SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
D.C. 20549

FORM 10-K

|  |  |                                                                                                                                        
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|x |  | Annual report pursuant to Section 13 or 15 (d) of
 the Securities Exchange Act of 1934 for the fiscal year ended December 31,
 2008, or
|  |  |                                                                                                                                        
|o |  | Transition report pursuant to Section 13 or 15 (d)
 of Securities Exchange Act of 1934                                                 

Commission File No. 000-49693

FNB BANCORP(Exact name of registrant as specified in its charter)

|                                                      |  |                         
|----------------------------------------------------- |  | ------------------------
|California                                            |  | 92-2115369              
|                                                      |  |                         
|(State or other jurisdiction of                       |  | (IRS Employer ID Number)
|incorporation or organization)                        |  |                         
|                                                      |  |                         
|975 El Camino Real, South San Francisco, California   |  | 94080                   
|                                                      |  |                         
|(Address of principal executive
 offices)             |  | (Zip code)              
|                                                      |  |                         
|(650) 588-6800                                       
|                                                     
|(Registrants telephone number,
 including area code)

|                                                            |  |                            
|----------------------------------------------------------- |  | ---------------------------
|Securities registered pursuant to Section 12(b) of the Act: |  | None                       
|                                                           
|Securities registered pursuant to Section 12(g) of the Act: |  | _________________________  
|                                                           
|Title of Class:                                             |  | Common
 Stock, no par value

Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.


Yes o No x


Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o No x


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

Indicate by check
mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this 10-K o

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

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

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

Aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant, computed by
reference to the price at which the common equity was last sold, or the average
bid and asked price of such common equity, as of the last business day of the
registrants most recently completed second fiscal quarter: $46,938,037

Page 1 of 103 pages
Number of shares outstanding of each of the registrants classes of common
stock, as of March 3, 2009

No par value Common Stock  3,030,418 shares
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE The
following documents are incorporated by reference into this Form 10-K: Part
III, Items 10 through 14 from Registrants definitive proxy statement for the
2009 annual meeting of shareholders.

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TABLE OF CONTENTS

|         |                                                                                                                       |         
|-------- | --------------------------------------------------------------------------------------------------------------------- | --------
|         |                                                                                                                       | PAGE    
|         |                                                                                                                       |         
|PART I   |                                                                                                                       |         
|Item 1   | Business                                                                                                              | 3       
|Item 1A  | Risk Factors                                                                                                          | 24      
|Item 1B  | Unresolved Staff
 Comments                                                                                            | 31      
|Item 2   | Properties                                                                                                            | 31      
|Item 3   | Legal Proceedings                                                                                                     | 32      
|Item 4   | Submission of Matters
 to a Vote of Security Holders                                                                  | 32      
|         |                                                                                                                       |         
|PART II  |                                                                                                                       |         
|Item 5   | Market for the
 Registrants Common Equity and Related Stockholder Matters and Issuer
 Purchases of Equity Securities | 32      
|Item 6   | Selected Financial
 Data                                                                                              | 35      
|Item 7   | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                                | 36      
|Item 7A  | Quantitative and
 Qualitative Disclosures About Market Risk                                                           | 54      
|Item 8   | Financial Statements
 and Supplementary Data                                                                          | 56      
|Item 9   | Changes In and
 Disagreements with Accountants on Accounting and Financial Disclosure                                 | 91      
|Item 9A  | Controls and
 Procedures                                                                                              | 91      
|Item 9B  | Other Information                                                                                                     | 92      
|         |                                                                                                                       |         
|PART III |                                                                                                                       |         
|Item 10  | Directors, Executive
 Officers and Corporate Governance                                                               | 93      
|Item 11  | Executive Compensation                                                                                                | 93      
|Item 12  | Security Ownership of
 Certain Beneficial Owners and Management and Related Stockholder Matters                       | 93      
|Item 13  | Certain Relationships
 and Related Transactions, and Director Independence                                            | 93      
|Item 14  | Principal Accounting
 Fees and Services                                                                               | 93      
|         |                                                                                                                       |         
|PART IV  |                                                                                                                       |         
|Item 15  | Exhibits, Financial
 Statements, Schedules                                                                            | 94      
|(a)(1)   | Financial Statements.
 Listed and included in Part II, Item 8                                                         | 94      
|(2)      | Financial Statements
 Schedules. Not applicable                                                                       | 94      
|(3)      | Index to Exhibits                                                                                                     | 94 - 98 
|         | Signatures                                                                                                            | 99 - 100
|         | Exhibit 31 - Rule 13a-14(a)/15d-14(a)
 Certifications                                                                 |         
|         | Exhibit 32  Section 1350
 Certifications                                                                             |         

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PART I

ITEM 1. BUSINESS

Forward-Looking
Statements: Certain matters discussed or incorporated by reference in this
Annual Report on Form 10-K including, but not limited to, matters described in
Item 7  Managements Discussion and Analysis of Financial Condition and
Results of Operations, are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. Such forward-looking statements may
contain words related to future projections including, but not limited to,
words such as believe, expect, anticipate, intend, may, will,
should, could, would, and variations of those words and similar words
that are subject to risks, uncertainties and other factors that could cause
actual results to differ materially from those projected. Factors that could
cause or contribute to such differences include, but are not limited to, the
following: (1) variances in the actual versus projected growth in assets; (2)
return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the
interest rate environment including interest rates charged on loans, earned on
securities investments and paid on deposits; (6) competition effects; (7) fee
and other noninterest income earned; (8) general economic conditions
nationally, regionally, and in the operating market areas of the Company and
its subsidiary; (9) changes in the regulatory environment; (10) changes in
business conditions and inflation; (11) changes in securities markets; (12)
data processing problems; (13) a decline in real estate values in the Companys
operating market areas; (14) the effects of terrorism, the threat of terrorism
or the impact of the current military conflict in Iraq and Afghanistan, and the
conduct of the war on terrorism by the United States and its allies, as well as
other factors. The factors set forth under Item 1A  Risk Factors in this
report and other cautionary statements and information set forth in this report
should be read carefully, considered and understood as being applicable to all
related forward-looking statements contained in this report when evaluating the
business prospects of the Company and its subsidiary.

Forward-looking
statements are not guarantees of performance. By their nature, they involve
risks, uncertainties and assumptions. Actual results and shareholder values in
the future may differ significantly from those expressed in forward-looking
statements. You are cautioned not to put undue reliance on any forward-looking
statement. Any such statement speaks only as of the date of the report, and in
the case of any documents that may be incorporated by reference, as of the date
of those documents. We do not undertake any obligation to update or release any
revisions to any forward-looking statements, or to report any new information,
future event or other circumstances after the date of this report or to reflect
the occurrence of unanticipated events, except as required by law. However,
your attention is directed to any further disclosures made on related subjects
in our subsequent reports filed with the Securities and Exchange Commission on
Forms 10-K, 10-Q and 8-K.

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General

FNB
Bancorp (sometimes referred to herein as 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. As a bank holding company, the Company is authorized to engage in the
activities permitted under the Bank Holding Company Act of 1956, as amended,
and regulations thereunder. Its principal office is located at 975 El Camino
Real, South San Francisco, California 94080, and its telephone number is (650) 588-6800.

The
Company owns all of the issued and outstanding shares of common stock of First
National Bank of Northern California, a national banking association (First
National Bank or the Bank). The Company has no other subsidiary.

The
Bank was organized in 1963 as First National Bank of Daly City. In 1995, the
shareholders approved a change in the name to First National Bank of Northern
California. The administrative headquarters of the Bank is located at 975 El
Camino Real, South San Francisco, California. The Bank is locally owned and
presently operates thirteen full service banking offices in the cities of
Colma, Daly City, South San Francisco, Millbrae, Pacifica, Half Moon Bay, San
Mateo, Redwood City, Pescadero, as well as its Financial District and Portola
offices in San Francisco. The Banks primary business is servicing the business
or commercial banking needs of individuals and small to mid-sized businesses
within San Mateo and San Francisco Counties.

The
Bank is chartered under the laws of the United States and is governed by the
National Bank Act, and is a member of the Federal Reserve System. The Federal
Deposit Insurance Corporation insures the deposits of the Bank up to the
applicable legal limits. The Bank is also participating in the FDIC Transaction
Account Guarantee Program (TAGP). Under that program, through December 31,
2009, all noninterest-bearing transaction accounts are fully guaranteed by the
FDIC for the entire amount in the account. Coverage under the TAGP is in
addition to and separate from the coverage available under the FDICs general
deposit insurance rules. The Bank is subject to regulation, supervision and
regular examination by the Office of the Comptroller of the Currency. The
regulations of the Federal Deposit Insurance Corporation, the Board of
Governors of the Federal Reserve System, and the Office of the Comptroller of
the Currency govern many aspects of the Banks business and activities,
including investments, loans, borrowings, branching, mergers and acquisitions,
reporting and numerous other areas. The Bank is also subject to applicable
provisions of California law to the extent those provisions are not in conflict
with or preempted by federal banking law. See Supervision and Regulation
below.

First
National Bank offers a broad range of services to individuals and businesses in
its primary service area, including a full line of business financial products
with specialized services such as courier, appointment banking, and business
Internet banking. The Bank offers personal and business checking and savings
accounts, including individual interest-bearing negotiable orders of withdrawal
(NOW), money market accounts and/or accounts combining checking and savings
accounts with automatic transfer capabilities, IRA accounts, time certificates
of deposit, direct deposit services and computer cash management with access
through the Internet. First National Bank also makes available commercial loans
and standby letters of credit and construction, accounts receivable, inventory,
automobile, home improvement, residential real estate, commercial real estate,
single family mortgage, Small Business Administration, office equipment,
leasehold improvement and consumer loans as well as overdraft protection lines
of credit. In addition, the Bank sells travelers checks and cashiers checks,
offers automated teller machine (ATM) services tied in with major statewide and
national networks and offers other customary commercial banking services.

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Most
of First National Banks deposits are obtained from commercial and non-profit
businesses, professionals and individuals. As of December 31, 2008, First
National Bank had a total of 23,420 deposit accounts. On occasion, the Bank has
obtained deposits through deposit brokers for which it pays a broker fee. As of
December 31, 2008, First National Bank had no such deposits. There is no
concentration of deposits or any customer with 5% or more of First National
Banks deposits.

At
December 31, 2008, the Company had total assets of $660,957,000, net loans of
$497,984,000, deposits of $500,910,000 and shareholders equity of $68,149,000.
The Company competes with approximately 33 other banking or savings
institutions in its service areas. The Companys market share of Federal
Deposit Insurance Corporation insured deposits in the service area of San Mateo
County is approximately 2.44% (based upon the most recent information available
by the Federal Deposit Insurance Corporation through June 30, 2008). See
Competitive Data below.

Employees

At
December 31, 2008, The Company employed 180 persons on a full-time equivalent
basis. The Company believes its employee relations are good. The Company is not
a party to any collective bargaining agreement.

Available Information

FNB
Bancorp and First National Bank of Northern California maintain an Internet
website at http://www.FNBNORCAL.com. The Companys annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, are made available free of charge
on or through such website as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the Securities and Exchange
Commission. Also made available on or through such website are the Section 16
reports of ownership and changes in ownership of the Companys common stock
which are filed with the Securities and Exchange Commission by the directors
and executive officers of the Company and by any persons who own more than 10
percent of the outstanding shares of such stock. Information on such website is
not incorporated by reference into this report.

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SUPERVISION AND REGULATION

General

FNB Bancorp.
The common stock of FNB Bancorp is subject to the registration requirements of
the Securities Act of 1933, as amended, and the qualification requirements of
the California Corporate Securities Law of 1968, as amended. FNB Bancorp has
registered its common stock under Section 12 (g) of the Securities Exchange Act
of 1934, as amended. The Company is also subject to the periodic reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as amended,
which include, but are not limited to, annual, quarterly and other current
reports required to be filed with the Securities and Exchange Commission.

FNB
Bancorp is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended (the Bank Holding Company Act), and is registered as
such with, and subject to the supervision of, the Board of Governors of the
Federal Reserve System (the Board of Governors). FNB Bancorp is required to
obtain the approval of the Board of Governors before it may acquire all or
substantially all of the assets of any bank, or ownership or control of the
voting shares of any bank if, after giving effect to such acquisition of
shares, FNB Bancorp would own or control more than 5% of the voting shares of
such bank. The Bank Holding Company Act prohibits FNB Bancorp from acquiring
any voting shares of, or interest in, all or substantially all of the assets of
a bank located outside the State of California unless such an acquisition is
specifically authorized by the laws of the state in which such bank is located.
Any such interstate acquisition is also subject to the provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.

FNB
Bancorp, and any subsidiary which it may acquire or organize, are deemed to be
affiliates of the Bank within the meaning of that term as defined in the
Federal Reserve Act. This means, for example, that there are limitations (a) on
loans by First National Bank to its affiliates, and (b) on investments by First
National Bank in affiliates stock as collateral for loans to any borrower. FNB
Bancorp and First National Bank are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.

In
addition, regulations of the Board of Governors under the Federal Reserve Act
require that reserves be maintained by First National Bank in conjunction with
any liability of FNB Bancorp under any obligation (promissory note,
acknowledgment of advance, bankers acceptance or similar obligation) with a
weighted average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying funds to
First National Bank for use in its banking business, or to maintain the
availability of such funds.

First
National Bank of Northern California. As a national banking
association licensed under the national banking laws of the United States,
First National Bank is regularly examined by the Office of the Comptroller of
the Currency and is subject to supervision and regulation by the Federal
Deposit Insurance Corporation, the Board of Governors of the Federal Reserve
System, and the Office of the Comptroller of the Currency.

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This
supervision and regulation includes comprehensive reviews of all major aspects
of First National Banks business and condition, including its capital ratios,
allowance for possible loan losses and other factors. However, no inference
should be drawn that such authorities have approved any such factors. First
National Bank is required to file reports with the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation. First National
Banks deposits are insured by the Federal Deposit Insurance Corporation up to
the applicable legal limits.

Capital Standards.

The
Board of Governors, the Federal Deposit Insurance Corporation, and the Office
of the Comptroller of the Currency have adopted risk-based guidelines for
evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences
in risk profiles among banking organizations, to take into account off-balance sheet
exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, First National Bank is required to
maintain (and FNB Bancorp and First National Bank will be required to maintain)
capital equal to at least 8.0% of its assets and commitments to extend credit,
weighted by risk, of which at least 4.0% must consist primarily of common
equity (including retained earnings) and the remainder may consist of
subordinated debt, cumulative preferred stock, or a limited amount of loan loss
reserves.

Assets,
commitments to extend credit, and off-balance sheet items are categorized
according to risk and certain assets considered to present less risk than
others permit maintenance of capital at less than the 8% ratio. For example,
most home mortgage loans are placed in a 50% risk category and therefore
require maintenance of capital equal to 4% of those loans, while commercial
loans are placed in a 100% risk category and therefore require maintenance of
capital equal to 8% of those loans.

Under
the risk-based capital guidelines, assets reported on an institutions balance
sheet and certain off-balance sheet items are assigned to risk categories, each
of which has an assigned risk weight. Capital ratios are calculated by dividing
the institutions qualifying capital by its period-end risk-weighted assets.
The guidelines establish two categories of qualifying capital: Tier 1 capital
(defined to include common shareholders equity and noncumulative perpetual preferred
stock) and Tier 2 capital which includes, among other items, limited life (and
in the case of banks, cumulative) preferred stock, mandatory convertible
securities, subordinated debt and a limited amount of reserve for credit
losses. Tier 2 capital may also include up to 45% of the pretax unrealized
gains on certain available-for-sale equity securities having readily
determinable fair values (i.e. the excess, if any, of fair market value over
the book value or historical cost of the investment security). The federal
regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier
2 capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be
Tier 1 capital.

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A
leverage capital standard was adopted as a supplement to the risk-weighted
capital guidelines. Under the leverage capital standard, an institution is
required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board
of Governors and the Federal Deposit Insurance Corporation have also adopted a
minimum leverage ratio for bank holding companies as a supplement to the
risk-weighted capital guidelines. The leverage ratio establishes a minimum Tier
1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank
holding companies or those that have implemented the risk-based capital market
risk measure. All other bank holding companies must maintain a minimum Tier 1
leverage ratio of 4% with higher leverage capital ratios required for bank
holding companies that have significant financial and/or operational weakness,
a high risk profile, or are undergoing or anticipating rapid growth.

