PINX:FNBG Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

Quarterly Report

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

 

For the Quarterly Period Ended June 30, 2012

 

FNB BANCORP

(Exact name of registrant as specified in its charter)

 

California

(State or other jurisdiction of incorporation)

 

000-49693   92-2115369
(Commission File Number)   (IRS Employer Identification No.)

 

975 El Camino Real, South San Francisco, California   94080
(Address of principal executive offices)   (Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £

 

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

Yes S No £

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer £   Accelerated filer £
  Non-accelerated filer S   Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock as of August 3, 2012: 3,514,745 shares.

 

 
 

 

FNB BANCORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
    Page No 
Item 1. Consolidated Financial Statements (unaudited):  
     
  Consolidated Balance Sheets 3
     
  Consolidated Statement of Earnings 4
     
  Consolidated Statement of Comprehensive Earnings 5
     
  Consolidated Statements of Cash Flows 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
     
Item 4T. Controls and Procedures 41
     
PART II. OTHER INFORMATION 41
     
Item 1. Legal Proceedings 41
     
Item 1A. Risk Factors  42
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
     
Item 4. Mining Safety Disclosures 42
     
Item 6. Exhibits 42
     
SIGNATURES 43

 

2
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 

   June 30,   December 31,  
(Dollar amounts in thousands)   2012   2011  
            
ASSETS  
   
Cash and due from banks  $44,856   $38,474  
Securities available-for-sale, at fair value   203,548    187,664  
Loans, net of deferred loan fees and allowance for loan losses of $8,458 and $9,897 on June 30, 2012 and December 31, 2011   453,300    443,721  
Bank premises, equipment, and leasehold improvements, net   12,916    13,227  
Bank owned life insurance   11,594    9,521  
Other equity securities   4,603    4,608  
Accrued interest receivable   3,621    3,614  
Other real estate owned, net   1,923    2,747  
Goodwill   1,841    1,841  
Prepaid expenses   1,609    2,107  
Other assets   8,939    8,117  
Total assets  $748,750   $715,641  
  
Liabilities & Stockholders’ Equity 
           
Deposits          
Demand, noninterest bearing  $159,370   $139,382 
Demand, interest bearing   63,971    63,308 
Savings and money market   323,372    310,237 
Time   105,130    108,851 
Total deposits   651,843    621,778 
           
Accrued expenses and other liabilities   7,586    6,667 
Total liabilities   659,429    628,445 
           
Stockholders’ equity          
           
Preferred stock - series C - no par value, authorized and outstanding 12,600 shares (liquidation preference of $1,000 per share)   12,600    12,600 
           
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding  3,514,745 shares at June 30, 2012 and 3,506,405 shares at December 31, 2011   49,097    48,895 
Retained earnings   24,179    22,427 
Accumulated other comprehensive earnings , net of tax   3,445    3,274 
Total stockholders’ equity   89,321    87,196 
Total liabilities and stockholders’ equity  $748,750   $715,641 

 

 See accompanying notes to consolidated financial statements.

 

3
 

 

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

(Dollar amounts and average shares are in thousands, except earnings per share amounts)

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Interest income:                    
Interest and fees on loans  $6,758   $7,407   $13,513   $14,845 
Interest on taxable securities   617    462    1,230    866 
Interest on tax-exempt securities   503    401    1,017    778 
Total interest income   7,878    8,270    15,760    16,489 
Interest expense:                    
Deposits   653    857    1,337    1,741 
Total interest expense   653    857    1,337    1,741 
Net interest income   7,225    7,413    14,423    14,748 
Provision for loan losses   400    400    800    850 
Net interest income after provision for loan losses   6,825    7,013    13,623    13,898 
Noninterest income:                    
Service charges   744    811    1,496    1,508 
Credit card fees   155    178    308    328 
Net gain on sale of available-for-sale securities   325    128    809    150 
Bank owned life insurance earnings   111    84    578    165 
Other income   80    188    144    251 
Total noninterest income   1,415    1,389    3,335    2,402 
Noninterest expense:                    
Salaries and employee benefits   3,645    3,423    7,419    6,909 
Occupancy expense   598    585    1,198    1,141 
Equipment expense   432    417    878    825 
Professional fees   383    393    971    757 
FDIC assessment   156    300    336    675 
Telephone, postage and supplies   271    298    549    611 
Operating (recoveries) losses   (56)   10    52    234 
Bankcard expenses   157    165    313    301 
Data processing expense   138    154    276    286 
Low income housing expense   70    69    139    139 
(Gain) loss on sale of other real estate owned   (9)   25    (4)   (66)
Loss on impairment of other real estate owned       230        230 
Other real estate owned expense   15    73    51    261 
Other expense   698    630    1,373    1,217 
Total noninterest expense   6,498    6,772    13,551    13,520 
Earnings before provision for income tax expense   1,742    1,630    3,407    2,780 
Provision for income tax expense   514    450    891    797 
Net earnings   1,228    1,180    2,516    1,983 
Dividends and discount accretion on preferred stock   157    214    343    428 
Net earnings available to common stockholders  $1,071   $966   $2,173   $1,555 
                     
Earnings per share data:                 
Basic  $0.30   $0.28   $0.62   $0.44 
Diluted  $0.30   $0.27   $0.61   $0.44 
Weighted average shares outstanding:                    
Basic   3,514    3,509    3,512    3,509 
Diluted   3,576    3,535    3,563    3,528 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)

 

(Dollar amounts in thousands)  Three months ended   Six months ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Net earnings  $1,228   $1,180   $2,516   $1,983 
Unrealized holding gain on available-for-sale securities, net of tax   631    1,147    648    1,444 
Reclassification adjustment for gains recognized on available-for-sale securities sold, net of tax   (192)   (76)   (477)   (89)
Total comprehensive earnings  $1,667   $2,251   $2,687   $3,338 

 

See accompanying notes to consolidated financial statements. 

 

5
 

 

FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

(Dollar amounts in thousands)  Six months ended 
   June 30 
   2012   2011 
Cash flow from operating activities:          
Net earnings  $2,516   $1,983 
Adjustments to reconcile net earnings to net cash provided by operating activities:          
Net gain on sale of securities available-for-sale   (809)   (150)
Depreciation, amortization and accretion   1,680    1,332 
Loss (gain) on sale of other real estate owned   5    (66)
Stock-based compensation expense   121    154 
Provision for loan losses   800    850 
(Increase) decrease in accrued interest receivable   (7)   691 
Decrease in prepaid expense   498    877 
Increase in bank-owned life insurance   (2,073)   (166)
(Increase) decrease in other assets   (801)   25 
Valuation allowance on other real estate owned       230 
Increase (decrease) in accrued expenses and other liabilities   800    (205)
Net cash provided by operating activities   2,730    5,555 
           
Cash flows from investing activities:          
Purchase of securities available-for-sale   (43,995)   (29,786)
Proceeds from matured/called/sold securities available-for-sale   28,269    14,655 
Investment, net of redemption, in other equity securities   5    317 
Proceeds from sale of other real estate owned   832    4,078 
Net investment in other real estate owned   (13)    
Net (increase) decrease in loans   (10,379)   14,222 
Purchases of bank premises, equipment, leasehold improvements   (427)   (842)
Net cash (used in) provided by investing activities   (25,708)   2,644 
           
Cash flows from financing activities:          
Net increase in demand and savings deposits   33,786    11,854 
Net decrease in time deposits   (3,721)   (11,786)
Dividends paid on common stock   (421)   (167)
Exercise of stock options   59    7 
Dividends paid on preferred stock series A and B       (327)
Dividends on preferred stock series C   (343)    
Net cash (used in) provided by financing activities   29,360    (419)
NET INCREASE IN CASH AND CASH EQUIVALENTS   6,382    7,780 
Cash and cash equivalents at beginning of period   38,474    60,874 
Cash and cash equivalents at end of period  $44,856   $68,654 
           
Additional cash flow information:          
Interest paid  $1,338   $1,728 
Income taxes paid   930    1,090 
Non-cash investing and financing activities:          
Change in unrealized gain in available for-sale securities, net of tax   648    1,444 
Loans transferred to other real estate owned        
Deemed dividends on preferred stock       101 

 

See accompanying notes to consolidated financial statements.

