and First National Bank of Northern California | ||
| Randy R. Brugioni | ||
| Senior Vice President and Senior Loan Officer | ||
| FNB Bancorp and First National Bank of Northern California | ||
| (incorporated by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on February 27, 2009). | ||
| 10.49 | Lease agreement dated June 8, 1999, as amended August 18, 2009, for Linda Mar Branch Office of First National Bank of Northern California at LindaMarShopping Center, Pacifica, California | |
| 10.50 | Sublease agreement dated as of September 20, 2010, between Wells Fargo Bank, N. A. as Sublandlord, and First National Bank of Northern California as Subtenant, for Chestnut Street Branch of First National Bank of Northern California | |
| 10.51 | SBLF Securities Purchase Agreement dated September 15, 2011 between FNB Bancorp and the Secretary of the Treasury of the Treasury with respect to the Series C Preferred Stock (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 19, 2011) | |
| 10.52 | Letter Agreement dated September 15, 2011 between FNB Bancorp and the Secretary of the Treasury pertaining to the election of directors by the holder(s) of the Series C Preferred Stock (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on September 19, 2011) | |
| 10.53 | Letter Agreement dated September 15, 2011 between FNB Bancorp and the United States Department of the Treasury pertaining to the repurchase of all outstanding shares of Series A Preferred Stock and Series B Preferred Stock (incorporated by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on September 19, 2011) | |
| 10.54 | Lease Assumption and underlying lease agreement for the Guam Branch Office. | |
| 10.55 | Lease agreement dated February 8, 2013 between Dalum Corporation, Landlord, and First National Bank of Northern California, as Tenant, for the Battery Street Branch, at 130 Battery Street, San Francisco, CA, 94111 | |
| 10.56 | Lease agreement dated August 7, 2013, between Eureka Square Shopping Center, L.P., as Landlord, and First National Bank of Northern California, as Tenant, for space to be occupied by the Bank’s ATM. | |
| 10.57 | Second Amendment dated August 12, 2013 to Lease between Song Development Inc., as Lessor, and First National Bank of Northern California, as Lessee, for premises at 150 East Third Street, San Mateo, CA, as The San Mateo Branch. |
| 110 |
| ******14.0 | Code of Ethics | |
| 21.1 | The Registrant has one subsidiary, First National Bank of Northern California | |
| 23.1 | Consent of Moss Adams LLP | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification | |
| (principal executive officer) | ||
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification | |
| (principal financial officer) | ||
| 32.0 | Section 1350 Certifications | |
| 101.INS | XBRL Instance Document (furnished herewith) | |
| 101.SCH | XBRL Taxonomy Extension Schema Document (furnished herewith) | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith) | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith) | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document (furnished herewith) | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith) | |
| * | Denotes management contracts, compensatory plans or arrangements. | |
| ** | Incorporated by reference to registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2002. | |
| *** | Incorporated by reference to registrant’s Annual Report on Form 10-K filed with the Commission on March 31, 2002. | |
| **** | Incorporated by reference to registrant’s Statement on Form S-8 (No. 333-91596) filed with the Commission on July 1, 2002. | |
| ***** | Incorporated by reference to the registrant’s Registration Statement on Form S-8 (No. 333-98293) filed with the Commission on August 16, 2002. | |
| ****** | Incorporated by reference to registrant’s Annual Report on Form 10-K filed with the Commission on March 30, 2003. | |
| ******* | Incorporated by reference to registrant’s Annual Report on Form 10-K filed with the Commission on March 29, 2006. | |
| ******** | Incorporated by reference from Appendix A to the Registrant’s Definitive Proxy Statement for its 2008 Annual Meeting of Shareholders, filed with the Commission on April 21, 2008. |
An Annual Report for the fiscal year ended December 31, 2013, and Notice of AnnualMeeting and Proxy Statement for the Company’s 2014 Annual Meeting will be mailed to security holders subsequent to the date of filing this report. Copies of said materials will be furnished to the Commission in accordance with the Commission’s Rules and Regulations.
| 111 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FNB BANCORP | ||
| Dated: March 28, 2014 | By: | /s/ Thomas C. McGraw |
| Thomas C. McGraw | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Lisa Angelot | Chairwoman of the Board | March 28, 2014 | ||
| Lisa Angelot | of Directors | |||
| /s/ Thomas C. McGraw | Director, Chief Executive | March 28, 2014 | ||
| Thomas C. McGraw | Officer | |||
| /s/ David A. Curtis | Senior Vice President | March 28, 2014 | ||
| David A. Curtis | and Chief Financial Officer | |||
| (Principal Financial Officer | ||||
| and Principal Accounting | ||||
| Officer) | ||||
| /s/ Thomas G. Atwood | Director | March 28, 2014 | ||
| Thomas G. Atwood, D.D. S. |
| 112 |
| /s/ Ronald R. Barels | Director | March 28, 2014 | ||
| Ronald R. Barels, D.D.S. | ||||
| /s/ Merrie Turner Lightner | Director | March 28, 2014 | ||
| Merrie Turner Lightner | ||||
| /s/ Michael Pacelli | Director | March 28, 2014 | ||
| Michael Pacelli | ||||
| /s/ Edward J. Watson | Director and Secretary | March 28, 2014 | ||
| Edward J. Watson | ||||
| /s/ Jim D. Black | Director and President | March 28, 2014 | ||
| Jim D. Black | ||||
| /s/ Anthony J. Clifford | Director and Executive | March 28, 2014 | ||
| Anthony J. Clifford | Vice President and Chief | |||
| Operating Officer |
| 113 |