At
December 31, 2008, the Company was in compliance with the risk-weighted capital
and leverage ratios. See Capital under Item 7 below.

Prompt Corrective Action

The
Board of Governors, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency have adopted regulations implementing a system of
prompt corrective action pursuant to Section 38 of the Federal Deposit
Insurance Act and Section 131 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). The regulations establish five capital
categories with the following characteristics:

(1) Well
capitalized  consisting of institutions with a total risk-based capital ratio
of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a
leverage ratio of 5% or greater, and the institution is not subject to an
order, written agreement, capital directive or prompt corrective action
directive;

(2)
Adequately capitalized  consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not
meet the definition of a well capitalized institution;

(3)
Undercapitalized  consisting of institutions with a total risk-based capital
ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a
leverage ratio of less than 4%;

(4)
Significantly undercapitalized  consisting of institutions with a total
risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of
less than 3%, or a leverage ratio of less than 3%;

(5)
Critically undercapitalized  consisting of an institution with a ratio of
tangible equity to total assets that is equal to or less than 2%.

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The
regulations established procedures for classification of financial institutions
within the capital categories, filing and reviewing capital restoration plans
required under the regulations and procedures for issuance of directives by the
appropriate regulatory agency, among other matters. The regulations impose
restrictions upon all institutions to refrain from certain actions which would
cause an institution to be classified within any one of the three
undercapitalized categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
undercapitalized categories. In addition, institutions that are classified in
one of the three undercapitalized categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include:

(1) increased
monitoring and review by the appropriate federal banking agency;

(2)
implementation of a capital restoration plan;

(3) total
asset growth restrictions; and

(4) limitation
upon acquisitions, branch expansion, and new business activities without prior
approval of the appropriate federal banking agency. Discretionary supervisory
actions may include:

(a) requirements to augment capital;

(b) restrictions upon affiliate transactions;

(c) restrictions upon deposit gathering activities and interest rates paid;

(d) replacement of senior executive officers and directors;

(e) restrictions upon activities of the institution and its affiliates;

(f) requiring divestiture or sale of the institution; and

(g) any other supervisory action that the appropriate federal banking agency
determines is necessary to further the purposes of the regulations. Further,
the federal banking agencies may not accept a capital restoration plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institutions
capital. In addition, for a capital restoration plan to be acceptable, the
depository institutions parent holding company must guarantee that the
institution will comply with such capital restoration plan.

The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository institutions
total assets at the time it became undercapitalized, and (ii) the amount that
is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
significantly undercapitalized. FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not well capitalized. An undercapitalized
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institutions normal market areas or in the market
areas in which such deposits would otherwise be accepted.

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Any
financial institution which is classified as critically undercapitalized must
be placed in conservatorship or receivership within 90 days of such
determination unless it is also determined that some other course of action
would better serve the purposes of the regulations. Critically undercapitalized
institutions are also prohibited from making (but not accruing) any payment of
principal or interest on subordinated debt without prior regulatory approval
and regulators must prohibit a critically undercapitalized institution from
taking certain other actions without prior approval, including (1) entering into
any material transaction other than in the usual course of business, including
investment expansion, acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3) amending articles or
bylaws unless required to do so to comply with any law, regulation or order;
(4) making any material change in accounting methods; (5) engaging in certain
affiliate transactions; (6) paying excessive compensation or bonuses; and (7)
paying interest on new or renewed liabilities at rates which would increase the
weighted average costs of funds beyond prevailing rates in the institutions
normal market areas.

Additional Regulations

Under
FDICIA, the federal financial institution agencies have adopted regulations
which require institutions to establish and maintain comprehensive written real
estate policies which address certain lending considerations, including
loan-to-value limits, loan administrative policies, portfolio diversification
standards, and documentation, approval and reporting requirements. FDICIA
further generally prohibits an insured bank from engaging as a principal in any
activity that is impermissible for a national bank, absent Federal Deposit
Insurance Corporation determination that the activity would not pose a
significant risk to the Bank Insurance Fund, and that such bank is, and will
continue to be, within applicable capital standards.

The
Federal Financial Institutions Examination Council (FFIEC) utilizes the
Uniform Institutions Rating System (UFIRS), commonly referred to as CAMELS,
to classify and evaluate the soundness of financial institutions. Bank
examiners use the CAMELS measurements to evaluate capital adequacy, asset
quality, management, earnings, liquidity and sensitivity to market risk.
Effective January 1, 2005, bank holding companies such as the Company, became
subject to evaluation and examination under a revised bank holding company
rating system. This so-called BOPEC rating system, implemented in 1979, has been
focused primarily on financial condition, consolidated capital and consolidated
earnings. The new rating system reflects a change toward analysis of risk
management (as reflected in bank examination under the CAMELS measurements), in
addition to financial factors and the potential impact of nondepository
subsidiaries upon depository institution subsidiaries.

The
federal financial institution agencies have established bases for analysis and
standards for assessing financial institutions capital adequacy in conjunction
with the risk-based capital guidelines including analysis of interest rate
risk, concentrations of credit risk, risk posed by non-traditional activities,
and factors affecting overall safety and soundness. The safety and soundness standards
for insured financial institutions include analysis of (1) internal controls,
information systems and internal audit systems; (2) loan documentation; (3)
credit underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees and benefits; and (7) excessive compensation for executive
officers, directors or principal shareholders which could lead to material
financial loss. If an agency determines that an institution fails to meet any
standard, the agency may require the financial institution to submit to the
agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.

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Community
Reinvestment Act (CRA) regulations evaluate banks lending to low and
moderate income individuals and businesses across a four-point scale from
outstanding to substantial noncompliance, and are a factor in regulatory
review of applications to merge, establish new branches or form bank holding
companies. In addition, any bank rated in substantial noncompliance with the
CRA regulations may be subject to enforcement proceedings. First National Bank
has a current rating of satisfactory for CRA compliance.

FDIC Insurance

In
1996, pursuant to Congressional mandate, the FDIC reduced bank deposit
insurance assessment rates to a range from $0 to $0.27 per $100 of deposits,
dependent upon a banks risk. In 2005, Congress adopted the Federal Deposit
Insurance Reform Act of 2005 (the Reform Act), which had the effect of
merging the Bank Insurance Fund and the Savings Association Insurance Fund into
a new Deposit Insurance Fund (DIF). The FDIC released final regulations under
the Reform Act on November 2, 2006 that established a revised risk-based
deposit insurance assessment rate system for members of the DIF to insure,
among other matters, that there will be sufficient assessment income for
repayment of DIF obligations and to further refine the differentiation of risk
profiles among institutions as a basis for assessments. Under the new
assessment rate system, the FDIC set the assessment rates that became effective
January 1, 2007 for most institutions from $0.05 to $0.07 per $100 of insured
deposits and established a Designated Reserve Ratio (DRR) for the DIF during
2007 of 1.25% of insured deposits.

The
new assessment rate system consolidates the nine categories of the prior
assessment system into four categories (Risk Categories I, II, III and IV) and
three Supervisory Groups (A, B and C) based upon institutions capital levels
and supervisory ratings. Risk Category I includes all well capitalized
institutions with the highest supervisory ratings. Risk Category II includes
adequately capitalized institutions that are assigned to Supervisory Groups A
and B. Risk Category III includes all undercapitalized institutions that are
assigned to Supervisory Groups A and B and institutions assigned to Supervisory
Group C that are not undercapitalized but have a low supervisory rating. Risk
Category IV includes all undercapitalized institutions that are assigned to
Supervisory Group C.

On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the
EESA) was signed into law. The EESA temporarily raised the limit on federal
deposit insurance coverage provided by the FDIC from $100,000 to $250,000 per
depositor.

11

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On
October 14, 2008, the FDIC implemented the Temporary Liquidity Guarantee
Program (the TLGP) to strengthen confidence and encourage liquidity in the
financial system. The TLGP includes the Transaction Account Guarantee Program
(the TAGP). The TAGP offers full guarantee for noninterest-bearing
transaction accounts held at FDIC-insured depository institutions. The
unlimited deposit coverage was voluntary for eligible institutions and was in
addition to the $250,000 FDIC deposit insurance per account that was included
as part of the EESA. The insured deposit limits are currently scheduled to
return to $100,000 on January 1, 2010, except for certain retirement
accounts. The TAGP coverage became effective on October 14, 2008 and is
scheduled to continue for participating institutions until December 31,
2009. In addition to the existing risk-based deposit insurance premium assessed
on such deposits, TAGP participants will be assessed, on a quarterly basis, an
annualized 10 basis point fee on balances in noninterest-bearing transaction
accounts that exceed the existing deposit insurance limit of $250,000. The Bank
has elected to participate in the TAGP.

On
December 16, 2008, the FDIC approved an earlier proposed seven basis point rate
increase for the first quarter 2009 assessment period effective January 1, 2009
as part of the DIF restoration plan to achieve a minimum DRR of 1.15% within
five years.

On
February 27, 2009, the FDIC issued a press release with attached final rule
dated February 26, 2009, which established increased assessment rates effective
as of April 1, 2009 and included adjustments to improve differentiation of risk
profiles among institutions. The FDIC concurrently adopted an interim rule that
imposes a 20 basis point emergency special assessment effective June 30, 2009,
to be collected from all insured depository institutions on September 30, 2009,
in addition to the imposition of an emergency special assessment of up to 10
basis points at the end of any calendar quarter after June 30, 2009 if the FDIC
determines the DRR will fall to a level that would adversely affect public
confidence, among other factors. The proposed changes to differentiate risk profiles will require
riskier institutions to pay higher assessment rates based on classification
into one of four risk categories. Within each category, the FDIC will be able
to assess higher rates to institutions with a significant reliance on secured
liabilities, which generally raises the FDICs loss in the event of failure
without providing additional assessment revenue. The proposal also would assess
higher rates for institutions with a significant reliance on brokered deposits
but, for well-managed and well-capitalized institutions, only when accompanied
by rapid asset growth. The proposal also would provide incentives in the form
of a reduction in assessment rates for institutions to hold long-term unsecured
debt and, for smaller institutions, high levels of Tier 1 capital. Together,
the changes would improve the way the system differentiates risk among insured
institutions and help ensure that a minimum DRR of at least 1.15% by the end of
2013.

Based
upon the announced increase in assessments for insured financial institutions
in 2009 as described above and the continuing adverse economic conditions impacting
financial institutions generally which may necessitate further increases in
assessments, the Company anticipates that such assessments will have a
significantly greater impact upon operating expenses in 2009 compared to 2008.

12

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Limitation on Dividends

FNB Bancorp.
The Companys ability to pay cash dividends is subject to restrictions set
forth in the California General Corporation Law. The Company has to make
dividend payments to the U. S. Treasury on the Preferred shares that were issued
in February 27, 2009, before the Company can pay dividends on our Common Stock.
Funds for payment of any cash dividends by the Company would be obtained from
its investments as well as dividends and/or management fees from First National
Bank. First National Banks ability to pay cash dividends is subject to
restrictions imposed under the National Bank Act and regulations promulgated by
the Office of the Comptroller of the Currency.

FNB
Bancorp has paid quarterly dividends for each quarter commencing with the
second quarter of 2002. Future dividends will continue to be determined after
consideration of the Companys earnings, financial condition, future capital
funds, regulatory requirements and other factors such as the Board of Directors
may deem relevant. It is the intention of the Company to continue to pay cash
dividends, subject to legal restrictions on the payment of cash dividends and
depending upon the level of earnings, managements assessment of future capital
needs and other factors to be considered by the Board of Directors.

The
California General Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporations retained earnings equal
at least the amount of the proposed distribution. The California General
Corporation Law further provides that, in the event sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if, after giving effect to
the distribution, it meets two conditions, which generally stated are as
follows: (i) the corporations assets must equal at least 125% of its
liabilities; and (ii) the corporations current assets must equal at least its
current liabilities or, if the average of the corporations earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporations interest expense for those
fiscal years, then the corporations current assets must equal at least 125% of
its current liabilities.

The
Board of Governors of the Federal Reserve System generally prohibits a bank
holding company from declaring or paying a cash dividend which would impose
undue pressure on the capital of subsidiary banks or would be funded only
through borrowing or other arrangements that might adversely affect a bank
holding companys financial position. The Federal Reserve Board policy is that
a bank holding company should not continue its existing rate of cash dividends
on its common stock unless its net income is sufficient to fully fund each
dividend and its prospective rate of earnings retention appears consistent with
its capital needs, asset quality and overall financial condition.

First
National Bank of Northern California. As First National Banks sole
shareholder, FNB Bancorp is entitled to receive dividends when and as declared
by its Board of Directors, out of funds legally available therefore, subject to
the restrictions set forth in the National Bank Act.

The
payment of cash dividends by First National Bank may be subject to the approval
of the Office of the Comptroller of the Currency, as well as restrictions
established by federal banking law and the Federal Deposit Insurance Corporation.
Approval of the Office of the Comptroller of the Currency is required if the
total of all dividends declared by First National Banks board of directors in
any calendar year will exceed First National Banks net profits for that year
combined with its retained net profits for the preceding two years, less any
required transfers to surplus or to a fund for the retirement of preferred
stock. Additionally, the Federal Deposit Insurance Corporation and/or the
Office of the Comptroller of the Currency, might, under some circumstances,
place restrictions on the ability of a bank to pay dividends based upon peer
group averages and the performance and maturity of that bank.

13

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COMPETITION

Competitive Data

In
its market area, First National Bank competes for deposit and loan customers
with other banks (including those with much greater resources), thrifts and, to
a lesser extent, credit unions, finance companies and other financial service
providers.

Larger
banks may have a competitive advantage because of higher lending limits and
major advertising and marketing campaigns. They also perform services, such as
trust services, international banking, discount brokerage and insurance
services, which First National Bank is not authorized nor prepared to offer
currently. First National Bank has made arrangements with its correspondent
banks and with others to provide some of these services for its customers. For
borrowers requiring loans in excess of First National Banks legal lending
limits, First National Bank has offered, and intends to offer in the future,
such loans on a participating basis with its correspondent banks and with other
independent banks, retaining the portion of such loans which is within its
lending limits. As of December 31, 2008, First National Banks aggregate legal
lending limits to a single borrower and such borrowers related parties were
$10,711,000 on an unsecured basis and $17,851,000 on a fully secured basis,
based on regulatory capital of $71,405,000.

First
National Banks business is concentrated in its service area, which primarily
encompasses San Mateo County, but also includes portions of the City and County
of San Francisco. The economy of First National Banks service area is
dependent upon government, manufacturing, tourism, retail sales, population
growth and smaller service oriented businesses.

Based
upon the most recent information made available by the Federal Deposit
Insurance Corporation, at June 30, 2008, there were 33 commercial and savings
banking institutions in San Mateo County with a total of $18,572,979,000 in
deposits at June 30, 2008. First National Bank had a total of 11 offices with
total deposits of $453,381,000 at the same date, or 2.44% of the San Mateo
County totals.

Based
upon the current assessment rate system, the Banks capital ratios and levels
of deposits, the Bank anticipates a significant increase in operating expenses
due to the FDIC insurance assessment rate expected to be applicable to the Bank
during 2009 compared to the rate applicable to the Bank in 2008.

14

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General Competitive Factors

In
order to compete with the financial institutions in their primary service
areas, community banks such as First National Bank use to the fullest extent
possible, the flexibility which is accorded by their independent status. This
includes an emphasis on specialized services, local promotional activity, and
personal contacts by their respective officers, directors and employees. They
also seek to provide special services and programs for individuals in their
primary service area who are employed in the agricultural, professional and
business fields, such as loans for equipment, furniture and tools of the trade
or expansion of practices or businesses. In the event there are customers whose
loan demands exceed their respective lending limits, they seek to arrange for
such loans on a participation basis with other financial institutions. They
also assist those customers requiring services not offered by either bank to
obtain such services from correspondent banks.