 

6
 

 

FNB BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2012

 

(UNAUDITED)

 

NOTE A – BASIS OF PRESENTATION

 

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

 

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

 

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011.

 

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

 

NOTE B – STOCK OPTION PLANS

 

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

 

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

 

The amount of compensation expense for options recorded in the quarters ended June 30, 2012 and June 30, 2011 was $59,000 and $81,000, respectively. There was an income tax benefit of $22,000 recognized in the statements of earnings for these amounts for the quarter ended June 30, 2012, but no tax benefit recognized for the same quarter ended in 2011. The amount of compensation expense for options recorded in the six months ended June 30, 2012 and 2011 was $121,000 and $154,000, respectively. There was an income tax benefit of $22,000 recognized in the statements of earnings for these amounts for the six months ended June 30, 2012, but no tax benefit recognized for the six months ended June 30, 2011.

 

7
 

 

The intrinsic value for options exercised during the quarter ended June 30, 2012 was $58,000.The intrinsic value for options exercised during the six month period ended June 30, 2012 was $61,000. The intrinsic value of options exercisable as of June 30, 2012 was $620,000. The intrinsic value for options exercised during the quarter and six months ended June 30, 2011 was $6,000.

 

The amount of total unrecognized compensation expense related to non-vested options at June 30, 2012 was $472,000, and the weighted average period over which it will be amortized is 3.1 years.

 

NOTE C – EARNINGS PER SHARE CALCULATION

 

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

 

Earnings per share have been computed based on the following :

 

(Dollar amounts in thousands)  Three months ended   Six months ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Net earnings  $1,228   $1,180   $2,516   $1,983 
Dividends and discount accretion on preferred stock   157    214    343    428 
Net earnings available to common stockholders  $1,071   $966   $2,173   $1,555 
                     
Average number of shares outstanding   3,514,000    3,509,000    3,512,000    3,509,000 
Effect of dilutive options   62,000    26,000    51,000    19,000 
Average number of shares outstanding used to calculate diluted earnings per share   3,576,000    3,535,000    3,563,000    3,528,000 

 

Antidilutive options that were excluded from the calculation for the quarter and year to date totaled 277,032 and 299,194 in 2012, and 334,997 and 322,797 in 2011, respectively.

 

8
 

 

NOTE D – 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 
June 30, 2012                
U. S. Treasury securities  $8,212   $172   $   $8,384 
Obligations of U.S. Government agencies   62,995    1,102        64,097 
Mortgage backed securities   36,162    1,260        37,422 
Obligations of states and political subdivisions   73,885    3,290    (39)   77,136 
Corporate debt   16,455    190    (136)   16,509 
Totals  $197,709   $6,014   $(175)  $203,548 

 

(Dollar amounts in thousands)  Amortized   Unrealized   Unrealized   Carrying 
   cost   gains   losses   value 
December 31, 2011:                    
U.S. Treasury securities  $12,371   $263   $   $12,634 
Obligations of U.S. government agencies   53,150    964    (12)   54,102 
Mortgage-backed securities   32,606    838    (9)   33,435 
Obligations of states and political subdivisions   73,674    3,592    (15)   77,251 
Corporate debt   10,314    102    (174)   10,242 
Totals  $182,115   $5,759   $(210)  $187,664 

 

An analysis of gross unrealized losses within the available-for-sale investment securities portfolio as of June 30, 2012 and December 31, 2011 follows.

 

   Total   < 12 Months   Total   12 Months or >   Total   Total 
June 30, 2012  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(Dollar amounts in thousands)  Value   Losses   Value   Losses   Value   Losses 
Obligations of states and political subdivisions  $4,753   $(39)  $   $  $4,753   $(39)
Corporate debt   5,176    (45)   1,369    (91)   6,545    (136)
Total  $9,929   $(84)  $1,369   $(91)  $11,298   $(175)

 

   Total   < 12 Months   Total   12 Months or >   Total  Total
December 31, 2011:  Fair   Unrealized   Fair   Unrealized   Fair  Unrealized
(Dollar amounts in thousands)  Value   Losses   Value   Losses   Value  Losses
Obligations of U.S. government agencies  $6,293   $(12)  $    $  $6,293  $ (12)
Mortgage-backed securities   6,466    (9)           6,466    (9)
Obligations of states and political subdivisions   2,744    (15)           2,744    (15)
Corporate debt   5,554    (173)   500    (1)   6,054    (174)
Total  $21,057   $(209)  $500   $(1  $21,557  $ (210)

 

 

9
 

 

At June 30, 2012, there were two securities in an unrealized loss position for greater than 12 consecutive months. At December 31, 2011, 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. The unrealized losses are due solely to interest rate changes and the Company does not intend to sell nor expects it will be required to sell investment securities identified with impairments prior to the earliest of forecasted recovery or the maturity of the underlying investment security. Management has determined that no investment security is other-than-temporarily impaired at June 30, 2012.

 

The amortized cost and carrying value of available-for-sale debt securities as of June 30, 2012 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.

 

At June 30, 2012:        
         
(Dollar amounts in thousands)  Amortized   Carrying 
   Cost   Value 
Available-for-sale:          
Due in one year or less  $12,359   $12,462 
Due after one through five years   84,506    86,243 
Due after five years through ten years   61,512    63,750 
Due after ten years   39,332    41,093 
   $197,709   $203,548 

 

For the six months ended June 30, 2012, gross realized gains amounted to $817,000 on the sale of $22,717,000 in securities. For the six months ended June 30, 2011, gross realized gains amounted to $150,000 on the sale of $10,185,000 in securities. For the six months ended June 30, 2012 and June 30, 2011, gross unrealized losses were $8,000 and $2,000, respectively.

 

At June 30, 2012, securities with an amortized cost of $68,349,000 and fair value of $70,592,000 were pledged as collateral for public deposits and for other purposes required by law.

 

At June 30, 2012 and December 31, 2011, the Bank had investments in Federal Reserve Bank stock of $1,062,000 classified as other equity securities in the accompanying balance sheet. These investments in Federal Reserve Bank stock are carried at cost, and evaluated periodically for impairment. At June 30, 2012 and December 31, 2011, the Bank had investments in Federal Home Loan Bank stock classified as other equity securities in the accompanying balance sheet of $3,293,000 and $3,300,000, respectively. These investments in Federal Home Loan Bank stock are carried at cost, and evaluated periodically for impairment.

 

10
 

 

NOTE E – LOANS

 

Loans are summarized as follows at June 30, 2012 and December 31, 2011:

 

   June 30   December 31 
(Dollar amounts in thousands)  2012   2011 
Commercial real estate  $244,753   $257,413 
Real estate construction   25,644    28,229 
Real estate multi-family   39,960    36,369 
Real estate 1 to 4 family   95,886    86,322 
Commercial & industrial   53,562    43,074 
Consumer loans   2,037    2,335 
Gross loans   461,842    453,742 
Net deferred loan fees   (84)   (124)
Allowance for loan losses   (8,458)   (9,897)
Net loans  $453,300   $443,721 

 

A summary of impaired loans, the related allowance for loan losses, average investment and income recognized on impaired loans follows.