Banking
is a business that depends on interest rate differentials. In general, the
difference .between the interest rate paid by a bank to obtain their deposits
and other borrowings and the interest rate received by a bank on loans extended
to customers and on securities held in a banks portfolio comprise the major
portion of a banks earnings. Commercial banks compete with savings and loan
associations, credit unions, other financial institutions and other entities
for funds. For instance, yields on corporate and government debt securities and
other commercial paper affect the ability of commercial banks to attract and
hold deposits. Commercial banks also compete for loans with savings and loan associations,
credit unions, consumer finance companies, mortgage companies and other lending
institutions.

The
interest rate differentials of a bank, and therefore its earnings, are affected
not only by general economic conditions, both domestic and foreign, but also by
statutes and as implemented by federal agencies, particularly the Federal
Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial
institutions are required to maintain, and adjustments to the discount rates
applicable to borrowing by banks from the Federal Reserve Board. These
activities influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and paid on deposits. The nature
and timing of any future changes in monetary policies and their impact on First
National Bank are not predictable.

Legislative and Regulatory Impact

Since
1996, California law implementing certain provisions of prior federal law has
(1) permitted interstate merger transactions; (2) prohibited interstate
branching through the acquisition of a branch business unit located in
California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition or merger with an existing
whole bank, which has been in existence for at least five years.

15

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The
federal financial institution agencies, especially the Office of the
Comptroller of the Currency and the Board of Governors, have taken steps to
increase the types of activities in which national banks and bank holding
companies can engage, and to make it easier to engage in such activities. The
Office of the Comptroller of the Currency has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
Eligible institutions (those national banks that are well capitalized, have a
high overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through
operating subsidiaries subject to an expedited application process. In
addition, a national bank may apply to the Office of the Comptroller of the Currency
to engage in an activity through a subsidiary in which First National Bank
itself may not engage.

The
Gramm-Leach-Bliley Act (the Act), eliminated most of the remaining
depression-era firewalls between banks, securities firms and insurance
companies which was established by the Banking Act of 1933, also known as the
Glass-Steagall Act (Glass-Steagall). Glass-Steagall sought to insulate banks
as depository institutions from the perceived risks of securities dealing and
underwriting, and related activities. The Act repealed Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as financial holding companies can
now, among other matters, acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The Act includes provisions
which permit national banks to conduct financial activities through a
subsidiary that are permissible for a national bank to engage in directly, as
well as certain activities authorized by statute, or that are financial in
nature or incidental to financial activities to the same extent as permitted to
a financial holding company or its affiliates. This liberalization of United
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms and insurance is
now possible, as is the conduct of commercial banking, merchant banking,
investment management, securities underwriting and insurance within a single
financial institution using a structure authorized by the Act.

Prior
to the Act, significant restrictions existed on the affiliation of banks with
securities firms and related securities activities. Banks were also (with minor
exceptions) prohibited from engaging in insurance activities or affiliating
with insurers. The Act removed these restrictions and substantially eliminated
the prohibitions under the Bank Holding Company Act on affiliations between
banks and insurance companies. Bank holding companies which qualify as
financial holding companies can now, among other matters, insure, guarantee, or
indemnify against loss, harm, damage, illness, disability, or death; issue
annuities; and act as a principal, agent, or broker regarding such insurance
services.

In
order for a commercial bank to affiliate with a securities firm or an insurance
company pursuant to the Act, its bank holding company must qualify as a
financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are well capitalized and well managed and (ii) it
files with the Board of Governors a certification to such an effect and a
declaration that it elects to become a financial holding company. The amendment
of the Bank Holding Company Act now permits financial holding companies to
engage in activities, and acquire companies engaged in activities, that are
financial in nature or incidental to such financial activities. Financial
holding companies are also permitted to engage in activities that are
complementary to financial activities if the Board of Governors determines that
the activity does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system in general. These standards
expand upon the list of activities closely related to banking which to date
have defined the permissible activities of bank holding companies under the
Bank Holding Company Act.

16

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One
further effect of the Act was to require that federal financial institution and
securities regulatory agencies prescribe regulation to implement the policy
that financial institutions must respect the privacy of their customers and
protect the security and confidentiality of customers non-public personal
information. These regulations require, in general, that financial institutions
(1) may not disclose non-public information of customers to non-affiliated
third parties without notice to their customers, who must have an opportunity
to direct that such information not be disclosed; (2) may not disclose customer
account numbers except to consumer reporting agencies; and (3) must give prior
disclosure of their privacy policies before establishing new customer
relationships.

Neither
the Company nor First National Bank has determined whether or when it may seek
to acquire and exercise new powers or activities under the Act, and the extent
to which competition will change among financial institutions affected by the
Act has not yet become clear.

RECENT LEGISLATION

The Patriot Act

On
October 26, 2001, President Bush signed the USA Patriot Act (the Patriot
Act), which includes provisions pertaining to domestic security, surveillance
procedures, border protection, and terrorism laws to be administered by the
Secretary of the Treasury. Title III of the Patriot Act entitled,
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001 includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.

Effective December 25, 2001, Section 313(a)
of the Patriot Act prohibits any insured financial institution such as First
National Bank, from providing correspondent accounts to foreign banks which do
not have a physical presence in any country (designated as shell banks),
subject to certain exceptions for regulated affiliates of foreign banks.
Section 313(a) also requires financial institutions to take reasonable steps to
ensure that foreign bank correspondent accounts are not being used to
indirectly provide banking services to foreign shell banks, and Section 319(b)
requires financial institutions to maintain records of the owners and agent for
service of process of any such foreign banks with whom correspondent accounts
have been established.

Effective July 23, 2002, Section 312 of the
Patriot Act created a requirement for special due diligence for correspondent
accounts and private banking accounts. Under Section 312, each financial
institution that establishes, maintains, administers, or manages a private
banking account or a correspondent account in the United States for a
non-United States person, including a foreign individual visiting the United
States, or a representative of a non-United States person shall establish
appropriate, specific, and, where necessary, enhanced, due diligence policies,
procedures, and controls that are reasonably designed to detect and record instances
of money laundering through those accounts.

17

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The Patriot Act contains various provisions
in addition to Sections 313(a) and 312 that affect the operations of financial
institutions by encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. The Company and
First National Bank are not currently aware of any account relationships
between First National Bank and any foreign bank or other person or entity as
described above under Sections 313(a) or 312 of the Patriot Act.

In
March 2, 2006, after temporary extensions of the Patriot Act, Congress passed
and President Bush signed the USA Patriot Act Improvement and Reauthorization
Act of 2005, and the related Amendments Act of 2006, which reauthorized all
expiring provisions of the Patriot Act by making permanent 14 of the 16 provisions
and imposed a four-year expiration date in 2009 on the other two provisions
related to roving surveillance and production of business records.

The effects which the Patriot Act and any
additional legislation enacted by Congress may have upon financial institutions
is uncertain; however, such legislation could increase compliance costs and
thereby potentially may have an adverse effect upon the Companys results of
operations.

Sarbanes-Oxley Act of 2002

On
July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act
of 2002 (the Act), legislation designed to address certain issues of
corporate governance and accountability. The key provisions of the Act and the
rules promulgated by the SEC pursuant to the Act include the following:

| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Expanded
 oversight of the accounting profession by creating a new independent public
 company oversight board to be monitored by the SEC.                                                                        
| |   |                                                                                                                                                                                                                   
| | · | Revised
 rules on auditor independence to restrict the nature of non-audit services provided
 to audit clients and to require such services to be pre-approved by the audit
 committee.                           
| |   |                                                                                                                                                                                                                   
| | · | Improved
 corporate responsibility through mandatory listing standards relating to
 audit committees, certifications of periodic reports by the CEO and CFO and
 making issuer interference with an audit a crime.
| |   |                                                                                                                                                                                                                   
| | · | Enhanced
 financial disclosures, including periodic reviews for largest issuers and
 real time disclosure of material company information.                                                                        
| |   |                                                                                                                                                                                                                   
| | · | Enhanced
 criminal penalties for a broad array of white collar crimes and increases in
 the statute of limitations for securities fraud lawsuits.                                                                 

18

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| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Disclosure
 of whether a company has adopted a code of ethics that applies to the
 companys principal executive officer, principal financial officer, principal
 accounting officer or controller, or persons performing similar functions,
 and disclosure of any amendments or waivers to such code of ethics.
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Disclosure
 of whether a companys audit committee of its board of directors has a member
 of the audit committee who qualifies as an audit committee financial
 expert.                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | A
 prohibition on insider trading during pension plan black-out periods.                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Disclosure
 of off-balance sheet transactions.                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | A
 prohibition on personal loans to directors and officers.                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Conditions
 on the use of non-GAAP (generally accepted accounting principles) financial
 measures.                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Standards of
 professional conduct for attorneys, requiring attorneys having an
 attorney-client relationship with a company, among other matters, to report
 up the ladder to the audit committee, to another board committee or to the
 entire board of directors regarding certain material violations.     
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Expedited
 filing requirements for Form 4 reports of changes in beneficial ownership of
 securities, reducing the filing deadline to within 2 business days of the
 date on which an obligation to report is triggered.                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Accelerated
 filing requirements for reports on Forms 10-K and 10-Q by public companies
 which qualify as accelerated filers, with a phased-in reduction of the
 filing deadline for Form 10-K and Form 10-Q.                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Disclosure
 concerning website access to reports on Forms 10-K, 10-Q and 8-K, and any
 amendments to those reports, by accelerated filers as soon as reasonably
 practicable after such reports and material are filed with or furnished to
 the SEC.                                                          
| |   |                                                                                                                                                                                                                                                                                                                  
| | · | Rules
 requiring national securities exchanges and national securities associations
 to prohibit the listing of any security whose issuer does not meet audit
 committee standards established pursuant to the Act.                                                                                              

The Companys securities are not currently
listed on any exchange. In the event of such a listing in the future, in
addition to the rules promulgated by the SEC pursuant to the Act, the Company
would be required to comply with the listing standards applicable to all
exchange listed companies.

The Company has incurred and it is
anticipated that it will continue to incur costs to comply with the Act and the
rules and regulations promulgated pursuant to the Act by the Securities and
Exchange Commission of approximately $200,000 annually.

19

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California Corporate
Disclosure Act

Effective
January 1, 2003, the California Corporate Disclosure Act (the CCD Act)
required publicly traded corporations incorporated or qualified to do business
in California to disclose information about their past history, auditors,
directors and officers. Effective September 28, 2004, the CCD Act, as currently
in effect and codified at California Corporations Code Section 1502.1, requires
the Company to file with the California Secretary of State and disclose within
150 days after the end of its fiscal year certain information including the
following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | The name of
 the companys independent auditor and a description of services, if any,
 performed for a company during the previous two fiscal years and the period
 from the end of the most recent fiscal year to the date of filing;                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | The annual
 compensation paid to each director and the five most highly compensated
 non-director executive officers (including the CEO) during the most recent
 fiscal year, including all plan and non-plan compensation for all services
 rendered to a company as specified in Item 402 of Regulation S-K such as
 grants, awards or issuance of stock, stock options and similar equity-based
 compensation;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | A
 description of any loans made to a director or executive officer at a
 preferential loan rate during the companys two most recent fiscal years,
 including the amount and terms of the loans;                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | Whether any
 bankruptcy was filed by a company or any of its directors or executive
 officers within the previous 10 years;                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | Whether any
 director or executive officer of a company has been convicted of fraud during
 the previous 10 years; and                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | A
 description of any material pending legal proceedings other than ordinary
 routine litigation as specified in Item 103 of Regulation S-K and a
 description of such litigation where the company was found legally liable by
 a final judgment or order.                                                                                                                                                      

The
Company does not currently anticipate that compliance with the CCD Act will
have a material adverse effect upon its financial position or results of its
operations or its cash flows.

Emergency Economic Stabilization Act of 2008

On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the
EESA) was signed into law. Pursuant to the EESA, the United States Department
of the Treasury (the U.S. Treasury) was granted the authority to take a range
of actions for the purpose of stabilizing and providing liquidity to the U.S.
financial markets and has implemented several programs, including the purchase
by the U.S. Treasury of certain troubled assets from financial institutions
under the Troubled Asset Relief Program (the TARP) and the direct purchase
by the U.S. Treasury of equity securities of financial institutions under the
Capital Purchase Program (the CPP). A summary of the CPP appears below under
Recent Regulatory Developments. The EESA also temporarily raised the limit on
federal deposit insurance coverage provided by the FDIC from $100,000 to
$250,000 per depositor. Please refer to the discussion of Pro Forma Risk-Based
Capital Ratios following Table 14, and the discussion of liquidity sources,
immediately following the Pro Forma Risk-Based Capital Ratios.

20

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On
February 27, 2009, as part of the CPP, the Company entered into a Letter
Agreement and Securities Purchase Agreement  Standard Terms (collectively, the
Purchase Agreement) with the U.S. Treasury. Pursuant to the Purchase
Agreement, the Company (i) sold to the U.S. Treasury 12,000 shares of the
Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
Series A Preferred Stock), having a liquidation preference amount of $1,000
per share, for a purchase price of $12,000,000 in cash, and (ii) issued to the
U.S. Treasury a warrant (the Warrant) to purchase 600 shares of the Companys
Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the Series B Preferred
Stock), at an exercise price of $0.01 per share. Immediately after the
issuance of the Warrant, the U.S. Treasury exercised the Warrant in a cashless
exercise resulting in the net issuance of 600 shares of the Series B Preferred
Stock, having a liquidation preference amount of $1,000 per share, to the U.S.
Treasury. The Series A Preferred Stock entitles its holder(s) to cumulative
dividends on the liquidation preference amount on a quarterly basis at a rate
of 5% per annum for the first five years, and 9% per annum thereafter. The
Series B Preferred Stock entitles its holder(s) to cumulative dividends on the
liquidation preference amount on a quarterly basis at a rate of 9% per annum
from the date of issuance. Subject to certain conditions, the Series A and
Series B Preferred Stock are redeemable at the option of the Company in whole
or in part at a redemption price of 100% of the liquidation preference amount
plus any accrued and unpaid dividends.

American Recovery and Reinvestment Act of 2009

On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the
ARRA) was signed into law. Section 7001 of the ARRA amended
Section 111 of the EESA in its entirety. While the U.S. Treasury must
promulgate regulations to implement the restrictions and standards set forth in
Section 7001, the ARRA, among other things, significantly expands the
executive compensation restrictions previously imposed by the EESA. Such
restrictions apply to any entity that has received or will receive financial
assistance under the TARP, and shall generally continue to apply for as long as
any obligation arising from financial assistance provided under the TARP,
including preferred stock issued under the CPP, remains outstanding. These ARRA
restrictions do not apply to any TARP recipient during such time when the
federal government (i) only holds any warrants to purchase common stock of
such recipient or (ii) holds no preferred stock or warrants to purchase
common stock of such recipient. Since the Company participates in the CPP, the
restrictions and standards set forth in Section 7001 of the ARRA are
applicable to the Company.

Recent Regulatory Developments

In
response to global credit and liquidity issues involving a number of financial
institutions, the United States government, particularly the U.S. Treasury and
the Federal financial institution regulatory agencies, have taken a variety of
extraordinary measures designed to restore confidence in the financial markets
and to strengthen financial institutions, including capital injections,
guarantees of bank liabilities and the acquisition of illiquid assets from
banks.

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Capital
Purchase Program. On October 24, 2008, the U.S. Treasury announced
plans to direct $700 billion of the TARP funding into the CPP to acquire
preferred stock investments in bank holding companies and banks. Requirements
for bank holding companies and banks eligible to participate as a Qualifying
Financial Institution (QFI) in the CPP include:

| |   |                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Submission
 of an application prior to November 14, 2008 to the QFIs Federal banking
 regulator to obtain preliminary approval to participate in the CPP;                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                         
| | · | If the QFI
 receives preliminary approval, it will have 30 days within which to submit
 final documentation and fulfill any outstanding requirements;                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                         
| | · | The minimum
 amount of capital eligible for purchase by the U.S. Treasury under the CPP is
 1 percent of the Total Risk-Weighted Assets of the QFI and the maximum is the
 lesser of (i) an amount equal to 3 percent of the Total Risk-Weighted Assets
 of the QFI or (ii) $25 billion;
| |   |                                                                                                                                                                                                                                                                                         
| | · | Capital
 acquired by a QFI under the CPP will be accorded Tier 1 capital treatment;                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                         
| | · | The
 preferred stock issued to the U.S. Treasury will be non-voting (except in the
 case of class votes), senior perpetual preferred stock that ranks senior to
 common stock and pari passu with existing preferred stock (except junior
 preferred stock);                            
| |   |                                                                                                                                                                                                                                                                                         
| | · | In addition
 to the preferred stock, the U.S. Treasury will be issued warrants to acquire
 shares of the QFIs common stock equal in value to 15 percent of the amount
 of capital purchased by the QFI;                                                                                
| |   |                                                                                                                                                                                                                                                                                         
| | · | Dividends
 are payable to the U.S. Treasury at the rate of 5% per annum for the first 5
 years and 9% per annum thereafter;                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                         
| | · | Subject to
 certain exceptions and other requirements, no redemption of the preferred
 stock is permitted during the first 3 years;                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                         
| | · | Certain
 restrictions on the payment of dividends to shareholders of the QFI shall
 remain in effect while the preferred stock purchased by the U.S. Treasury is
 outstanding;                                                                                                          
| |   |                                                                                                                                                                                                                                                                                         
| | · | Repurchase
 of the QFIs stock requires consent of the U.S. Treasury, subject to certain
 exceptions;                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                         
| | · | The
 preferred shares are not subject to any contractual restrictions on transfer
 by the U.S. Treasury; and                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                         
| | · | The QFI must
 agree to be bound by certain executive compensation and corporate governance
 requirements and senior executive officers must agree to certain compensation
 restrictions.                                                                                                

Temporary
Liquidity Guarantee Program. Among other programs and actions taken
by the U.S. Treasury and other regulatory agencies, the FDIC implemented the
Temporary Liquidity Guarantee Program (the TLGP) to strengthen confidence and
encourage liquidity in the financial system. The TLGP is comprised of the Debt
Guarantee Program (the DGP) and the Transaction Account Guarantee Program
(the TAGP). The Bank did not participate in the DGP Program. The DGP
guarantees all newly issued senior unsecured debt (e.g., promissory notes,
unsubordinated unsecured notes and commercial paper) up to prescribed limits
issued by participating entities beginning on October 14, 2008 and
continuing through October 31, 2009. For eligible debt issued by that date, the
FDIC will provide the guarantee coverage until the earlier of the maturity date
of the debt or June 30, 2012. The TAGP offers full guarantee for
noninterest-bearing transaction accounts held at FDIC-insured depository
institutions. The unlimited deposit coverage was voluntary for eligible
institutions and was in addition to the $250,000 FDIC deposit insurance per
account that was included as part of the EESA. The insured deposit limits are
currently scheduled to return to $100,000 on January 1, 2010, except for
certain retirement accounts. The TAGP coverage became effective on
October 14, 2008 and is scheduled to continue for participating
institutions until December 31, 2009. The Bank has elected to participate
in the TAGP.

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Initially, the
TLGP programs, the DGP and TAGP, were provided at no cost for the first
30 days. On November 3, 2008, the FDIC extended the opt-out period to
December 5, 2008 to provide eligible institutions additional time to
consider the terms before making a final decision regarding participation in
the program. Participants in the DGP are charged an annualized fee ranging from
50 basis points to 100 basis points (depending on the maturity of the debt
issued) multiplied by the amount of debt issued, and calculated for the
maturity period of that debt, or through June 30, 2012, whichever is
earlier. As of
December 31, 2008, the Bank has no senior unsecured debt outstanding. The
Company has not determined whether to issue qualifying senior debt securities
under the DGP as part of its liquidity planning for 2009 or thereafter. In
addition to the existing risk-based deposit insurance premium paid on such
deposits, TAGP participants will be assessed, on a quarterly basis, an
annualized 10 basis points fee on balances in noninterest-bearing transaction
accounts that exceed the existing deposit insurance limit of $250,000.

Financial
Stability Plan. On February 10, 2009, the U.S. Treasury announced a
Financial Stability Plan (the FSP) as a comprehensive approach to
strengthening the financial system and credit crisis. The Plan includes a
Capital Assistance Program (the CAP) that is intended to serve as a bridge to
raising private capital and to ensure sufficient capital to preserve or
increase lending in a worse-than-expected economic deterioration. Eligibility
to participate in the CAP will be consistent with the criteria for QFIs under
the CPP. Eligible institutions with consolidated assets in excess of $100
billion will be able to obtain capital under the CAP, subject to a supervisory
review process and comprehensive stress test assessment of the losses that
could occur over a two year period in the future across a range of economic
scenarios, including conditions more severe than anticipated or as typically
used in capital planning processes. Eligible institutions with consolidated
assets below $100 billion will be able to obtain capital under the CAP after a
supervisory review. As announced, the CAP includes issuance of a convertible
preferred security to the U.S. Treasury at a discount to the participating
institutions stock price as of February 9, 2009, subject to a dividend to be
determined. The security instrument will be designed to incentivize
institutions to replace the CAP capital with private capital or redeem it.
Institutions participating in the CPP under TARP may also be permitted to
exchange their CPP preferred stock for the convertible preferred CAP security.
Among the other elements of the FSP, is a temporary extension by the FDIC of
the TLGP for enhancing financial institution liquidity to October 31, 2009. On
February 25, 2009, the FDIC and other regulatory agencies jointly announced the
commencement of the stress test assessment with the intention to complete the
process of assessment not later than April 2009.

Term
Asset-Backed Securities Loan Facility. On March 3, 2009, the U.S.
Treasury and the Board of Governors announced the Term Asset-Backed Securities
Loan Facility (the TALF). The TALF is one of the programs under the Financial
Stability Plan announced by the U.S. Treasury on February 10, 2009. The TALF is
intended to help stimulate the economy by facilitating securitization
activities which allow lenders to increase the availability of credit to
consumers and businesses. Under the TALF, the Federal Reserve Bank of New York
(FRBNY) will lend up to $200 billion to provide financing to investors as
support for purchases of certain AAA-rated asset-backed securities (ABS)
initially for newly and recently originated auto loans, credit card loans,
student loans, and SBA-guaranteed small business loans anticipated to be funded
on March 25, 2009, and rental, commercial, and government vehicle fleet leases,
small ticket equipment, heavy equipment, and agricultural equipment loans and
leases proposed to be funded in April.

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ABS fundings
will be held monthly beginning on March 25, 2009 through December 2009, or
longer if the TALF is extended. The loan asset classes may be expanded in the
future to include commercial mortgages, non-Agency residential mortgages,
and/or other asset classes. Credit extensions under the TALF will be
non-recourse loans to eligible borrowers secured by eligible collateral for a
three-year term with interest paid monthly. Any U.S. company that owns eligible
collateral may borrow from the TALF, provided the company maintains an account
with a primary dealer who will act as agent for the borrower and deliver
eligible collateral to the FRBNY custodian in connection with the loan funding.
The FRBYN will create a special purpose vehicle (SPV) to purchase and manage
any assets received by the FRBYN in connection with the TALF loans.

The U.S.
Treasury will provide $20 billion of credit protection to the FRBNY in
connection with the TALF through the Troubled Assets Relief Program (the
TARP) by purchasing subordinated debt issued by the SPV to finance the first
$20 billion of asset purchases. If more than $20 billion in assets are
purchased by the SPV, the FRBNY will lend additional funds to the SPV to
finance such additional purchases. The FRBNYs loan to the SPV will be senior to
the TARP subordinated loan and secured by all of the assets of the SPV.

Future Legislation and Regulations

Certain
legislative and regulatory proposals that could affect FNB Bancorp, First
National Bank, and the banking business in general are periodically introduced
before the United States Congress, the California State Legislature and Federal
and state government agencies. It is not known to what extent, if any,
legislative proposals will be enacted and what effect such legislation would have
on the structure, regulation and competitive relationships of financial
institutions. It is likely, however, that such legislation could subject FNB
Bancorp and First National Bank to increased regulation, disclosure and
reporting requirements, competition, and costs of doing business.

In
addition to legislative changes, the various Federal and state financial
institution regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be predicted
whether or in what form any such rules or regulations will be enacted or the
effect that such regulations may have on the Company and First National Bank.

ITEM 1A. RISK FACTORS

In
addition to the risks associated with the business of banking generally, as
described above under Item 1 (Description of Business), the Companys business,
financial condition, operating results, future prospects and stock price can be
adversely impacted by certain risk factors, as set forth below, any of which
could cause the Companys actual results to vary materially from recent results
or from the Companys anticipated future results.

24

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Extensive Regulation of Banking.
The Companys operations are subject to extensive regulation by Federal, state
and local governmental authorities and are subject to various laws and judicial
and administrative decisions imposing requirements and restrictions on part or
all of its operations. The Company believes that it is in substantial
compliance in all material respects with laws, rules and regulations applicable
to the conduct of its business. Because the Companys business is highly
regulated, the laws, rules and regulations applicable to it are subject to
regular modification and change. There can be no assurance that these laws,
rules and regulations, or any other laws, rules or regulations, will not be
adopted in the future, which could make compliance much more difficult or
expensive, restrict the Companys ability to originate, broker or sell loans,
further limit or restrict the amount of commissions, interest or other charges
earned on loans originated or sold by the Company, or otherwise adversely
affect the Companys results of operations, financial condition, or future
prospects.

Governmental Fiscal and Monetary Policies.
The business of banking is affected significantly by the fiscal and monetary
policies of the federal government and its agencies. Such policies are beyond
the control of the Company. The Company is particularly affected by the
policies established by the Board of Governors in relation to the supply of
money and credit in the United States, and the target federal funds rate. The
instruments of monetary policy available to the Board of Governors can be used
in varying degrees and combinations to directly affect the availability of bank
loans and deposits, as well as the interest rates charged on loans and paid on
deposits, and this can and does have a material effect on the Companys
business, results of operations and financial condition. Federal monetary
policy may also affect the longer-term inflation rate which directly affects
the national and local economy.

The Effects of Legislation in Response to
Current Credit Conditions. Legislation passed at the
federal level and/or by the State of California in response to current
conditions affecting credit markets could cause the Company to experience
higher credit losses if such legislation reduces the amount that borrowers are
otherwise contractually required to pay under existing loan contracts with
First National Bank. Such legislation could also result in the imposition of
limitations upon First National Banks ability to foreclose on property or
other collateral or make foreclosure less economically feasible. Such events
could result in increased loan losses and require a material increase in the
allowance for loan losses and thereby adversely affect the Companys results of
operations, financial condition, future prospects, profitability and stock
price.

Geographic Concentration.
All of the business of the Company is located in the State of California and
the banking offices of the Company are located in the Northern California
Counties of San Mateo and San Francisco. The Company and the Bank conduct
business primarily in the San Francisco Bay area. As a result, our financial
condition, results of operations and cash flows are subject to changes in the
economic conditions in this area. Our success depends upon the business
activity, population, income levels, deposits and real estate activity in these
markets, and adverse economic conditions could reduce our growth rate, or
affect the ability of our customers to repay their loans, and generally impact
our financial condition and results of operations. Economic conditions in the
State of California are subject to various uncertainties at this time,
including the budgetary and fiscal difficulties facing the State Government.
The Company can provide no assurance that conditions in the California economy
will not deteriorate further or that such deterioration will not adversely
affect the Company.

25

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Competition.
Increased competition in the market of First National Bank of Northern
California (the Bank) may result in reduced loans and deposits. Ultimately,
the Bank may not be able to compete successfully against current and future
bank and non bank competitors. Many competitors offer the banking services that
are offered by the Bank in its service area. These competitors include national
and super-regional banks, finance companies, investment banking and brokerage
firms, credit unions, government-assisted farm credit programs, other community
banks and technology-oriented financial institutions offering online services.
In particular, the Banks competitors include several major financial companies
whose greater resources may afford them a marketplace advantage by enabling
them to maintain numerous banking locations and mount extensive promotional and
advertising campaigns. Additionally, banks and other financial institutions
with larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to
serve the credit needs of larger customers. Areas of competition include
interest rates for loans and deposits, efforts to obtain deposits, and range
and quality of products and services provided, including new technology-driven
products and services. Technological innovation continues to contribute to
greater competition in domestic and international financial services markets as
technological advances, such as Internet-based banking services that cross
traditional geographic bounds, enable more companies to provide financial
services. If First National Bank is unable to attract and retain banking
customers, it may be unable to continue its loan growth and level of deposits,
which may adversely affect its and the Companys results of operations,
financial condition and future prospects.

The Effects of Changes to FDIC Insurance
Coverage Limits and Assessments.These changes are
uncertain and increased premiums may adversely affect the Company. The FDIC
charges insured financial institutions premiums to maintain the Deposit
Insurance Fund. Current economic conditions have increased expectations for
bank failures. In such event, the FDIC would take control of failed banks and
guarantee payment of deposits up to applicable insured limits from the Deposit
Insurance Fund. Insurance premium assessments to insured financial institutions
may increase as necessary to maintain adequate funding of the Deposit Insurance
Fund.

The Emergency
Economic Stabilization Act of 2008 included a provision for an increase in the
amount of deposits insured by the FDIC to $250,000. On October 24, 2008, the
FDIC announced the Temporary Liquidity Guarantee Program that provides
unlimited deposit insurance on funds in noninterest-bearing transaction deposit
accounts not otherwise covered by the existing deposit insurance limit of
$250,000. All eligible institutions will be covered under the program for the
first 30 days without incurring any costs. After the initial period,
participating institutions will be assessed a 10 basis point surcharge on the
additional insured deposits through the scheduled end of the program, currently
December 31, 2009. Increased premiums will impact the Companys earnings.

It is not
clear how depositors may respond regarding the increase in insurance coverage.
Despite the increase, some depositors may reduce the amount of deposits held at
First National Bank if concerns regarding bank failures persist, which could
affect the level and composition of the Banks deposit portfolio and thereby
directly impact the Banks funding costs and net interest margin. First
National Banks funding costs may also be adversely affected in the event that
activities of the Federal Reserve Board and the U.S. Treasury to provide
liquidity for the banking system and improvement in capital markets are
curtailed or are unsuccessful. Such events could reduce liquidity in the
markets, thereby increasing funding costs to First National Bank or reducing
the availability of funds to First National Bank to finance its existing
operations and thereby adversely affect the Companys results of operations,
financial condition, future prospects, profitability and stock price.

26

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Dependence on Key Officers and Employees.
We are dependent on the successful recruitment and retention of highly
qualified personnel. Our ability to implement our business strategies is
closely tied to the strengths of our executive officers who have extensive
experience in the banking industry but who are not easily replaced. In
addition, business banking, one of the Companys principal lines of business,
is dependent on relationship banking, in which First National Bank personnel
develop professional relationships with small business owners and officers of
larger business customers who are responsible for the financial management of
the companies they represent. If these employees were to leave First National
Bank and become employed by a local competing bank, we could potentially lose
business customers. In addition, we rely on our customer service staff to
effectively serve the needs of our consumer customers. We actively recruit for
all open positions and management believes that its relations with employees
are good.

Growth strategy. We
have pursued and continue to pursue a growth strategy which depends primarily
on generating an increasing level of loans and deposits at acceptable risk
levels. We may not be able to sustain this growth strategy without establishing
new branches or new products. Therefore, we may expand in our current market by
opening or acquiring branch offices or other financial institutions or branch
offices. This expansion may require significant investments in equipment,
technology, personnel and site locations. The Company and the Bank may also
attempt to grow through mergers and acquisitions. There can be no assurance
that a successful merger or acquisition can be successfully completed. We
cannot assure you of our success in implementing our growth strategy either
through expansion of our existing branch system or through mergers and
acquisitions, and there may be significant increases in our noninterest
expenses, without any corresponding balance sheet growth.