 

    Impaired Loans
At June 30, 2012
 
                 
(Dollar amounts in thousands)   Recorded Investment    Unpaid Principal Balance     Related Allowance 
With no related allowance recorded             
Commercial & industrial  $1,751   $2,327    $ 
Commercial real estate construction   6,186    6,186      
Commercial real estate   2,886    3,452      
Residential - 1 to 4 family   1,527    1,675      
Total   12,350    13,640      
                 
With an allowance recorded                
Commercial & industrial  $3,105   $3,421    $505 
Commercial real estate construction   1,052    1,052     75 
Real estate multi-family   3,242    3,369     42 
Commercial real estate   8,811    9,987     477 
Residential- 1 to 4 family   4,916    4,916     157 
Consumer   10    10     1 
 Total   21,136    22,755     1,257 
                 
Total                
Commercial & industrial  $4,856   $5,748    $505 
Commercial real estate construction   7,238    7,238     75 
Real estate multi-family   3,242    3,369     42 
Commercial real estate   11,697    13,439     477 
Residential - 1 to 4 family   6,443    6,591     157 
Consumer   10    10     1 
Grand total  $33,486   $36,395    $1,257 

 

11
 

 

   Impaired Loans 
                 
   3 months ended
June 30, 2012
   6 months ended
June 30, 2012
 
   Average       Average     
(Dollar amounts in thousands)   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
                     
With no related allow ance recorded                    
Commercial & industrial  $1,840   $29   $1,888   $45 
Commercial real estate construction   6,197    85    6,209    109 
Commercial real estate   2,886    16    2,886    36 
Residential - 1 to 4 family   1,539    15    1,542    32 
Total   12,462    145    12,525    222 
                     
With an allow ance recorded                    
Commercial & industrial  $3,328   $39   $3,358   $60 
Commercial real estate construction   1,054    14    1,056    29 
Commercial real estate   8,827    59    10,033    130 
Real estate multi-family   3,252        3,263     
Residential- 1 to 4 family   4,916    18    4,916    40 
Consumer   10        10     
Total   21,387    130    22,636    259 
                     
Total                    
Commercial & industrial  $5,168    68   $5,246   $105 
Commercial real estate construction   7,251    99    7,265    138 
Commercial real estate   11,713    75    12,919    166 
Real estate multi-family   3,252        3,263     
Residential - 1 to 4 family   6,455    33    6,458    72 
Consumer   10        10     
Grand total  $33,848   $275   $35,161   $481 

 

   Impaired Loans
   For the Year Ended December 31, 2011
             
       Unpaid     
(Dollar amounts in thousands)  Recorded   Principal   Related 
   Investment   Balance   Allowance 
             
With no related allowance recorded               
Commercial & industrial  $2,926   $3,560   $ 
Commercial real estate construction   6,232    6,232     
Commercial real estate   3,269    3,835     
Residential- 1 to 4 family   1,059    1,145     
Total   13,486    14,772     
                
With an allowance recorded               
Commercial & industrial  $5,881    5,896   $428 
Commercial real estate construction   1,586    1,686    214 
Commercial real estate   11,767    11,767    727 
Residential- 1 to 4 family   2,254    2,262    200 
Total   21,488    21,611    1,569 
                
Total               
Commercial & industrial  $8,807   $9,456   $428 
Commercial real estate construction   7,818    7,918    214 
Commercial real estate   15,036    15,602    727 
Residential - 1 to 4 family   3,313    3,407    200 
Grand total  $34,974   $36,383   $1,569 

 

12
 

 

   Impaired Loans
                 
   3 months ended   6 months ended 
   June 30, 2011   June 30, 2011 
   Average       Average     
(Dollar amounts in thousands)  Recorded   Income   Recorded   Income 
    Investment    Recognized    Investment    Recognized 
                     
With no related allowance recorded                    
Commercial & industrial  $5,566   $41   $4,962   $45 
Commercial real estate   1,933    30    1,934    27 
Residential - 1 to 4 family   1,069    11    1,082    12 
Total   8,568    82    7,978    84 
                     
With an allowance recorded                    
Commercial  $4,102   $8   $4,125   $8 
Commercial real estate construction   8,400    37    8,402    65 
Commercial real estate   6,710    11    6,746    9 
Residential- 1 to 4 family   2,256    18    2,256    20 
Total   21,467    74    21,529    102 
                     
Total                    
Commercial & industrial  $9,668    49   $9,087   $53 
Commercial real estate construction   8,400    37    8,402    65 
Commercial real estate   8,643    41    8,680    36 
Residential - 1 to 4 family   3,325    29    3,338    32 
Grand total  $30,035   $156   $29,507   $186 

 

Nonaccrual loans totaled $19,030,000 and $19,098,000 as of June 30, 2012 and December 31, 2011. The difference between impaired loans and nonaccrual loans represents loans that are restructured, are performing under modified agreements, and accruing interest.

 

The following aggregate information is provided at June 30, 2012 and December 31, 2011, about the contractual balances of nonaccrual loans:

 

   Loans on Nonaccrual Status as of 
(Dollar amounts in thousands)  June 30,   December 31, 
   2012   2011 
Commercial & industrial  $5,805   $7,019 
Real estate - construction   115    642 
Commercial real estate   5,102    6,826 
Real estate multi-family   3,242    3,283 
Real estate 1 to 4 family   4,756    1,328 
Consumer   10     
Total  $19,030   $19,098 

 

Interest income on impaired loans of $275,000 and $481,000 was recognized for the three and six months ended June 30, 2012, and $1,143,000 was recognized from cash payments received during the year ended December 31, 2011. The amount of interest on impaired loans not collected for the three and six months ended June 30, 2012 was $355,000 and $768,000, and the year ended December 31, 2011 was $1,137,000. The cumulative amount of unpaid interest on impaired loans was $250,000 and $513,000 for the three and six months ended June 30, 2012, and $1,967,000 for the year ended December 31, 2011.

 

13
 

 

Troubled Debt Restructurings

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories.

 

Rate Modification – A modification in which the interest rate is changed.

 

Term modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

 

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

 

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

 

As of June 30, 2012 and 2011, respectively, there were no available commitments for troubled debt restructurings.

 

A summary of the number, principal amounts outstanding for troubled debt restructurings were as follows as of June 30, 2012 and December 31, 2011.

 

   Modifications 
   As of June 30, 2012 
             
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
(Dollar amounts in thousands)               
Commercial & industrial   6   $3,584   $3,584 
Real estate 1 to 4 family   3    1,481    1,481 
Commercial real estate   4    5,299    5,299 
Real estate multi family   1    3,242    3,242 
Total   14    13,606    13,606 

 

14
 

 

   Modifications
   As of March 31, 2012
    
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
Troubled Debt Restructurings:            
Commercial & industrial   5   $2,925   $2,925 
Real estate 1 to 4 family   2    994    994 
Commercial real estate   5    6,021    6,021 
Real estate multi family   1    3,262    3,262 
Total   13   $13,202   $13,202 

 

None of these loans defaulted within twelve months following the date of restructure. All restructurings were a modification of interest rate and/or impairment. There were no principal reductions granted.

 

 Modifications
 As of December 31, 2011
             
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
(Amounts in thousands)               
Commercial & industrial   5   $2,987$   2,987 
Real estate 1 to 4 family   2    1,004    1,004 
Commercial real estate   6    9,173    9,173 
Real estate multi family   1    3,283    3,283 
Total   14    16,447    16,447 

 

15
 

 

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.

 

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

 

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.

 

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.

 

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.

 

16
 

 

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.

 

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.

 

 

   Age Analysis of Past Due Loans
As of June 30, 2012
(Dollar amounts in thousands)                            
   30-59   60-89   Greater               Recorded 
   Days   Days   Than   Total           Investment > 
   Past   Past   90   Past       Total   90 Days and 
   Due   Due   Days   Due   Current   Loans   Accruing 
Commercial & industrial  $483   $38   $3,645   $4,166   $49,396   $53,562   $ 
Commercial real estate   500        5,102    5,602    239,151    244,753     
Commercial real estate -construction                   25,644    25,644     
Real estate multi-family            3,242    3,242    36,718    39,960     
Residential       69    3,775    3,844    92,042    95,886     
Consumer                   2,037    2,037     
Total  $983   $107   $15,764   $16,854   $444,988   $461,842   $ 

 

   Age Analysis of Past Due Loans
As of December 31, 2011
(Dollar amounts in thousands)                           
   30-59
Days
   60-89
Days
   Over   Total           Recorded Investment >
   Past   Past   90   Past       Total   90 Days and
   Due   Due   Days   Due   Current   Loans   Accruing
Commercial & industrial  $247   $712   $232   $1,191   $41,883   $43,074 $
Commercial real estate   1,618        10,109    11,727    245,686    257,413    
Commercial real estate -construction   549        527    1,076    27,153    28,229  
Real estate multi-family                   36,369    36,369  
Real estate 1 to 4 family   71    2,629    257    2,957    83,365    86,322  
Consumer                   2,335    2,335  
Total  $2,485   $3,341   $11,125   $16,951   $436,791   $453,742 $

 

17
 

 

$19,030,000 and $19,098,000 in nonaccrual loans included past due loans of $16,854,000 and $16,951,000 at June 30, 2012 and December 31, 2011.

 

   Credit Quality Indicators
As of June 30, 2012
        
(Dollar amounts in thousands)                    
                     
       Special   Sub-       Total 
   Pass   mention   standard   Doubtful   loans 
Commercial & industrial  $50,525   $   $2,705   $332   $53,562 
Real estate construction   23,929        1,715        25,644 
Commercial real estate   233,798    3,377    7,578        244,753 
Real estate multi-family   36,718        3,242        39,960 
Real estate 1 to 4 family   91,086        4,444    356    95,886 
Consumer loans   2,027        10        2,037 
Totals  $438,083   $3,377   $19,694   $688   $461,842 

 

 

   Credit Quality Indicators         
   As of December 31, 2011         
(Dollar amounts in thousands)                    
                     
       Special   Sub-       Total 
   Pass   mention   standard   Doubtful   loans 
Commercial & industrial  $35,089   $   $7,720   $265   $43,074 
Real estate construction   25,987        2,242        28,229 
Commercial real estate   247,253        10,160        257,413 
Real estate multi-family   33,085        3,284        36,369 
Real estate 1 to 4 family   82,014        3,862    446    86,322 
Consumer loans   2,335                2,335 
Totals  $425,763   $   $27,268   $711   $453,742 

 

18
 

 

Allowance for Credit Losses
For the Three Months Ended June 30, 2012

 

(Dollar amounts in thousands)                        
       Real Estate         
   Commercial         Multi   1 to          
   & industrial   Commercial   Construction   family   4 family   Consumer   Total 
Allowance for credit losses                                   
                                    
Beginning balance  $1,628  $3,592  $1,055  $151  $1,798  $63  $8,287 
Charge-offs   (312)       (54)          (1)    (367)
Recoveries      (2)           139    1    138 
Provision   418    162    (167)   (102)   89    0    400 
Ending balance  $1,734  $3,752  $834  $49  $2,026  $63  $8,458 
                                   
Ending balance: individually evaluated for impairment  $505  $477  $75  $42  $157  $1  $1,257 
Ending balance: collectively evaluated for impairment  $1,229  $3,275  $759  $7  $1,869   $62  $7,201 

 

Allowance for Credit Losses
For the Six Months Ended June 30, 2012

 

(Dollar amounts in thousands)                        
           Real Estate                 
   Commercial           Multi   1 to         
   & industrial   Commercial   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   (1,487)   (738)   (54)       (109)   (4)    (2,392)
Recoveries   1    3    3        148    4    153 
Provision   1,602    (255)   (283)   (622)   395    (37)   800 
Ending balance  $1,734  $3,752  $834  $49  $2,026  $63  $8,458 
Ending balance: individually evaluated for impairment  $505  $477  $75  $42  $157  $1  $1,257 
Ending balance: collectively evaluated for impairment  $1,229  $3,275  $759  $7  $1,869  $62  $7,201 

 

19
 

 

Recorded Investment in Loans at June 30, 2012

 

(Dollar amounts in thousands)

 

   Commercial           Multi   1 to         
   & industrial   Commercial   Construction   family   4 family   Consumer   Total 
                             
Loans:                                   
Ending balance  $53,562 $244,753   $25,644   $39,960   $95,886  $2,037   $461,842 
Ending balance: individually evaluated for impairment  $7,082  $9,471   $7,238   $3,242   $6,443  $10   $33,486 
                                   
Ending balance: collectively evaluated for impairment  $46,480  $235,282   $18,406   $36,718 $89,443 $2,027   $428,356 

 

Allowance for Credit Losses
For the Three Months Ended June 30, 2011

 

(Dollar amounts in thousands)

 

   Commercial   Commercial   Real estate   Real estate         
   & industrial   real estate   construction   1 to 4 family   Consumer   Total 
Allowance for credit losses                        
                         
Beginning balance  $1,605   $4,360  $2,105  $1,605  $109  $9,784 
Charge-offs   100    (525)           (50)   (475)
Recoveries   1        9            10 
Provision   583    530    (578)   (145)   10    400 
Ending balance  $2,289   $4,365  $1,536  $1,460  $69  $9,719 
                               
Ending balance: individually evaluated for impairment  $1,223   $858  $143  $176  $  $2,400 
                              
Ending balance: collectively evaluated for impairment  $1,066   $3,507  $1,393  $1,284  $69  $7,319 

 

20
 

 

Allowance for Credit Losses
For the Six Months Ended June 30, 2011

(Dollar amounts in thousands)

 

   Commercial   Commercial   Real Estate   1 to        
   & industrial   Real Estate   Construction   4 family   Consumer   Total 
Allowance for credit losses                              
                               
Beginning balance  $2,102   $4,103   $1,999    1,233   $87   $9,524 
Charge-offs   (100)   (525)           (53)   (678)
Recoveries   5        18            23 
Provision   282    787    (481)   227    35    850 
Ending balance  $2,289   $4,365   $1,536    1,460   $69   $9,719 
                               
Ending balance: individually evaluated for impairment  $1,223   $858   $143   $176   $   $2,400 
Ending balance: collectively evaluated for impairment  $1,066   $3,507   $1,393$   1,284   $69   $7,319 

 

Recorded Investment in Loans at June 30, 2011

(Dollar amounts in thousands)

   Commercial   Commercial   Real estate   Real estate         
   & industrial   real estate   construction   1 to 4 family   Consumer   Total 
                         
Loans:                              
Ending balance  $43,623   $315,806   $29,938   $77,992   $2,321   $469,680 
                               
Ending balance: individually evaluated for impairment  $6,328   $9,017   $8,696   $3,636   $   $27,677 
                               
Ending balance: collectively evaluated for impairment  $37,295   $306,789   $21,242   $74,356   $2,321   $442,003 

 

NOTE F – FAIR VALUE MEASUREMENT

 

The following tables present information about the Company’s assets and liabilities measured at fair value as of June 30, 2012 and December 31, 2011, and indicate the fair value techniques used by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

21
 

 

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

 

       Fair Value Measurements 
(Dollar amounts in thousands)      at June 30, 2012, Using 
       Quoted Prices         
       in Active         
       Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair Value   Assets   Inputs   Inputs 
Description  6/30/2012   (Level 1)   (Level 2)   (Level 3) 
U. S. Treasury securities  $8,384   $8,384   $   $ 
Obligations of U.S.                    
Government agencies   64,097        64,097     
Mortgage-backed securities   37,422        37,422     
Obligations of states and political subdivisions   77,136        77,136     
Corporate debt   16,509        16,509     
Total assets measured at fair value  $203,548   $8,384   $195,164   $ 