Commercial loans. As
of December 31, 2008, approximately 16.5% of our loan portfolio consisted of
commercial business loans, which have a higher degree of risk than other types
of loans. Commercial lending is dependent on borrowers making payments on their
loans and lines of credit in accordance with the terms of their notes. Our
current economic recession has made it difficult for many commercial borrowers
to make their required loan payments. This credit risk is increased when there
is a concentration of principal in a limited number of loans and borrowers, the
mobility of collateral, the effect of general economic conditions and the
increased difficulty of evaluating and monitoring these types of loans. The
availability of funds for the repayment of commercial business loans may be
substantially dependent on the success of the business itself and the general
economic environment. If the cash flow from business operations is reduced, the
borrowers ability to repay the loan may be impaired. In addition, unlike
residential mortgage loans, which generally are made on the basis of the
borrowers ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrowers ability to make repayment from the cash flow of the
borrowers business. If the Bank is required to repossess equipment or pursue
collection efforts under personal guarantees, there could be a substantial decrease
in value of collateral, if any, increased legal costs, and an increased risk of
loss on the amount outstanding.

27

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Real Estate Values.
A large portion of the loan portfolio of the Company is dependent on the
performance of our real estate portfolio. At December 31, 2008, real estate
(including construction loans) served as the principal source of collateral
with respect to approximately 82.9% of the Companys loan portfolio. The
current substantial decline in the economy in general, coupled with a continued
decline in real estate values in the Companys primary operating market areas
could have an adverse effect on the demand for new loans, the ability of
borrowers to repay outstanding loans, and the value of real estate and other
collateral securing loans. Real estate values have declined, due in part to
reduced construction lending, tighter underwriting requirements, and reduced
borrower ability to make payments. Real estate loans may pose collection
problems, resulting in increased collection expenses, and delays in the
ultimate collection of these loans. In addition, acts of nature, including
fires, earthquakes and floods, which may cause uninsured damage and other loss
of value to real estate that secures these loans, may also negatively impact the
Companys financial condition.

Allowance for Loan and Lease Losses.
The Company maintains an allowance for loan losses to provide for loan defaults
and non-performance, but its allowance for loan losses may not be adequate to
cover actual loan and lease losses. In addition, future provisions for loan and
lease losses could materially and adversely affect the Company and therefore
the Companys operating results. The Companys allowance for loan and lease
losses is based on prior experience, as well as an evaluation of the risks in
the current portfolio. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates
that may be beyond the Companys control, and these losses may exceed current
estimates. Federal regulatory agencies, as an integral part of their
examination process, review the Companys loans and allowance for loan and
lease losses. Although we believe that the Companys allowance for loan and
lease losses is adequate to cover current losses, we cannot assure you that it
will not further increase the allowance for loan and lease losses or that the
regulators will not require it to increase this allowance. Either of these
occurrences could materially and adversely affect the Companys earnings.

Environmental Liabilities.
In the course of our business, we may foreclose and take title to real estate,
and could be subject to environmental liabilities with respect to these
properties. We may be held liable to a governmental entity or third parties for
property damage, personal injury, investigation and clean-up costs incurred by
these parties in connection with environmental contamination, or may be
required to investigate or clean up hazardous or toxic substances, or chemical releases
at a property. The costs associated with investigations or remediation
activities could be substantial. In addition, as the owner or former owner of a
contaminated site, we could become subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from the property. If we ever become subject to significant
environmental liabilities, our business prospects, financial condition,
liquidity, results of operations and stock price could be materially and
adversely affected.

Dilution of Common Stock.
Shares of the Companys common stock eligible for future sale could have a
dilutive effect on the market for common stock and could adversely affect the
market price.

The Articles
of Incorporation of the Company authorize the issuance of 10,000,000 shares of
common stock, of which 3,030,000 were outstanding at December 31, 2008.
Pursuant to its 1997, 2002 and 2008 Stock Option Plans, at December 31, 2008,
the Company had outstanding options to purchase 347,792 shares of common stock.
As of December 31, 2008, 337,386 shares of common stock remained available for
grants under the 2008 Stock Option Plan as well as an additional 27,866 shares
under the 2002 Stock Option Plan. The issuance of substantial amounts of the
Companys newly issued common stock in the public market could adversely affect
the market price of the Companys common stock. The market for the Companys
common stock is limited. The ability to raise funds in the future through a
stock offering could be difficult.

28

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Operating Losses.
The Company is subject to certain operations risks, including, but not limited
to, data processing system failures and errors and customer or employee fraud.
The Company maintains a system of internal controls to mitigate against such
occurrences and maintains insurance coverage for such risks, but should such an
event occur that is not prevented or detected by the Companys internal
controls, uninsured or in excess of applicable insurance limits, it could have
a significant adverse impact on the Companys business, financial condition or
results of operations. Additionally, the Company is dependent on network and
computer systems. If these systems and their back-up systems were to fail or
were breached, the Company could be adversely affected.

Business Confidence Uncertainty.
Terrorist activities in the future and the actions taken by the United States
and its allies in combating terrorism on a worldwide basis could adversely
impact the Company and the extent of such impact is uncertain. Even more so,
the problems in the mortgage and credit markets, the government conservatorship
of Fannie Mae and Freddie Mac, the failure of investment firms such as of Bear,
Stearns, and Lehman Brothers, as well as large write-offs at some major
financial institutions have had a ripple effect on the entire financial
services industry, and may continue to do so for some time. Such events have
had and may continue to have an adverse effect on the economy in the Companys
market areas. Such continued economic deterioration could adversely affect the
Companys future results of operations by, among other matters, reducing the
demand for loans and the amounts required to be reserved for loan losses,
reducing the value of collateral held as security for the Companys loans, and
causing a decline in the Companys stock price.

Restrictions in Purchase Agreement with U.S.
Treasury. The Purchase Agreement between the Company
and the U.S. Treasury dated February 27, 2009, pursuant to which the Company
sold $12 million of the Companys Series A Preferred Stock and issued
600 share of the Companys Series B Preferred Stock (upon exercise of the
Warrant issued to the U.S. Treasury), provides that prior to the earlier of
(1) February 27, 2012 and (2) the date on which all of the
shares of the U.S. Treasury Preferred Stock have been redeemed by the Company
or transferred by the U.S. Treasury to third parties, the Company may not,
without the consent of the Treasury, (a) declare or pay any dividend or
make any distribution on capital stock or other equity securities of any kind
of the Company other than (i) regular quarterly cash dividends of not more than
the amount of the last quarterly cash dividend per share declared, or (ii)
dividends payable solely in shares of common stock, or (b) subject to limited
exceptions, redeem, repurchase or otherwise acquire shares of the Companys
common stock or preferred stock other than the U.S. Treasury Preferred Stock.
In addition, the Company is unable to pay any dividends on the Companys common
stock unless the Company is current in the Companys dividend payments on the
U.S. Treasury Preferred Stock. These restrictions could have a negative effect
on the value of the Companys common stock. Dividends paid by the Company on
the shares of U.S. Treasury Preferred Stock will reduce the net income
available to the holders of Company common stock and the Companys earnings per
common share. The holders of the Companys common stock are entitled to receive
dividends only when, as and if declared by the Companys Board of Directors.
Although the Company has historically paid stock and cash dividends on the
Companys common stock, the Company is not required to do so and the Companys
Board of Directors could reduce or eliminate these common stock dividends in
the future, depending on the circumstances. The U.S. Treasury Preferred Stock
will also receive preferential treatment in the event of liquidation,
dissolution or winding up of the Company.

29

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Restrictions on Executive Compensation.
Pursuant to the terms of the Purchase Agreement, the Company adopted certain
standards for executive compensation and corporate governance. These standards
generally apply to the Companys Chief Executive Officer, the Chief Financial Officer
and the three next most highly compensated senior executive officers. The
standards (1) ensure that incentive compensation for senior executives
does not encourage unnecessary and excessive risks that threaten the value of
the financial institution; (2) require clawback of any bonus or
incentive compensation paid to a senior executive based on statements of
earnings, gains or other criteria that are later proven to be materially
inaccurate; (3) prohibit making golden parachute payments to senior executives;
and (4) confirm agreement not to deduct for tax purposes executive
compensation in excess of $500,000 for each senior executive. Pursuant to the
American Recovery and Reinvestment Act of 2009, further compensation
restrictions, including significant limitations on incentive compensation and
golden parachute payments, have been imposed on the Companys most highly
compensated employees, which could, in the future, make it more difficult for
the Company to retain and recruit qualified personnel.

Federal Home Loan Bank Risk.
The failure of the Federal Reserve Bank (FHLB) of San Francisco or the
national Federal Home Loan Bank System may have a material negative impact on
our earnings and liquidity.

Recently, the
FHLB of San Francisco announced that it was suspending dividend payments and
suspending capital repurchases due to the deterioration in the market value of
their mortgage-backed securities portfolio. While the FHLB of San Francisco has
announced it does not anticipate that additional capital is immediately
necessary, nor does it believe that its capital level is inadequate to support
realized losses in the future, the FHLB of San Francisco could require its
members, including the Bank, to contribute additional capital in order to
return the FHLB of San Francisco to compliance with capital guidelines.

At December
31, 2008, we held $4.4 million of common stock in the FHLB of San Francisco.
Should the FHLB of San Francisco fail, we anticipate that our investment in the
FHLBs common stock would be other than temporarily impaired and may have no
value.

At December
31, 2008, we maintained a line of credit with the FHLB of San Francisco equal
to 30% of total assets to the extent the Bank provides qualifying collateral
and holds sufficient FHLB stock. At December 31, 2008, we were in compliance
with collateral requirements. We are highly dependent on the FHLB of San
Francisco to provide the primary source of wholesale funding for immediate
liquidity and borrowing needs. The failure of the FHLB of San Francisco or the
FHLB System in general, may materially impair our ability to meet our growth
plans or to meet short and long term liquidity demands.

30

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

FNB
Bancorp does not own any real property. Since its incorporation on February 28,
2001, FNB Bancorp has conducted its operations at the administrative offices of
First National Bank, located at 975 El Camino Real, South San Francisco,
California 94080.

First
National Bank owns the land and building at 975 El Camino Real, South San
Francisco, California 94080. The premises consist of a modern, three-story
building of approximately 15,000 square feet and off-street parking for
employees and customers of approximately 45 vehicles. The Buri Buri Branch
Office of First National Bank is located on the ground floor of this
three-story building and administrative offices, including the offices of
senior management, occupy the second and third floors.

First
National Bank owns the land and two-story building occupied by the Daly City
Branch Office (6600 Mission Street, Daly City, CA 94014); the land and
two-story building occupied by the Colma Branch Office (1300 El Camino Real,
Colma, CA 94014); the land and two-story building occupied by the South San
Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080);
the land and two-story building occupied by the Redwood City Branch Office (700
El Camino Real, Redwood City, CA 94063); the land and two-story building
occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA
94030); the land and single-story building occupied by the Half Moon Bay Branch
Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story
building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA
94060). All properties include adequate vehicle parking for customers and
employees.

First
National Bank leases premises at 1450 Linda Mar Shopping Center, Pacifica,
California 94044, for its Linda Mar Branch Office. This ground floor space of
approximately 4,100 square feet is leased from Fifty Associates and
Demartini/Linda Mar, LLC. The lease term is 10 years and expires on September
1, 2009.

First
National Bank leases premises at 210 Eureka Square, Pacifica, California 94044,
for its Eureka Square Branch Office. This ground floor space of approximately
3,000 square feet is leased from Joseph A. Sorci and Eldiva Sorci. The lease
term is for 5 years, commencing January 1, 1995, with two 5-year options to
extend the lease term, the second of which has been exercised and expires on
December 31, 2009.

First
National Bank leases premises at 65 Post Street, San Francisco, CA 94104, for
its Financial District Office. The current lease term expires April 30, 2013,
with one 5-year option to extend the lease remaining. The location consists of
approximately 2,826 square feet of street level, 1,322 square feet of basement,
and 1,077 square feet of mezzanine space.

31

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First
National Bank leases premises at 6599 Portola Drive, San Francisco, CA 94127,
for its Portola Office. The current lease expires June 30, 2009, and has a
remaining 5-year option to extend the lease. The location consists of
approximately 1,325 square feet of street level space.

First
National Bank leases premises at 150 East Third Avenue, San Mateo, CA 94401,
for its San Mateo Branch Office. The current lease term, expires July 31, 2013.
It has one remaining five-year option to extend the lease. The location
consists of approximately 4,000 square feet of ground floor usable commercial
space.

First
National Bank leases a warehouse facility at 450 Cabot Road, South San
Francisco, CA 94080. The lease term is for 5 years and one half month, and will
expire February 28, 2011. The facility consists of approximately 7,600 square
feet of office/warehouse space.

The
foregoing summary descriptions of leased premises are qualified in their
entirety by reference to the full text of the lease agreements listed as
exhibits to this report.

ITEM 3. LEGAL PROCEEDINGS

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

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS

None
in the fourth quarter.

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since
March 18, 2002, the common stock of the Company has been quoted on the OTC
Bulletin Board under the trading symbol, FNBG.OB. There has been limited
trading in the shares of common stock of the Company. On February 28, 2009, the
Company had approximately 700 shareholders of common stock of record.

32

---



The
following table summarizes sales of the Common Stock of FNB Bancorp during the
periods indicated of which management of the Bank has knowledge, including the
approximate high and low bid prices during such periods and the per share cash
dividends declared for the periods indicated. All information has been adjusted
to reflect 5% stock dividends effected on December 14, 2007 and on December 15,
2008. The prices indicated below reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.

|               |  |                                        |         |                                 |   |         |  |   |      | 
|-------------- |  | -------------------------------------- | ------- | ------------------------------- | - | ------- |  | - | ---- | 
|               |  | Bid Price of FNB Bancorp
 Common Stock |         | Cash 
 Dividends 
 Declared (1) |  
|               |  | High                                   |         | Low                             |   |        
|               |  |                                        |         |                                 |   |         | 
|2007           |  |                                        |         |                                 |   |         |  |   |      | 
|First Quarter  |  | $                                      | 35.3351 |                                 | $ | 33.3506 |  | $ | 0.15 | 
|Second Quarter |  |                                        | 34.7288 |                                 |   | 33.5160 |  |   | 0.15 | 
|Third Quarter  |  |                                        | 33.6263 |                                 |   | 30.6495 |  |   | 0.15 | 
|Fourth Quarter |  |                                        | 30.5025 |                                 |   | 25.7250 |  |   | 0.15 | 
|               |  |                                        |         |                                 |   |         |  |   |      | 
|2008           |  |                                        |         |                                 |   |         |  |   |      | 
|First Quarter  |  | $                                      | 24.4650 |                                 | $ | 21.5250 |  | $ | 0.15 | 
|Second Quarter |  |                                        | 23.1000 |                                 |   | 16.2750 |  |   | 0.15 | 
|Third Quarter  |  |                                        | 16.9050 |                                 |   | 11.5500 |  |   | 0.15 | 
|Fourth Quarter |  |                                        | 13.0000 |                                 |   | 10.1500 |  |   | 0.15 | 

|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Item 1,
 Limitations on Dividends, above, for a description of the limitations
 applicable to the payment of dividends by FNB Bancorp.

STOCK PERFORMANCE GRAPH

Set
forth below is a line graph comparing the annual percentage change in the
cumulative total return on FNB Bancorp Common Stock with the cumulative total
return of the SNL Securities Index of Pink Banks (asset size of over $500
million) and the Russell 2000 Index as of the end of each of the last five
fiscal years.

The
graph assumes that $100.00 was invested on December 31, 2003 in FNB Bancorp
Common Stock and each index, and that all dividends were reinvested. Returns
have been adjusted for any stock dividends and stock splits declared by FNB
Bancorp. Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns.