 

       Fair Value Measurements 
(Dollar amounts in thousands)      at December 31, 2011, Using 
       Quoted Prices         
       in Active         
       Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair Value   Assets   Inputs   Inputs 
Description  12/31/2011   (Level 1)   (Level 2)   (Level 3) 
U. S. Treasury securities  $12,634   $12,634   $   $ 
Obligations of U.S.                    
Government agencies   54,102        54,102     
Mortgage-backed securities   33,435        33,435     
Obligations of states and political subdivisions   77,251        77,251     
Corporate debt   10,242        10,242     
Total assets measured at fair value  $187,664   $12,634   $175,030   $ 

 

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

 

(Dollar amounts in thousands)      Fair Value Measurements
at June 30, 2012, Using
        
       Quoted Prices          Losses   Losses 
       in Active          for three   for three 
       Markets  Other   Significant   months   months 
       for Identical  Observable   Unobservable   ended   ended 
   Fair Value   Assets  Inputs   Inputs   June 30,   June 30, 
Description  6/30/2012   (Level 1)  (Level 2)   (Level 3)   2012   2011 
Impaired loans  $12,384   $   $   $12,384   $225    894 
Total impaired assets measured at fair value  $12,384   $   $   $12,384   $225   $894 

22
 

 

       Fair Value Measurements 
(Dollar amounts in thousands)      at December 31, 2011, Using 
       Quoted Prices in         
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair Value   Assets   Inputs   Inputs 
Description  12/31/11   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $ 8,383   $    $    $ 8,383 
Other real estate owned   2,747            2,747 
Total impaired assets measured at fair value  $11,130   $   $   $11,130 

 

 

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

 

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

 

Fair Values of Financial Instruments.

 

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

 

Cash and Cash Equivalents.

 

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

23
 

 

Securities Available-for-Sale.

 

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

 

Loans Receivable.

 

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

 

Deposit liabilities.

 

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

 

Federal Home Loan Bank Advances.

 

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

 

Interest Receivable and Payable

 

The interesrt receivable and payable balances approximate their fair value due to the short-term nature of their settlement dates.

 

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.

 

The Bank has excluded non-financial assets and non-financial liabilities, such as Bank premises and equipment, deferred taxes and other liabilities.

24
 

 

The following table provides summary information on the estimated fair value of financial instruments at June 30, 2012:

 

(Dollar amounts in thousands)  Carrying   Fair   Fair value measurements  
   amount   value   Level 1   Level 2   Level 3  
Financial assets:                         
Cash and cash equivalents  $44,856   $44,856   $44,856           
Securities available for sale   203,548    203,548    8,384   $195,164      
Loans   461,842    467,931         455,547   $ 12,384 
Accrued interest receivable   3,621    3,621         3,621      
                          
Financial liabilities:                         
Accrued interest payable   297    297         297      
Deposits   651,843    652,293    546,713    105,580      
                          
Off-balance-sheet liabilities:                         
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit       847             847  

 

 

 

The carrying amount of loans include $19,030,000 of nonaccrual loans (loans that are not accruing interest) as of June 30, 2012. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

 

The following table provides summary information on the estimated fair value of financial instruments at December 31, 2011:

 

(Dollar amounts in thousands)  Carrying   Fair   Fair value measurements  
   amount   value   Level 1   Level 2   Level 3  
Financial assets:                        
Cash and cash equivalents  $38,474   $38,474   $38,474           
Securities available for sale   187,664    187,664    12,634   $175,030      
Loans, net   453,742    454,342         445,959   $ 8,383  
Accrued interest receivable   3,614    3,614         3,614      
                          
Financial liabilities:                         
Accrued interest payable   299    299         299      
Deposits   621,778    622,291    512,927    109,364      
                          
Off-balance-sheet liabilities:                         
Undisbursed loan commitments, lines of credit, standby letters of credit and Mastercard lines of credit       945             945  

 

The carrying amount of loans include $19,098,000 of nonaccrual loans (loans that are not accruing interest) as of December 31, 2011. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

 

NOTE G – PREFERRED STOCK

 

On September 15, 2011, Preferred Stock was issued to the U. S. Treasury as part of the Treasury’s Small Business Lending Fund (“SBLF”), as Preferred Stock – Series C – Non-Cumulative. The initial dividend rate is 5%. 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.

25
 

 

This program does not contain any of the various restrictions (including restrictions related to the payment of dividends to Common Stockholders) that the Treasury’s Capital Purchase Program (“TARP”) required. The Series A and B Preferred Stock, which contained a blended yield of 6.83% to the expected repayment date, were paid off in full and canceled with the proceeds received from the U. S. Treasury’s SBLF investment.

 

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

 

Forward-Looking Information and Uncertainties Regarding Future Financial Performance.

 

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

 

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

 

Liquidity Risk. The stability of funding sources and continued availability of borrowings; our ability to raise capital or incur debt on reasonable terms.

 

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

 

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

26
 

 

Changes in Regulatory Policies. Changes in federal and national bank regulatory policies, such as increases in capital requirements or in loan loss reserve or asset/liability ratio requirements, liquidity requirements, and the risks associated with concentration in real estate related loans could adversely affect earnings by reducing yields on earning assets or increasing operating costs.

 

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

 

Critical Accounting Policies And Estimates

 

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

 

Allowance for Loan Losses

 

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

 

Goodwill

 

Goodwill arises from the Company’s purchase price exceeding the fair value of the net assets of an acquired business. Goodwill represents the value attributable to intangible elements acquired. The value of goodwill is supported ultimately by profit from the acquired business. A decline in earnings could lead to impairment, which would be recorded as a write-down in the Company’s consolidated statements of income. 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.

27
 

 

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

 

Recent Accounting Pronouncements

 

In May, 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.

 

Some of the amendments clarify the Board’s intent about the application of existing fair value measurements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. As this ASU is disclosure-related only, the adoption of this ASU did not impact the Bank’s financial condition or results of operations.

28
 

 

Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

 

The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. This ASU had no material impact on the Bank when adopted.

 

 

In December, 2011, the FASB issued ASU 2011-12, “Comprehensive Income” – (Topic 220). “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.

 

All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.

 

In July, 2012, the FASB issued ASU 2012-02 “Intangibles-Goodwill and Other” – (Topic 350) “Testing Indefinite-Lived Intangible Assets for Impairment.” In accordance with the amendments in this Update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.

29
 

 

Earnings Analysis

 

Net earnings for the quarter ended June 30, 2012 were $1,228,000, compared to net earnings of $1,180,000 for the quarter ended June 30, 2011, an increase of $48,000, or 4%. Cash dividend payments on the preferred shares outstanding were made as scheduled during the six months ended June 30, 2012 and 2011, respectively. Net earnings for the six months ended June 30, 2012 were $2,516,000 compared to net earnings of $1,983,000 for the six months ended June 30, 2011, an improvement of $533,000. Net earnings before income tax expense for the quarter ended June 30, 2012 were $1,742,000, compared to net earnings before income tax expense of $1,630,000 for the quarter ended June 30, 2011, an increase of $112,000. Net earnings available to common stockholders for the quarter ended June 30, 2012, were $1,071,000, compared to net earnings available to common stockholders of $966,000 for the quarter ended June 30, 2011. Earnings before income tax expense were $3,407,000 for the six months ended June 30, 2012 compared to net earnings before income tax expense of $2,780,000 for the six months ended June 30, 2011, an improvement of $627,000. The principal items contributing to this change were an increase in gain on sales of available-for-sale securities of $659,000, and an increase in bank-owned life insurance, which was $413,000, offset by a decrease in net interest income of $325,000. Net earnings available to common stockholders were $2,173,000 for the six months ended June 30, 2012, compared to net earnings available to common stockholders of $1,555,000 for the six months ended June 30, 2011.

 

Net interest income for the quarter ended June 30, 2012 was $7,225,000, compared to $7,413,000 for the quarter ended June 30, 2011, a decrease of $188,000, or 2.5%. Net interest income for the six months ended June 30, 2012 was $14,423,000 compared to $14,748,000 for the six months ended June 30, 2011, a decrease of $325,000, or 2.2%.

 

Basic and diluted earnings per share were $0.30 for the second quarter of 2012 compared to basic and diluted earnings of $0.28 and $0.27, respectively, for the second quarter of 2011. Basic earnings per share were $0.62 and diluted earnings per share were $0.61 for the six months ended June 30, 2012, compared to basic and diluted earnings per share of $0.44 for the six months ended June 30, 2011.

30
 

 

The following table presents an analysis of net interest income and average earning assets and liabilities for the three-and six-month periods ended June 30, 2012 compared to the three-and six-month periods ended June 30, 2011.

 

TABLE 1  NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY
 
                         
   Three months ended June 30, 
   2012   2011 
(Dollar amounts in thousands)          Annualized           Annualized 
   Average       Average   Average       Average 
   Balance   Interest   Yield   Balance   Interest   Yield 
INTEREST EARNING ASSETS                        
Loans, gross (1) (2)  $459,778   $6,758    5.90%  $470,490   $7,407    6.31%
Taxable securities   132,987    617    1.86%   90,094    462    2.06%
Nontaxable securities (3)   71,416    670    3.76%   46,934    537    4.59%
Fed funds sold           n/a    29        n/a 
Total interest earning assets   664,181    8,045    4.86%   607,547    8,406    5.55%
                               
NONINTEREST EARNING ASSETS:                              
Cash and due from banks   43,722              62,897           
Premises   12,970              13,601           
Other assets   29,478              29,071           
Total noninterest earning assets   86,170              105,569           
TOTAL ASSETS  $750,351             $713,116           
                               
INTEREST BEARING LIABILITIES:                              
Demand, int bearing  $62,809    22    0.14%  $62,201    36    0.23%
Money market   276,251    411    0.60%   263,796    538    0.82%
Savings   51,403    26    0.20%   46,110    29    0.25%
Time deposits   105,828    194    0.74%   113,695    254    0.90%
Total interest bearing liabilities   496,291    653    0.53%   485,802    857    0.71%
                               
NONINTEREST BEARING LIABILITIES:                              
Demand deposits   155,329              136,831           
Other liabilities   10,255              7,845           
Total noninterest bearing liabilities   165,584              144,676           
                               
TOTAL LIABILITIES   661,875              630,478           
Stockholders’ equity   88,476              82,638           
                               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $750,351             $713,116           
                               
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)       $7,392    4.46%       $7,549    4.98%

 


 

(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 $277,000 and $273,000 for the quarters ended June 30, 2012 and 2011, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $167,000 and $136,000 for the quarters ended June 30, 2012 and 2011, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

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

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TABLE 2  NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY
 
                         
   Six months ended June 30, 
   2012   2011 
(Dollar amounts in thousands)          Annualized           Annualized 
   Average       Average   Average       Average 
   Balance   Interest   Yield   Balance   Interest   Yield 
INTEREST EARNING ASSETS                              
Loans, gross (1) (2)  $456,159   $13,513    5.97%  $476,279   $14,845    6.29%
Taxable securities   128,225    1,230    1.93%   87,750    866    1.99%
Nontaxable securities (3)   71,818    1,354    3.80%   45,272    1,035    4.61%
Fed funds sold           n/a    14        n/a 
Tot interest earning assets   656,202    16,097    4.95%   609,315    16,746    5.54%
                               
NONINTEREST EARNING ASSETS:                              
Cash and due from banks   45,479              59,140           
Premises   13,038              13,546           
Other assets   28,176              29,993           
Tot noninterest earning assets   86,693              102,679           
TOTAL ASSETS  $742,895             $711,994           
                               
Demand, int bearing  $62,710    50    0.16%  $61,449    70    0.23%
Money market   273,499    828    0.61%   260,875    1,081    0.84%
Savings   50,383    50    0.20%   45,991    57    0.25%
Time deposits   107,323    409    0.77%   115,883    533    0.93%
Tot interest bearing liabilities   493,915    1,337    0.55%   484,198    1,741    0.73%
                               
NONINTEREST BEARING LIABILITIES:                              
Demand deposits   150,436              138,226           
Other liabilities   10,367              7,563           
Tot noninterest bearing liabilities   160,803              145,789           
                               
TOTAL LIABILITIES   654,718              629,987           
Stockholders’ equity   88,177              82,007           
                               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $742,895             $711,994           
                               
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)       $14,760    4.54%       $15,005    4.97%

 

(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 included loan fees of $567,000 and $519,000 for the six months ended June 30, 2012 and 2011, respectively.

(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $337,000 and $257,000 for the six months ended June 30, 2012 and 2011, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.

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

 

Tables 1 and 2, above, show the various components that contributed to changes in net interest income for the three and six months ended June 30, 2012 and 2011. The principal interest earning assets are loans, from a volume as well as from a rate or yield perspective. For the quarter ended June 30, 2012, average loans outstanding represented 69.2% of average earning assets. For the quarter ended June 30, 2011, they represented 77.4% of average earning assets. For the six months ended June 30, 2012 and 2011, average loans outstanding represented 69.5% and 78.2%, respectively, of average earning assets.

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The taxable equivalent yield on average interest earning assets for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011 decreased from 5.55% to 4.86%, or 69 basis points. Average loans decreased by $10,712,000, quarter to quarter, while their yield decreased from 6.31% to 5.90%, or 41 basis points. Interest income on total interest earning assets for the quarter decreased $361,000 or 4.3% on a fully-taxable equivalent basis.

 

For the three months ended June 30, 2012 compared to the three months ended June 30, 2011, the cost on total interest bearing liabilities decreased from 0.71% to 0.53%, a decrease of 18 basis points. Time deposit interest cost decreased from 0.90% to 0.74%. Their average balance outstanding decreased by $7,867,000, or 6.9%, while their expense decreased $60,000. Money market deposits average volume increased $12,455,000, or 4.7%, while their cost decreased 22 basis points, or 26.8%.

 

For the six months ended June 30, 2012 compared to the six months ended June 30, 2011, interest income on interest earning assets decreased $649,000 or 3.9% on a fully-taxable equivalent basis, but average earning assets increased $46,887,000, or 7.7%. Average loans decreased by $20,120,000, or 4.2%. Interest on loans decreased $1,332,000 or 9.0%, while the yield decreased 32 basis points, or 5.1%. The cost on total interest bearing liabilities decreased from 0.73% to 0.55%. Time deposit averages decreased $8,560,000 or 7.4%. Their yield decreased 16 basis points, or 17.2%. Money market deposit average balances increased $12,624,000, or 4.8%, and their cost decreased $253,000, or 23.4%.

 

For the three and six month periods ended June 30, 2012 and June 30, 2011, respectively, the following tables show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), and b) changes in rate (changes in rate times the prior year’s volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.