33

---



(FNB Bancorp)

(STOCK PERFORMANCE GRAPH)

|                            |  |               |        |          |  |          |  |          |        |          |  |          |  |  |        |  |  |       | 
|--------------------------- |  | ------------- | ------ | -------- |  | -------- |  | -------- | ------ | -------- |  | -------- |  |  | ------ |  |  | ----- | 
|                            |  | Period Ending |       
|                            |  |               |       
|Index                       |  | 12/31/03      |        | 12/31/04 |  | 12/31/05 |  | 12/31/06 |        | 12/31/07 |  | 12/31/08 | 
|                            |  |               |        |          |  |          |  |          |        |          |  |          | 
|FNB Bancorp                 |  |               | 100.00 |          |  | 122.27   |  |          | 128.50 |          |  | 131.20   |  |  | 98.73  |  |  | 53.86 | 
|Russell 2000                |  |               | 100.00 |          |  | 118.33   |  |          | 123.72 |          |  | 146.44   |  |  | 144.15 |  |  | 95.44 | 
|SNL Bank Pink > $500M Index |  |               | 100.00 |          |  | 116.97   |  |          | 124.48 |          |  | 136.58   |  |  | 125.85 |  |  | 91.32 | 

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 December 31, 2008.
There were 10,457 shares remaining that may be purchased under this Plan as of
December 31, 2008. Effective February 27, 2009, based on the Purchase Agreement
with the U. S. Treasury, the Company may not repurchase Company common stock so
long as the Treasurys Preferred Stock investment is outstanding.

34

---



ITEM 6 - SELECTED FINANCIAL DATA

The
following table presents a summary of selected financial information that
should be read in conjunction with the Companys consolidated financial
statements and notes thereto included under item 8 - FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.

|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|--------------------------------------------------------------------------- |  | --------------------------------------- | --------- | ---- | - | --------- | - | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|                                                                            |  | At and for the years ended December 31, |          
|                                                                            |  |                                         |          
|Dollar amounts in thousands, except
 per share amounts and ratios           |  | 2008                                    |           | 2007 |   | 2006      |   | 2005 |           | 2004 |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|STATEMENT OF INCOME DATA                                                    |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Total interest income                                                       |  | $                                       | 39,427    |      | $ | 42,290    |   | $    | 37,196    |      | $ | 30,732    |   | $ | 24,046    |  
|Total interest expense                                                      |  |                                         | 11,507    |      |   | 13,657    |   |      | 9,821     |      |   | 5,533     |   |   | 2,533     |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net interest income                                                         |  |                                         | 27,920    |      |   | 28,633    |   |      | 27,375    |      |   | 25,199    |   |   | 21,513    |  
|Provision for loan losses                                                   |  |                                         | 3,045     |      |   | 690       |   |      | 683       |      |   | 628       |   |   | 408       |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net interest income after provision for
 loan losses                        |  |                                         | 24,875    |      |   | 27,943    |   |      | 26,692    |      |   | 24,571    |   |   | 21,105    |  
|Total noninterest income                                                    |  |                                         | 5,043     |      |   | 4,300     |   |      | 6,259     |      |   | 3,841     |   |   | 3,787     |  
|Total noninterest expenses                                                  |  |                                         | 25,344    |      |   | 23,182    |   |      | 21,760    |      |   | 20,255    |   |   | 18,627    |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Earnings before taxes                                                       |  |                                         | 4,574     |      |   | 9,061     |   |      | 11,191    |      |   | 8,157     |   |   | 6,265     |  
|Income tax expense                                                          |  |                                         | 611       |      |   | 2,382     |   |      | 3,609     |      |   | 2,429     |   |   | 1,577     |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net earnings                                                                |  | $                                       | 3,963     |      | $ | 6,679     |   | $    | 7,582     |      | $ | 5,728     |   | $ | 4,688     |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|PER SHARE DATA - see note (1)                                               |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net earnings per share:                                                     |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Basic                                                                       |  | $                                       | 1.29      |      | $ | 2.13      |   | $    | 2.42      |      | $ | 1.83      |   | $ | 1.48      |  
|Diluted                                                                     |  | $                                       | 1.28      |      | $ | 2.10      |   | $    | 2.37      |      | $ | 1.80      |   | $ | 1.45      |  
|Cash dividends per share                                                    |  | $                                       | 0.60      |      | $ | 0.60      |   | $    | 0.60      |      | $ | 0.60      |   | $ | 0.60      |  
|Weighted average shares outstanding:                                        |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Basic                                                                       |  |                                         | 3,077,000 |      |   | 3,139,000 |   |      | 3,133,000 |      |   | 3,122,000 |   |   | 3,171,000 |  
|Diluted                                                                     |  |                                         | 3,099,000 |      |   | 3,173,000 |   |      | 3,203,000 |      |   | 3,181,000 |   |   | 3,222,000 |  
|Shares outstanding at period end                                            |  |                                         | 3,030,000 |      |   | 2,965,000 |   |      | 2,853,000 |      |   | 2,700,000 |   |   | 2,586,000 |  
|Book value per share                                                        |  | $                                       | 22.49     |      | $ | 22.44     |   | $    | 21.75     |      | $ | 20.46     |   | $ | 20.35     |  
|                                                                           
|BALANCE SHEET DATA                                                          |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Investment securities                                                       |  |                                         | 99,221    |      |   | 94,432    |   |      | 94,945    |      |   | 113,463   |   |   | 102,823   |  
|Net loans                                                                   |  |                                         | 497,984   |      |   | 489,574   |   |      | 419,437   |      |   | 380,224   |   |   | 341,107   |  
|Allowance for loan losses                                                   |  |                                         | 7,075     |      |   | 5,638     |   |      | 5,002     |      |   | 4,374     |   |   | 3,133     |  
|Total assets                                                                |  |                                         | 660,957   |      |   | 644,465   |   |      | 581,270   |      |   | 569,314   |   |   | 490,255   |  
|Total deposits                                                              |  |                                         | 500,910   |      |   | 499,255   |   |      | 481,567   |      |   | 507,544   |   |   | 413,253   |  
|Shareholders equity                                                        |  |                                         | 68,149    |      |   | 66,545    |   |      | 62,063    |      |   | 55,243    |   |   | 52,629    |  
|                                                                            |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|SELECTED PERFORMANCE DATA                                                   |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Return on average assets                                                    |  |                                         | 0.60      | %    |   | 1.07      | % |      | 1.32      | %    |   | 1.08      | % |   | 1.02      | %
|Return on average equity                                                    |  |                                         | 5.87      | %    |   | 10.39     | % |      | 12.86     | %    |   | 10.75     | % |   | 8.94      | %
|Net interest margin                                                         |  |                                         | 4.75      | %    |   | 5.05      | % |      | 5.26      | %    |   | 5.27      | % |   | 5.14      | %
|Average loans as a percentage of average
 deposits                          |  |                                         | 97.93     | %    |   | 91.74     | % |      | 78.92     | %    |   | 77.80     | % |   | 79.98     | %
|Average total stockholders equity as a
 percentage of average total assets |  |                                         | 10.25     | %    |   | 10.31     | % |      | 10.25     | %    |   | 10.06     | % |   | 11.37     | %
|Dividend payout ratio                                                       |  |                                         | 44.71     | %    |   | 25.69     | % |      | 21.43     | %    |   | 26.92     | % |   | 32.55     | %
|SELECTED ASSET QUALITY RATIOS                                               |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net loan charge-offs to average loans                                       |  |                                         | 0.32      | %    |   | 0.01      | % |      | 0.01      | %    |   | 0.02      | % |   | 0.13      | %
|Allowance for loan losses/Total Loans                                       |  |                                         | 1.40      | %    |   | 1.14      | % |      | 1.18      | %    |   | 1.14      | % |   | 0.91      | %
|CAPITAL RATIOS                                                              |  |                                         |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Total risk-based capital                                                    |  |                                         | 11.86     | %    |   | 11.47     | % |      | 12.00     | %    |   | 11.59     | % |   | 13.50     | %
|Tier 1 risk-based capital                                                   |  |                                         | 10.67     | %    |   | 10.52     | % |      | 11.05     | %    |   | 10.67     | % |   | 12.69     | %
|Tier 1 leverage capital                                                     |  |                                         | 9.70      | %    |   | 9.89      | % |      | 10.08     | %    |   | 9.50      | % |   | 10.72     | %

(1) per share
data has been adjusted for stock dividends.

35

---



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FNB BANCORP AND SUBSIDIARY

Critical Accounting Policies And Estimates

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

Allowance
for Loan Losses

The
allowance for loan losses is periodically evaluated for adequacy by management.
Factors considered include the Companys loan loss experience, known and
inherent risks in the portfolio, current economic conditions, known adverse
situations that may affect the borrowers ability to repay, regulatory
policies, and the estimated value of underlying collateral. The evaluation of
the adequacy of the allowance is based on the above factors along with
prevailing and anticipated economic conditions that may impact borrowers
ability to repay loans. Determination of the allowance is part objective and
part a subjective judgment by management given the information it currently has
in its possession. Adverse changes in any of these factors or the discovery of
new adverse information could result in higher charge-offs and loan loss
provisions.

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.

36

---



Other
Than Temporary Impairment

The
decline in the fair value of any security in the Companys investment portfolio
that is considered other than temporarily impaired is written down with a
charge to noninterest income in the period in which the impairment occurs in an
amount that equals the book value less the fair value of the security. There
are many factors that are considered before an other than temporary impairment
is recorded. These factors include the length of time and the extent to which
market value has been less than cost, reasons for decline in market price 
whether an industry issue or issuer specific, changes in the general market
condition of the area or issuers industry, the issuers financial condition, capital
strength, ability to make timely future payments and any changes in agencies
ratings that drop the securitys rating below investment grade and any
potential legal actions.

Provision
for Income Taxes

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

Recent
Accounting Pronouncements

In December
2007, the Financial Accounting Standards Board (FASB) announced that it had
revised Statement 141, Business Combinations, with 141(R). The revised
Statement No. 141 was written to improve the relevance, representational
faithfulness and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
This Statement establishes principles and requirements for how the acquirer:

| |    |                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Recognizes
 and measures in its financial statements the identifiable assets acquired,
 the liabilities assumed, and any noncontrolling interest in the acquiree
| |    |                                                                                                                                                                 
| | b. | Recognizes
 and measures the goodwill acquired in the business combination or a gain from
 a bargain purchase                                                   
| |    |                                                                                                                                                                 
| | c. | Determines
 what information to disclose to enable users of the financial statements to
 evaluate the nature and financial effects of the business combination  

This Statement
applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company does not expect this Standard to have a
material effect on the Companys financial statements.

37

---



In
December 2007, the Financial Accounting Standards Board (FASB) issued
Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements
 an amendment of ARB No. 51. Statement No. 160 clarifies reporting and
disclosure requirements related to noncontrolling interest included in an
entitys consolidated financial statements. This Statement clarifies that
noncontrolling interests are to be reported in the noncontrolling section of
the balance sheet and requires net income to include amounts from both the
parent and the noncontrolling interest. This Statement also requires the parent
company to recognize a gain or loss in net income when a subsidiary is
deconsolidated. This Statement is effective for fiscal years (and interim
periods within those years), beginning on or after December 15, 2008. The
Company will apply this Statement prospectively and does not expect the
Statement to have a material impact on the Companys financial statements.

In
March, 2008, the Financial Accounting Standards Board (FASB) issued Statement
No. 161 Disclosures About Derivative Instruments and Hedging Activities  an
amendment of FASB Statement No. 133. Statement No. 161 changes the disclosure
requirements for derivative instruments and hedging activities by requiring
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for, and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance and cash flows.
This statement is effective for fiscal years and interim periods beginning
after November 15, 2008. The Company does not expect this Standard to have a
material impact on the Companys financial statements.

In May, 2008
the Financial Accounting Standards Board (FASB) issued Statement No. 162 The
Hierarchy of Generally Accepted Accounting Principles. This new standard is
intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U. S. generally
accepted accounting principles (GAAP) for nongovernmental entities. This
Statement becomes effective 60 days following the SECs approval of the Public
Company Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. The Company
does not expect this Standard to have a material impact on the Companys
financial statements.

Earnings Analysis

Net
earnings in 2008 were $3,963,000, a $2,716,000 or a 40.7% decrease from 2007
earnings of $6,679,000. Earnings for the year 2007 decreased $903,000 or 11.9%
from year 2006 earnings of $7,582,000. The principal source of earnings is
interest income on loans. The Federal Open Market Committee made a series of
significant reductions in the intended federal funds rate in 2008, with a 4.25%
rate on January 1, 2008, ending with a target rate of 0% to 0.25% on December
16, 2008.

Basic
earnings per share were $1.29 in 2008, $2.13 in 2007 and $2.42 in 2006. Diluted
earnings per share were $1.28 in 2008; $2.10 in 2007; and $2.37 in 2006.

38

---



Net
interest income for 2008 was $27,920,000, a decrease of $713,000 or 2.5% from
2007. In 2007 it was $28,633,000, an increase of $1,258,000 or 4.6% from 2006.
Interest income was $39,531,000 in 2008, a decrease of $2,759,000 or 6.5% from
2007. Interest income was $42,290,000 in 2007, an increase of $5,094,000 or
13.7% over 2006. The decrease in net interest income was caused by a decrease
in the interest rate on earning assets which exceed the decrease in the
interest rate on interest bearing liabilities, reflecting the actions of the
Federal Open Market Committee, mentioned above. Most of the interest earning
assets are tied to the prime lending rate, which adjusts immediately, whereas
most of the interest-bearing liabilities adjust on a lagged basis, particularly
in the case of time deposits, which change only at maturity. An increase in the
volume of loans in nonaccrual status of $2,637,000 during 2008 also contributed
to the decline. Average interest earnings assets in 2008 were $598,399,000, an
increase of $31,154,000 or 5.5% over 2007. Average interest earning assets in
2007 were $567,245,000, an increase of $46,315,000 or 8.9% over 2006. The yield
on interest earning assets decreased 79 basis points in 2008 compared to 2007.
The yield on interest earning assets increased 32 basis points in 2007 compared
to 2006. The principal earning assets were loans, and average loans outstanding
increased $30,100,000 in 2008 versus 2007, and $80,269,000 in 2007 versus 2006,
while their yield decreased 100 basis points in 2008 versus 2007, and decreased
10 basis points in 2007 versus 2006.

Interest
expense for 2008 was $11,507,000 compared to $13,657,000 for 2007, a decrease
of $2,150,000 or 15.7%. It increased by $3,836,000 in 2007 over 2006, or 39.1%.
The decrease in interest expense during 2008 and 2007 was caused by rate
decreases on deposits, as rates followed the declines in prevailing short term
market interest rates. The Federal Open Market Committee intended federal funds
rate was 4.25% on December 31, 2007. By December 31, 2008, that rate had been
reduced to a target of 0% to 0.25%. No new branches or significant product
lines were added during 2008. Average interest bearing liabilities were
$463,546,000 in 2008, $426,354,000 in 2007 and $386,254,000 in 2006. This
represented an increase of $37,192,000 in 2008 over 2007, or 8.7%, and an
increase of $40,100,000 or 10.4% in 2007 compared to 2006. The cost of these
liabilities decreased 72 basis points in 2008 compared to 2007, and increased
66 basis points in 2007 compared to 2006. The principal cost was in time
deposits, which decreased 113 basis points in 2008 compared to 2007, and
increased 78 basis points in 2007 compared to 2006.

Net
Interest Income

Net
interest income is the difference between interest yield generated by earning
assets and the interest expense associated with the funding of those assets.
Net interest income is affected by the interest rate earned or paid and by
volume changes in loans, investment securities, deposits and borrowed funds.