33
 

 

Table 3  FNB BANCORP AND SUBSIDIARY 
   RATE/VOLUME VARIANCE ANALYSIS 
   Three Months Ended June 30, 
(Dollar amounts in thousands)  2012 Compared to 2011 
       Variance 
   Interest   Attributable to 
   Income/Expense   Rate   Volume 
INTEREST EARNING ASSETS               
Loans  $(649)  $(492)  $(157)
Taxable securities   155    (44)   199 
Nontaxable securities (1)   133    (96)   229 
Total  $(361)  $(632)  $271 
                
                
INTEREST BEARING LIABILITIES               
Demand deposits  $14   $14   $0 
Money market   127    146    (19)
Savings deposits   3    6    (3)
Time deposits   60    42    18 
Total  $204   $208   $(4)
NET INTEREST INCOME  $(157)  $(424)  $267 

 

  (1) Includes tax equivalent adjustment of $167,000 and $136,000 in the three months ended June 30, 2012 and June 30, 2011, respectively.

 

   RATE/VOLUME VARIANCE ANALYSIS 
   Six Months Ended June 30, 
(Dollar amounts in thousands)  2012 Compared to 2011 
       Variance 
   Interest   Attributable to 
   Income/Expense   Rate   Volume 
INTEREST EARNING ASSETS               
Loans  $(1,332)  $(705)  $(627)
Taxable securities   364    (35)   399 
Nontaxable securities (1)   319    (182)   501 
Total  $(649)  $(922)  $273 
                
INTEREST BEARING LIABILITIES               
Demand deposits  $20   $21   $(1)
Money market   253    305    (52)
Savings deposits   7    11    (4)
Time deposits   124    85    39 
Total  $404   $422   $(18)
NET INTEREST INCOME  $(245)  $(500)  $255 

 

  (1) Includes tax equivalent adjustment of $337,000 and $257,000 in the six months ended June 30, 2012 and June 30, 2011, respectively.

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Noninterest income

 

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

 

Table 5  NONINTEREST INCOME         
   Three months         
   ended Jun 30,   Variance 
(Dollar amounts in thousands)  2012   2011   Amount   Percent 
Service charges  $744   $811   $(67)   -8.3%
Credit card fees   155    178    (23)   -12.9%
Net gain on available-for-sale of securities   325    128    197    153.9%
Bank owned life insurance policy earnings   111    84    27    32.1%
Other income   80    188    (108)   -57.4%
Total noninterest income  $1,415   $1,389   $26    1.9%

 

   Six months         
   ended June 30,   Variance 
(Dollars in thousands)  2012   2011   Amount   Percent 
Service charges  $1,496   $1,508   $(12)   -0.8%
Credit card fees   308    328    (20)   -6.1%
Net gain on sale of available-for-securities   809    150    659    439.3%
Bank owned life insurance policy earnings   578    165    413    250.3%
Other income   144    251    (107)   -42.6%
Total noninterest income  $3,335   $2,402   $933    38.8%

 

Noninterest income consists mainly of service charges on deposits, credit card fees and several other types of miscellaneous income. The increase in gain on sale of available-for-sale securities for the quarter and six months as a result of re-positioning our portfolio in anticipation of the acquisition of Oceanic Bank. The other significant item was the increase in bank-owned life insurance policy earnings. During the first quarter of 2012, the bank recorded a one-time gain on life insurance due to the passing of Mr. Mike Wyman, the former Chairman of the Board and CEO of the Company.

35
 

 

Noninterest expense

 

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

 

Table 6  NONINTEREST EXPENSE         
   Three months         
   ended June 30,   Variance 
(Dollar amounts in thousands)  2012   2011   Amount   Percent 
Salaries and employee benefits  $3,645   $3,423   $222    6.5%
Occupancy expense   598    585    13    2.2%
Equipment expense   432    417    15    3.6%
Professional fees   383    393    (10)   -2.5%
FDIC assessment   156    300    (144)   -48.0%
Telephone, postage & supplies   271    298    (27)   -9.1%
Operating losses   (56)   10    (66)   -660.0%
Bankcard expenses   157    165    (8)   -4.8%
Data processing expense   138    154    (16)   -10.4%
Low income housing expense   70    69    1    1.4%
Other real estate owned expense   15    73    (58)   -79.5%
(Gain) loss on sale of other real estate owned   (9)   25    (34)   -136.0%
Loss on impairment of other real estate owned       230    (230)   -100.0%
Other expense   698    630    68    10.8%
Total noninterest expense  $6,498   $6,772   $(274)   -4.0%

 

   Six months         
   ended June 30,   Variance 
(Dollars in thousands)  2012   2011   Amount   Percent 
Salaries and employee benefits  $7,419   $6,909   $510    7.4%
Occupancy expense   1,198    1,141    57    5.0%
Equipment expense   878    825    53    6.4%
Professional fees   971    757    214    28.3%
FDIC assessment   336    675    (339)   -50.2%
Telephone, postage & supplies   549    611    (62)   -10.1%
Operating losses   52    234    (182)   -77.8%
Bankcard expenses   313    301    12    4.0%
Data processing expense   276    286    (10)   -3.5%
Low income housing expense   139    139    0    0.0%
Other real estate owned expense   51    261    (210)   -80.5%
Gain on sale of other real estate owned   (4)   (66)   62    -93.9%
Loss on impairment of other real estate owned       230    (230)   -100.0%
Other expense   1,373    1,217    156    12.8%
Total noninterest expense  $13,551   $13,520   $31    0.2%

 

Noninterest expense consists mainly of salaries and employee benefits. For the three months ended June 30, 2012 compared to three months ended June 30, 2011, it represented 56.1% and 50.5% of total noninterest expenses. For the six months ended June 30, 2012 and 2011, it was 54.7% and 51.1%, respectively, of total noninterest expenses. During the second quarter of 2012, an additional loan officer was added to our Sunnyvale loan production office. The FDIC assessment rate was reduced in 2012 compared to 2011, by $144,000 and $339,000 for the quarter and six months ended June 30, 2012 compared to the same periods of 2011. During the first quarter of 2011, the Bank experienced an operational loss of approximately $200,000 related to an unauthorized foreign wire transfer. The operational loss was increased by another $300,000 during the third quarter of 2011 when our insurance company denied coverage of our insurance reimbursement claim that had been filed. The Company disagrees with our insurance carrier’s decision to not cover the claim and has filed suit against the insurance carrier asking the courts to force the insurance company to pay our claim. Any recoveries that may be recovered as a result of our legal remedy efforts would be recorded as other income if and when any recovery actually occurs. Declines in our other real estate owned expenses in both the quarter and year-to-date period ending June 30, 2012 compared to the same periods in 2011 are directly related to the number of properties managed by the Bank.

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Provision for Loan Losses.

 

There was a provision for loan losses of $800,000 and $850,000 for the six months ended June 30, 2012 and 2011, respectively. There was a provision of $400,000 for the three months ended June 30, 2012 and 2011, respectively. The allowance for loan losses was $8,458,000 or 1.83% of total gross loans at June 30, 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 for management to provide for probable loan losses inherent in the loan portfolio. Charge-offs that have occurred in 2012 were related to loans with significant allowance allocations prior to the charge-off date, and is the primary reason the allowance for loan loss has declined without the need for a significant increase in the provision for loan losses.

 

Income Taxes

 

The effective tax rate for the quarter ended June 30, 2012 was a 29.5% tax expense compared to a 27.6% tax expense for the quarter ended June 30, 2011. The effective tax rate for the six months ended June 30, 2012 and June 30, 2011, respectively was a tax expense of 26.2% compared to a tax expense of 28.7%. Tax preference items which usually affect our effective tax rate are changing amounts invested in tax-advantaged securities, available Low Income Housing Credits, and amounts of interest income on qualifying loans in Enterprise Zones. During the first quarter of 2012, the Company recognized a tax free gain on proceeds of life insurance of approximately $370,000 due to the passing of the Company’s former Chairman and CEO, Mike Wyman. During the second quarter of 2012, the effective tax rate rose due to increased earnings that were fully taxable, primarily as a result of the level of gain on sale of available-for-sale securities.

 

Asset and Liability Management

 

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

 

In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company’s ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity comes from Company’s customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. Management believes the Company’s liquidity sources at June 30, 2012 are adequate to meet its operating needs in 2012 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

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Financial Condition

 

Assets. Total assets increased to $748,750,000 at June 30, 2012 from $715,641,000 at December 31, 2011, an increase of $33,109,000. The principal source of this increase was $15,884,000 in securities available-for-sale, $6,382,000 in cash and due from banks, and $9,579,000 in net loans.

Loans. Gross loans before loan fees at June 30, 2012 were $461,842,000, an increase of $8,100,000 or 1.8% from December 31, 2011. Commercial real estate loans decreased $12,660,000, construction loans decreased $2,585,000, real estate multi family increased $3,591,000, real estate one to four family increased $9,564,000, commercial loans increased $10,488,000, and consumer loans decreased by a modest $298,000. The portfolio breakdown was as follows:

 

TABLE 7  LOAN PORTFOLIO 
                 
   June 30   Percent   December 31   Percent 
(Dollar amounts in thousands)   2012         2011      
Commercial real estate  $244,753    53%  $257,413    57%
Real estate construction   25,644    5%   28,229    6%
Real estate multi family   39,960    9%   36,369    8%
Real estate 1 to 4 family   95,886    21%   86,322    19%
Commercial & industrial   53,562    12%   43,074    9%
Consumer loans   2,037    0%   2,335    1%
Gross loans   461,842    100%   453,742    100%
Net deferred loan fees   (84)   0%   (124)   0%
Total  $461,758    100%  $453,618    100%

 

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

38
 

 

A summary of activity in the allowance for loan losses for the six months ended June 30, 2012 and the six months ended June 30, 2011 is as follows.

 

TABLE 8  ALLOWANCE FOR LOAN LOSSES 
         
   Six months ended 
(Dollar amounts in thousands)  June 30, 2012   June 30, 2011 
Balance, beginning of period  $9,897   $9,524 
Provision for loan losses   800    850 
Recoveries   153    23 
Amounts charged off   (2,392)   (678)
Balance, end of period  $8,458   $9,719 

 

During the six months ended June 30, 2012, there was a provision for loan losses of $800,000, compared to $850,000 for the same period in 2011. The decrease in the provision was considered necessary given the existing risk levels within the Bank’s loan portfolio. Loan charge-off levels have increased year over year, yet overall financial risk in the loan portfolio has declined.

 

In management’s judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at June 30, 2012. However, changes in prevailing economic conditions in the Company’s markets or in the financial condition of its customers could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the allowance.

 

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

 

Nonperforming assets. Nonperforming assets consist of nonaccrual loans, loans that are 90 days or more past due but are still accruing interest and other real estate owned. At June 30, 2012, there was $20,953,000 in nonperforming assets, compared to $21,845,000 at December 31, 2011. Nonaccrual loans were $19,030,000 at June 30, 2012, compared to $19,098,000 at December 31, 2011. There were no loans past due 90 days and still accruing at either date.

 

There was $1,923,000 in Other Real Estate Owned at June 30, 2012 which consisted of two separate properties and $2,747,000 at December 31, 2011. During the first six months of 2012, the Bank sold one property and did not foreclose on any new loans. Management intends to aggressively market the two remaining properties. While management believes these properties will sell, there can be no assurance that these properties will sell quickly given the current real estate market, nor can the expected sales price be accurately predicted.

 

Deposits. Total deposits at June 30, 2012 were $651,843,000 compared to $621,778,000 on December 31, 2011. Of these totals, noninterest-bearing demand deposits were $159,370,000 or 24.4% of the total on June 30, 2012 and $139,382,000 or 22.4% on December 31, 2011. Time deposits were $105,130,000 on June 30, 2012 and $108,851,000 on December 31, 2011.

39
 

 

The following table sets forth the maturity schedule of the time certificates of deposit on June 30, 2012:

 

TABLE 9            
             
(Dollar amounts in thousands)  Under   $100,000     
Maturities  $100,000   or more   Total 
Three months or less  $11,146   $26,227   $37,373 
Over three through six months   8,235    13,399    21,634 
Over six through twelve months   11,711    12,072    23,783 
Over twelve months   8,712    13,628    22,340 
Total  $39,804   $65,326   $105,130 

 

Regulatory Capital. The following table shows the regulatory capital ratios and leverage ratios at June 30, 2012 and December 31, 2011 for the Bank:

 

 

TABLE 10                 Minimum “Well
    June 30,   December 31,     Capitalized”
Regulatory Capital Ratios   2012   2011     Requirements
Total Regulatory Capital Ratio     16.19 %     16.44 %     10.00 %
Tier 1 Capital     14.94 %     15.18 %     6.00 %
Leverage Ratios     11.09 %     11.15 %     5.00 %

 

Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of June 30, 2012, liquid assets (cash, cash equivalents and securities available for sale) were $248,404,000, or 33.2% of total assets. As of December 31, 2011, liquid assets were $226,138,000, or 31.6% of total assets. Liquidity consists of cash and due from banks, federal funds sold, and securities available-for-sale. The Company’s primary uses of funds are loans, and the primary sources of funds are deposits. The relationship between total net loans and total deposits is a useful additional measure of liquidity. The Company also has federal funds borrowing facilities totaling $45,000,000, a Federal Home Loan Bank line up to 30% of total assets, and a Federal Reserve Bank borrowing facility.

 

The relationship between total net loans and total deposits is a useful additional measure of liquidity. A higher loan to deposit ratio may lead to a loss of liquid assets in the future. This must be balanced against the fact that loans represent the highest interest earning assets. A lower loan to deposit ratio means lower potential income. On June 30, 2012, net loans were at 69.5% of deposits. On December 31, 2011, net loans were at 71.4% of deposits.

 

Off-Balance Sheet Items

 

The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results. As of June 30, 2012 and December 31, 2011, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and letters of credit were $84,734,000 and $92,690,000 at June 30, 2012 and December 31, 2011, respectively. As a percentage of net loans, these off-balance sheet items represent 18.7% and 20.9% respectively.

40
 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4T. Controls and Procedures.

 

(a) Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management as of June 30, 2012. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

(b) Internal Control Over Financial Reporting: An evaluation of any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company’s six months ended June 30, 2012, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

41
 

 

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

 

Item 1A. Risk Factors

 

During the course of normal operations, the Bank and the Company manage a variety of risks including, but not limited to, credit risk, operational risk, interest rate risk and regulatory compliance risk. For a more complete discussion of the risk factors facing the Bank and the Company, please refer to the section entitled “Item 1A – Risk Factors” in the Company’s December 31, 2011 Form 10K.

 

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

 

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

 

 

c) ISSUER PURCHASES OF EQUITY SECURITIES

 

On August 24, 2007, the Board of Directors of the Company authorized a stock repurchase program which calls for the repurchase of up to five percent (5%) of the Company’s then outstanding 2,863,635 shares of Common Stock, or 143,182 shares. There were no repurchases during the quarter ended June 30, 2012. There were 10,457 shares remaining that may be purchased under this Plan as of June 30, 2012.

 

Item 4. Mining Safety Disclosures

 

Not applicable.

 

Item 6. Exhibits

 

  Exhibits

 

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

42
 

 

SIGNATURES

 

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

 

    FNB BANCORP
    (Registrant)
Dated:      
August 14, 2012   By: /s/ Thomas C. McGraw
      Thomas C. McGraw
      Chief Executive Officer
      (Authorized Officer)
       
    By: /s/ David A. Curtis
      David A. Curtis
      Senior Vice President
      Chief Financial Officer
      (Principal Financial Officer)

 

43


 

PINX:FNBG Quarterly Report 10-Q Filling

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PINX:FNBG Quarterly Report 10-Q Filing - 6/30/2012
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