39

---



TABLE 1

|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|----------------------------------------------------------- |  | ----------------------------------------- | ------- | --------------------------- | - | ---------------------- |  | ---------------- | ---- | --------------------------- | - | ---------------------- |  | ---------------- | ------ | --------------------------- |  | ---------------------- | - | - | ------- |  | - | ------ |  |  | ---- | -
|                                                            |  | Net Interest Income and
 Average Balances |        
|                                                            |  |                                           |        
|                                                            |  | Year ended December 31                    |        
|                                                            |  | 2008                                      |         | 2007                        |   | 2006                   | 
|                                                            |  |                                           |         |                             |   |                        | 
|(Dollar amounts
 in thousands)                              |  | Average
 Balance                          |         | Interest
 Income
 (Expense) |   | Average
 Yield
 (Cost) |  | Average
 Balance |      | Interest
 Income
 (Expense) |   | Average
 Yield
 (Cost) |  | Average
 Balance |        | Interest
 Income
 (Expense) |  | Average
 Yield
 (Cost) |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |  
|INTEREST EARNING
 ASSETS                                    |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Loans, gross (1)
 (2)                                       |  | $                                         | 497,532 |                             | $ | 35,515                 |  |                  | 7.14 | %                           | $ | 467,432                |  | $                | 38,035 |                             |  | 8.14                   | % | $ | 387,163 |  | $ | 31,898 |  |  | 8.24 | %
|Taxable
 securities (3)                                     |  |                                           | 53,328  |                             |   | 2,248                  |  |                  | 4.22 | %                           |   | 34,323                 |  |                  | 1,733  |                             |  | 5.05                   | % |   | 62,354  |  |   | 2,595  |  |  | 4.16 | %
|Nontaxable
 securities (3)                                  |  |                                           | 42,809  |                             |   | 2,044                  |  |                  | 4.77 | %                           |   | 56,080                 |  |                  | 2,643  |                             |  | 4.71                   | % |   | 57,580  |  |   | 2,664  |  |  | 4.63 | %
|Federal funds
 sold                                         |  |                                           | 4,730   |                             |   | 106                    |  |                  | 2.24 | %                           |   | 9,410                  |  |                  | 487    |                             |  | 5.18                   | % |   | 13,833  |  |   | 683    |  |  | 4.94 | %
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Total interest
 earning assets                              |  | $                                         | 598,399 |                             | $ | 39,913                 |  |                  | 6.67 | %                           | $ | 567,245                |  | $                | 42,898 |                             |  | 7.56                   | % | $ | 520,930 |  | $ | 37,840 |  |  | 7.26 | %
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|NONINTEREST
 EARNING ASSETS:                                |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Cash and due from
 banks                                    |  | $                                         | 17,155  |                             |   |                        |  |                  |      |                             | $ | 17,487                 |  |                  |        |                             |  |                        |   | $ | 19,384  |  |   |        |  |  |      |  
|Premises and
 equipment                                     |  |                                           | 13,648  |                             |   |                        |  |                  |      |                             |   | 13,735                 |  |                  |        |                             |  |                        |   |   | 12,875  |  |   |        |  |  |      |  
|Other assets                                                |  | $                                         | 28,906  |                             |   |                        |  |                  |      |                             |   | 24,924                 |  |                  |        |                             |  |                        |   |   | 21,927  |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Total noninterest
 earning assets                           |  | $                                         | 59,709  |                             |   |                        |  |                  |      |                             | $ | 56,146                 |  |                  |        |                             |  |                        |   | $ | 54,186  |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|TOTAL ASSETS                                                |  | $                                         | 658,108 |                             |   |                        |  |                  |      |                             | $ | 623,391                |  |                  |        |                             |  |                        |   | $ | 575,116 |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|INTEREST BEARING
 LIABILITIES:                              |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Deposits:                                                   |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Demand, interest
 bearing                                   |  | $                                         | 59,472  |                             | $ | 329                    |  |                  | 0.55 | %                           | $ | 59,491                 |  | $                | 416    |                             |  | 0.70                   | % | $ | 62,382  |  | $ | 338    |  |  | 0.54 | %
|Money market                                                |  |                                           | 140,177 |                             |   | 3,259                  |  |                  | 2.32 | %                           |   | 136,672                |  |                  | 4,656  |                             |  | 3.41                   | % |   | 119,779 |  |   | 3,423  |  |  | 2.86 | %
|Savings                                                     |  |                                           | 46,695  |                             |   | 127                    |  |                  | 0.27 | %                           |   | 48,633                 |  |                  | 247    |                             |  | 0.51                   | % |   | 53,965  |  |   | 264    |  |  | 0.49 | %
|Time deposits                                               |  |                                           | 142,895 |                             |   | 4,689                  |  |                  | 3.28 | %                           |   | 140,934                |  |                  | 6,210  |                             |  | 4.41                   | % |   | 132,497 |  |   | 4,814  |  |  | 3.63 | %
|Fed Home Loan
 Bank advances                                |  |                                           | 73,777  |                             |   | 3,084                  |  |                  | 4.18 | %                           |   | 39,482                 |  |                  | 2,070  |                             |  | 5.24                   | % |   | 15,863  |  |   | 880    |  |  | 5.55 | %
|Fed funds
 purchased                                        |  |                                           | 530     |                             |   | 19                     |  |                  | 3.58 | %                           |   | 1,142                  |  |                  | 58     |                             |  | 5.08                   | % |   | 1,768   |  |   | 102    |  |  | 5.77 | %
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Total interest
 bearing liabilities                         |  | $                                         | 463,546 |                             | $ | 11,507                 |  |                  | 2.48 | %                           | $ | 426,354                |  | $                | 13,657 |                             |  | 3.20                   | % | $ | 386,254 |  | $ | 9,821  |  |  | 2.54 | %
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|NONINTEREST BEARING
 LIABILITIES:                           |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Demand deposits                                             |  |                                           | 118,784 |                             |   |                        |  |                  |      |                             |   | 123,766                |  |                  |        |                             |  |                        |   |   | 121,957 |  |   |        |  |  |      |  
|Other liabilities                                           |  |                                           | 8,290   |                             |   |                        |  |                  |      |                             |   | 8,977                  |  |                  |        |                             |  |                        |   |   | 7,944   |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Total noninterest
 bearing liabilities                      |  | $                                         | 127,074 |                             |   |                        |  |                  |      |                             | $ | 132,743                |  |                  |        |                             |  |                        |   | $ | 129,901 |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|Total liabilities                                           |  | $                                         | 590,620 |                             |   |                        |  |                  |      |                             | $ | 559,097                |  |                  |        |                             |  |                        |   | $ | 516,155 |  |   |        |  |  |      |  
|Stockholders
 equity                                       |  | $                                         | 67,488  |                             |   |                        |  |                  |      |                             | $ | 64,294                 |  |                  |        |                             |  |                        |   | $ | 58,961  |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|TOTAL LIABILITIES
 AND STOCKHOLDERS EQUITY                 |  | $                                         | 658,108 |                             |   |                        |  |                  |      |                             | $ | 623,391                |  |                  |        |                             |  |                        |   | $ | 575,116 |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  
|NET INTEREST
 INCOME AND MARGIN ON TOTAL EARNING ASSETS (4) |  |                                           |         |                             | $ | 28,406                 |  |                  | 4.75 | %                           |   |                        |  | $                | 29,241 |                             |  | 5.15                   | % |   |         |  | $ | 28,019 |  |  | 5.38 | %
|                                                            |  |                                           |         |                             |   |                        |  |                  |      |                             |   |                        |  |                  |        |                             |  |                        |   |   |         |  |   |        |  |  |      |  

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

(2) Amounts of interest
earned included loan fees of $1,425,000, $1,593,000 and $1,445,000 for the
years ended December 31, 2008, 2007 and 2006, respectively.

(3) Tax equivalent
adjustments recorded at the statutory rate of 34% that are included in the
nontaxable securities portfolio are $481,000, $608,000 and $625,000 for the
years ended December 31, 2008, 2007 and 2006, respectively, and were derived
from nontaxable municipal interest income. Tax equivalent adjustments recorded
at the statutory rate of 34% that are included in taxable securities portfolio
were created by a dividends received deduction of $5,000, $0 and $19,000 in the
years ended December 31, 2008, 2007 and 2006, respectively.

(4) Net interest margin is
computed by dividing net interest income by total average interest earning
assets.

40

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The following
table analyzes the dollar amount of change in interest income and expense and
the changes in dollar amounts attributable to (a) changes in volume (changes in
volume at the current year rate), (b) changes in rate (changes in rate times
the prior years volume) and (c) changes in rate/volume (changes in rate times
changes in volume). In this table, the dollar change in rate/volume is prorated
to volume and rate proportionately.

TABLE 2

|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|------------------------------- |  | ------------------------------------------- | ------ | ------------------------------------------- | -- | -------------------------- | - | ------------------------- | ----- | ---- | - | ------ | - | -- | ----- | - | -- | ------ | -
|                                |  | Rate/Volume
 Variance Analysis              |       
|                                |  |                                             |       
|                                |  | Year
 Ended December 31                     |       
|                                |  |                                             |       
|                                |  | 2008
 compared to 2007
 Increase (decrease) |        | 2007
 compared to 2006
 Increase (decrease) |   
|                                |  | Interest
 Income/
 Expense                  |        | Variance
 Attributable To                   |    | Interest
 Income/
 Expense |   | Variance
 Attributable To |      
|(Dollar
 amounts in thousands)  |  | Variance                                    |        | Rate                                        |    | Volume                     |   | Variance                  |       | Rate |   | Volume |  
|INTEREST EARNING ASSETS:        |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Loans                           |  | ($                                          | 2,520  | )                                           | ($ | 4,669                      | ) | $                         | 2,149 |      | $ | 6,137  |   | ($ | 394   | ) | $  | 6,531  |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Taxable securities              |  |                                             | 515    |                                             |    | (444                       | ) |                           | 959   |      |   | (862   | ) |    | 305   |   |    | (1,167 | )
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Nontaxable securities           |  |                                             | (599   | )                                           |    | 27                         |   |                           | (626  | )    |   | (21    | ) |    | 48    |   |    | (69    | )
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Federal funds sold              |  |                                             | (381   | )                                           |    | (276                       | ) |                           | (105  | )    |   | (196   | ) |    | 33    |   |    | (229   | )
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Total                           |  | ($                                          | 2,985  | )                                           | ($ | 5,362                      | ) | $                         | 2,377 |      | $ | 5,058  |   | -$ | 8     |   | $  | 5,066  |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|INTEREST BEARING LIABILITIES:   |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Demand deposits                 |  | ($                                          | 87     | )                                           | ($ | 87                         | ) | $                         |      |      | $ | 78     |   | $  | 94    |   | ($ | 16     | )
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Money market                    |  |                                             | (1,397 | )                                           |    | (1,478                     | ) |                           | 81    |      |   | 1,233  |   |    | 658   |   |    | 575    |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Savings deposits                |  |                                             | (120   | )                                           |    | (115                       | ) |                           | (5    | )    |   | (17    | ) |    | 10    |   |    | (27    | )
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Time deposits                   |  |                                             | (1,521 | )                                           |    | (1,607                     | ) |                           | 86    |      |   | 1,396  |   |    | 1,089 |   |    | 307    |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Federal Home Loan Bank advances |  |                                             | 1,014  |                                             |    | (420                       | ) |                           | 1,434 |      |   | 1,190  |   |    | (48   | ) |    | 1,238  |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Federal funds purchased         |  |                                             | (39    | )                                           |    | (17                        | ) |                           | (22   | )    |   | (44    | ) |    | (12   | ) |    | (32    | )
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|Total                           |  | ($                                          | 2,150  | )                                           | ($ | 3,724                      | ) | $                         | 1,574 |      | $ | 3,836  |   | $  | 1,791 |   | $  | 2,045  |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  
|NET INTEREST INCOME             |  | ($                                          | 835    | )                                           | ($ | 1,638                      | ) | $                         | 803   |      | $ | 1,222  |   | ($ | 1,799 | ) | $  | 3,021  |  
|                                |  |                                             |        |                                             |    |                            |   |                           |       |      |   |        |   |    |       |   |    |        |  

41

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In
2008, net interest income represented 84.70% of net revenue (net interest
income plus noninterest income) compared to 86.94% in 2007 and 81.39% in 2006.
The net interest margin on average earning assets was 4.75% in 2008 compared to
5.05% in 2007 and 5.26% in 2006. The average rate earned on interest earning
assets was 6.67% in 2008, up from 7.46% in 2007, and 7.14% in 2006. The average
cost for interest-bearing liabilities was 2.48% in 2008 compared to 3.20% in
2007 and 2.54% in 2006.

As
mentioned above under the heading Earnings Analysis, there were increases in
the prime lending rate during 2006, followed by decreases from 8.25% at the end
of 2006 to 7.25% at the end of 2007, and 3.25% at the end of 2008, as a result
of action by the Federal Open Market Committee of the Federal Reserve, which
affected interest-bearing assets and interest-bearing liabilities.

Yield
on average loans was 7.14% in 2008, 8.14% in 2007 and 8.24% in 2006. Interest
on average taxable securities was 4.22% in 2008, 5.05% in 2007, and 4.13% in
2006. Interest on average nontaxable securities was 4.77% in 2008, 3.63% in
2007 and 3.54% in 2006. Interest on average federal funds sold was 2.24% in
2008, 5.18% in 2007 and 4.94% in 2006. Interest on average total interest
earning assets was 6.67% in 2008, 7.46% in 2007 and 7.14% in 2006. On the
expense side, interest on average interest bearing demand deposits was 0.55% in
2008, 0.70% in 2007 and 0.54% in 2006. Interest on average money market
accounts was 2.32% in 2008, 3.41% in 2007 and 2.86% in 2006. Interest on
average savings accounts was 0.27% in 2008, 0.51% in 2007 and 0.49% in 2006.
Interest on average time deposits was 3.28% in 2008, 4.41% in 2007 and 3.63% in
2006. Interest on average Federal Home Loan Bank advances was 4.18% in 2008,
5.24% in 2007 and 5.55% in 2006. Interest on federal funds purchased was 3.58%
in 2008, 5.08% in 2007 and 5.77% in 2006. Interest on average total interest
bearing liabilities was 2.48% in 2008, 3.20% in 2007 and 2.54% in 2006.

Allowance
For Loan Losses

The
Bank has the responsibility of assessing the overall risks in its loan
portfolio, assessing the specific loss expectancy, and determining the adequacy
of the loan loss reserve. The level of reserves is determined by internally
generating credit quality ratings, reviewing economic conditions in the Banks
market area, and considering the Banks historical loan loss experience. The
Bank is committed to maintaining adequate reserves, identifying credit
weaknesses by consistent review of loans, and maintaining the risk ratings and
changing those risk ratings in a timely manner as circumstances change.

During
2006, the Bank transferred a portion of the allowance for loan losses to
establish a reserve for unfunded loan commitments in a separate account in
Other Liabilities. The Allowance for Loan Losses in Table 3 has been
reclassified for prior years to agree with the current year presentation.

42

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Real
estate loans outstanding increased by $961,000 in 2008 compared to 2007. They
increased by $33,395,000 in 2007 compared to 2006. The proportion of the
Allowance for Loan Losses attributable to real estate loans was $4,712,000 in
2008 compared to $3,669,000 in 2007, and $3,864,000 in 2006. Real estate loans
in 2008 remained nearly the same as in 2007, reflecting tighter underwriting
standards that were imposed during 2008 coupled with the fact that there were
fewer loans available that met those standards. We priced our loans
competitively, but did not discount our loans in order to attract new business.
The real estate loan growth in 2007 and 2006 was primarily the result of
increased market penetration within our existing market area. The perceived
risk in the Real Estate loan portfolio had decreased slightly in 2006 and 2007.
The reserve allocated to these loans was increased in 2008, to mitigate the
risk involved in the current markets. We experienced increased loan charge-offs
and non accrual loans during 2008. The credit quality of our underlying
collateral also deteriorated during 2008, necessitating an increased provision
for loan losses.

The
allowance for loan losses totaled $7,075,000, $5,638,000 and $5,002,000 at
December 31, 2008, 2007, and 2006, respectively. This represented 1.40%, 1.14%
and 1.18% of total loans outstanding on those dates. These balances reflect
amounts that, in managements judgment, are adequate to provide for probable
loan losses based on the considerations listed above. During 2008, the
provision for loan losses was $3,045,000, and the charge-offs were $1,788,000.
During 2007, the provision for loan losses was $690,000, and the charge-offs
were $80,000. In 2006, the provision for loan losses was $683,000, while
charge-offs were $59,000.

TABLE 3

|             |  |                                              |       |                                                       |  |        |   |                                                       |       |        |  |                                                       |   |        |       |                                                       |  |        |   |                                                       |       |  |  |       |   |   |       |  |  |       |  
|------------ |  | -------------------------------------------- | ----- | ----------------------------------------------------- |  | ------ | - | ----------------------------------------------------- | ----- | ------ |  | ----------------------------------------------------- | - | ------ | ----- | ----------------------------------------------------- |  | ------ | - | ----------------------------------------------------- | ----- |  |  | ----- | - | - | ----- |  |  | ----- | -
|             |  | Allocation
 of the Allowance for Loan Losses |      
|             |  |                                              |      
|             |  | (Dollar
 amounts in thousands)               |      
|             |  |                                              |       | 2008                                                  |  |        |   | 2007                                                  |       |        |  | 2006                                                  |   |        |       | 2005                                                  |  |        |   | 2004                                                  |      
|             |  |                                              |       |                                                       |  |        |   |                                                       |       |        |  |                                                       |   |        |       |                                                       |  |        |   |                                                       |      
|             |  | Amount                                       |       | Percent
 of loans
 in each
 category
 to total
 Loans |  | Amount |   | Percent
 of loans
 in each
 category
 to total
 Loans |       | Amount |  | Percent
 of loans
 in each
 category
 to total
 Loans |   | Amount |       | Percent
 of loans
 in each
 category
 to total
 Loans |  | Amount |   | Percent
 of loans
 in each
 category
 to total
 Loans |      
|             |  |                                              |       |                                                       |  |        |   |                                                       |       |        |  |                                                       |   |        |       |                                                       |  |        |   |                                                       |       |  |  |       |   |   |       |  |  |       |  
|             |  |                                              |       |                                                       |  |        |   |                                                       |       |        |  |                                                       |   |        |       |                                                       |  |        |   |                                                       |       |  |  |       |   |   |       |  |  |       |  
|Real Estate  |  | $                                            | 4,712 |                                                       |  | 69.9   | % | $                                                     | 3,669 |        |  | 71.1                                                  | % | $      | 3,864 |                                                       |  | 74.9   | % | $                                                     | 3,373 |  |  | 78.5  | % | $ | 1,940 |  |  | 73.9  | %
|Construction |  |                                              | 1,388 |                                                       |  | 13.0   | % |                                                       | 1,576 |        |  | 11.6                                                  | % |        | 539   |                                                       |  | 8.7    | % |                                                       | 365   |  |  | 6.8   | % |   | 755   |  |  | 8.4   | %
|Commercial   |  |                                              | 932   |                                                       |  | 16.5   | % |                                                       | 370   |        |  | 16.6                                                  | % |        | 582   |                                                       |  | 15.6   | % |                                                       | 611   |  |  | 13.8  | % |   | 415   |  |  | 17.0  | %
|Consumer     |  |                                              | 43    |                                                       |  | 0.6    | % |                                                       | 23    |        |  | 0.7                                                   | % |        | 17    |                                                       |  | 0.8    | % |                                                       | 25    |  |  | 0.9   | % |   | 23    |  |  | 0.7   | %
|             |  |                                              |       |                                                       |  |        |   |                                                       |       |        |  |                                                       |   |        |       |                                                       |  |        |   |                                                       |       |  |  |       |   |   |       |  |  |       |  
|Total        |  | $                                            | 7,075 |                                                       |  | 100.0  | % | $                                                     | 5,638 |        |  | 100.0                                                 | % | $      | 5,002 |                                                       |  | 100.0  | % | $                                                     | 4,374 |  |  | 100.0 | % | $ | 3,133 |  |  | 100.0 | %
|             |  |                                              |       |                                                       |  |        |   |                                                       |       |        |  |                                                       |   |        |       |                                                       |  |        |   |                                                       |       |  |  |       |   |   |       |  |  |       |  

43

---



Table
4 summarizes transactions in the allowance for loan losses and details the
charge-offs, recoveries and net loan losses by loan category for each of the
last five fiscal years ended December 31, 2008. The amount added to the
provision and charged to operating expenses for each period is based on the
risk profile of the loan portfolio.

TABLE 4

|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|---------------------------------------------- |  | ----------------------------------------------- | ------- | ---- | - | ----- | - | ---- | ------ | ---- | - | -------- | - | - | ------- | -
|                                               |  | Allowance
 for Loan Losses
 Historical Analysis |        
|                                               |  |                                                 |        
|                                               |  | For
 the year ended December 31,                |        
|(Dollar amounts in
 thousands)                 |  | 2008                                            |         | 2007 |   | 2006  |   | 2005 |        | 2004 |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Balance at Beginning of Period                 |  | $                                               | 5,638   |      | $ | 5,002 |   | $    | 4,374  |      | $ | 3,133    |   | $ | 3,155   |  
|Provision for Loan Losses                      |  |                                                 | 3,045   |      |   | 690   |   |      | 683    |      |   | 628      |   |   | 408     |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Charge-offs:                                   |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Real Estate                                    |  |                                                 | (493    | )    |   | (48   | ) |      | 0      |      |   | (70      | ) |   | (383    | )
|Commercial                                     |  |                                                 | (1,284  | )    |   | (19   | ) |      | (49    | )    |   | (34      | ) |   | (31     | )
|Consumer                                       |  |                                                 | (11     | )    |   | (13   | ) |      | (10    | )    |   | (6       | ) |   | (17     | )
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Total                                          |  |                                                 | (1,788  | )    |   | (80   | ) |      | (59    | )    |   | (110     | ) |   | (431    | )
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Recoveries:                                    |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Real Estate                                    |  |                                                 | 36      |      |   | 15    |   |      |       |      |   |         |   |   |        |  
|Commercial                                     |  |                                                 | 144     |      |   | 10    |   |      | 3      |      |   | 22       |   |   |        |  
|Consumer                                       |  |                                                 |        |      |   | 1     |   |      | 1      |      |   | 1        |   |   | 1       |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Total                                          |  |                                                 | 180     |      |   | 26    |   |      | 4      |      |   | 23       |   |   | 1       |  
|Net Charge-offs                                |  |                                                 | (1,608  | )    |   | (54   | ) |      | (55    | )    |   | (87      | ) |   | (430    | )
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Allowance acquired in business combination     |  |                                                 |        |      |   |      |   |      |       |      |   | 700      |   |   |        |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Balance at End of Period                       |  | $                                               | 7,075   |      | $ | 5,638 |   | $    | 5,002  |      | $ | 4,374    |   | $ | 3,133   |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|                                               |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Percentages                                    |  |                                                 |         |      |   |       |   |      |        |      |   |          |   |   |         |  
|Allowance for loan losses/total loans          |  |                                                 | 1.40    | %    |   | 1.14  | % |      | 1.18   | %    |   | 1.14     | % |   | 0.92    | %
|Net charge-offs/real estate loans              |  |                                                 | 0.14    | %    |   | 0.01  | % |      | 0.00   | %    |   | 0.02     | % |   | 0.15    | %
|Net charge-offs/commercial loans               |  |                                                 | 1.37    | %    |   | 0.01  | % |      | 0.07   | %    |   | 0.02     | % |   | #VALUE! |  
|Net charge-offs/consumer loans                 |  |                                                 | #VALUE! |      |   | 0.33  | % |      | 0.27   | %    |   | 0.15     | % |   | 0.62    | %
|Net charge-offs/total loans                    |  |                                                 | 0.32    | %    |   | 0.01  | % |      | 0.01   | %    |   | 0.02     | % |   | 0.13    | %
|Allowance for loan losses/non-performing loans |  |                                                 | 50.17   | %    |   | 49.18 | % |      | 190.33 | %    |   | 25729.41 | % |   | 111.97  | %

The increase
in charge-offs during 2008 is primarily related to problems related to specific
borrowers rather than problems with a specific segment of the loan portfolio.
In particular, borrowers who had exposure to real estate projects outside of
San Mateo and San Francisco counties were identified as having a relatively higher
risk profile than those operating solely in these two counties. If real estate
values continue to decline in the future, an increase in our allowance for loan
losses may be warranted.

44

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Non-performing Assets.

Non-performing
assets consist of nonaccrual loans, foreclosed assets, and loans that are 90
days or more past due but are still accruing interest. The accrual of interest
on non-accrual loans is discontinued when, in managements opinion, the
borrower may be unable to meet payments as they become due. For the years ended
December 31, 2008, 2007 and 2006, had non-accrual loans performed as agreed,
approximately $692,000, $547,000, and $70,000, respectively, would have accrued
in additional interest.

Table
5 provides a summary of contractually past due loans for the most recent five
years. Nonperforming loans were 1.8% of total loans at December 31, 2008
compared to 2.4% of total loans at December 31, 2007. Nonperforming loans were
2.4% of total loans at December 31, 2007 compared to 0.6% of total loans at
December 31, 2006. Management believes the current list of past due loans are
collectible and does not anticipate significant losses. Nonperforming loans at
December 31, 2008 include five Real Estate loans compared to four Real Estate
loans at December 31, 2007. The one nonperforming Real Estate loan at the end
of 2006 has since paid off.

TABLE 5

|                               |  |                                   |        |      |   |        |  |      |       |      |   |    |  |   |       | 
|------------------------------ |  | --------------------------------- | ------ | ---- | - | ------ |  | ---- | ----- | ---- | - | -- |  | - | ----- | 
|                               |  | Analysis
 of Nonperforming Assets |       
|                               |  |                                   |       
|                               |  |                                   |        |      |   |        |  |      |       |      |   |    |  |   |       | 
|                               |  | Year
 ended December 31           |       
|                               |  |                                   |       
|(Dollar amounts in thousands)  |  | 2008                              |        | 2007 |   | 2006   |  | 2005 |       | 2004 |  
|                               |  |                                   |        |      |   |        |  |      |       |      |  
|                               |  |                                   |        |      |   |        |  |      |       |      |   |    |  |   |       | 
|Accruing loans 90 days or more |  | $                                 |       |      | $ |       |  | $    |      |      | $ |   |  | $ |      | 
|Nonaccrual loans               |  |                                   | 14,102 |      |   | 11,465 |  |      | 2,628 |      |   | 17 |  |   | 2,798 | 
|Other real estate owned        |  |                                   | 3,557  |      |   | 440    |  |      |      |      |   |   |  |   |      | 
|                               |  |                                   |        |      |   |        |  |      |       |      |   |    |  |   |       | 
|Total                          |  | $                                 | 17,659 |      | $ | 11,905 |  | $    | 2,628 |      | $ | 17 |  | $ | 2,798 | 
|                               |  |                                   |        |      |   |        |  |      |       |      |   |    |  |   |       | 

There was no commitment
to lend additional funds to any customer whose loan was classified as
nonperforming at December 31, 2008, 2007 or 2006.

Nonaccrual
loans at December 31, 2008 consist of several single family residence loans and
commercial loans as well as some commercial real estate loans. The Bank is
working with our borrowers to develop strategies that can give the borrowers
time to work through their financial difficulties. The other real estate owned
consists of two single family residences and a land development parcel. The
Bank is actively marketing these properties. However, given current market
conditions, there can be no assurance that these properties can be sold in the
near future.

45

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Noninterest Income

The
following table sets forth the principal components of noninterest income:

TABLE 6

|                                                    |  |                           |          |                |          |                |  |        |       |         |   |        |   |         |        |   |    |        |   |  |        |  
|--------------------------------------------------- |  | ------------------------- | -------- | -------------- | -------- | -------------- |  | ------ | ----- | ------- | - | ------ | - | ------- | ------ | - | -- | ------ | - |  | ------ | -
|                                                    |  | Noninterest
 Income       |          |                |          |                | 
|                                                    |  |                           | Variance |                | Variance |               
|                                                    |  | Years
 ended December 31, |          | 2008
 vs. 2007 |          | 2007
 vs. 2006 | 
|(Dollar amounts in
 thousands)                      |  | 2008                      |          | 2007           |          | 2006           |  | Amount |       | Percent |   | Amount |   | Percent |       
|                                                    |  |                           |          |                |          |                |  |        |       |         |   |        |   |         |       
|Service charges                                     |  | $                         | 2,888    |                | $        | 2,580          |  | $      | 2,463 |         | $ | 308    |   |         | 11.9   | % | $  | 117    |   |  | 4.8    | %
|Death benefit bank owned life insurance policy      |  |                           | 760      |                |          |               |  |        |      |         |   | 760    |   |         |       |   |    |       |   |  |       |  
|Credit card fees                                    |  |                           | 749      |                |          | 778            |  |        | 839   |         |   | (29    | ) |         | -3.7   | % |    | (61    | ) |  | -7.3   | %
|Gain on sale of other equity securities             |  |                           |         |                |          |               |  |        | 1,352 |         |   |       |   |         |       |   |    | (1,352 | ) |  | -100.0 | %
|Gain on sale of other real estate owned             |  |                           | (2       | )              |          |               |  |        | 756   |         |   |       |   |         |       |   |    | (756   | ) |  | -100.0 | %
|Gain (loss) on sale or impairment of securities AFS |  |                           | (290     | )              |          | 4              |  |        | (11   | )       |   | (294   | ) |         | 7350.0 | % |    | 15     |   |  | 136.4  | %
|Other income                                        |  |                           | 938      |                |          | 938            |  |        | 860   |         |   | 0      |   |         | 0.0    | % |    | 78     |   |  | 9.1    | %
|                                                    |  |                           |          |                |          |                |  |        |       |         |   |        |   |         |        |   |    |        |   |  |        |  
|Total noninterest income                            |  | $                         | 5,043    |                | $        | 4,300          |  | $      | 6,259 |         | $ | 745    |   |         | 17.3   | % | ($ | 1,959  | ) |  | -31.3  | %
|                                                    |  |                           |          |                |          |                |  |        |       |         |   |        |   |         |        |   |    |        |   |  |        |  

Total
noninterest income consists mainly of service charges on deposits. The increase
in service charges on deposits in 2008 over 2007 is primarily attributable to
an increase in non-sufficient-funds fees and ATM surcharge fees. The increased
non-sufficient-funds fees are the result of increased liquidity problems that
some of our deposit customers are facing, stemming from the current economic
downturn. The increase in ATM surcharge fees is a function of increased demand
for cash from our ATM machines by those who do not have a deposit relationship
with the Bank. Noninterest income in 2008 included proceeds from a life
insurance contract related to death benefits received from a policy that was
placed on the life of an executive who is no longer working at the Bank.
Noninterest income in 2006 included a gain on sale of other equity securities
of $1,352,000 related to the sale of Pacific Coast Bankers Bank stock and a
gain of $756,000 on sale of other real estate owned in 2006. The principal
source of Other Income was policy dividends on Officers Life Insurance, which
was $404,000, $364,000, and $304,000 in the years 2008, 2007 and 2006,
respectively, which reflected an increased investment in these policies.

46

---



Noninterest Expenses

The
following table sets forth the various components of noninterest expense:

TABLE 7

|                               |  |                           |          |                |          |                |  |        |        |         |   |        |   |         |       |   |   |       |   |  |       |  
|------------------------------ |  | ------------------------- | -------- | -------------- | -------- | -------------- |  | ------ | ------ | ------- | - | ------ | - | ------- | ----- | - | - | ----- | - |  | ----- | -
|                               |  | Noninterest
 Expenses     |          |                |          |                | 
|                               |  |                           | Variance |                | Variance |               
|                               |  | Years
 ended December 31, |          | 2008
 vs. 2007 |          | 2007
 vs. 2006 | 
|(Dollar amounts in thousands)  |  | 2008                      |          | 2007           |          | 2006           |  | Amount |        | Percent |   | Amount |   | Percent |      
|                               |  |                           |          |                |          |                |  |        |        |         |   |        |   |         |      
|                               |  |                           |          |                |          |                |  |        |        |         |   |        |   |         |       |   |   |       |   |  |       |  
|Salaries and employee benefits |  | $                         | 14,335   |                | $        | 12,778         |  | $      | 12,300 |         | $ | 1,557  |   |         | 12.2  | % |   | 478   |   |  | 3.9   | %
|Occupancy expense              |  |                           | 2,081    |                |          | 1,975          |  |        | 1,728  |         |   | 106    |   |         | 5.4   | % |   | 247   |   |  | 14.3  | %
|Equipment expense              |  |                           | 1,930    |                |          | 1,620          |  |        | 1,665  |         |   | 310    |   |         | 19.1  | % |   | (45   | ) |  | -2.7  | %
|Professional fees              |  |                           | 1,149    |                |          | 1,303          |  |        | 1,278  |         |   | (154   | ) |         | -11.8 | % |   | 25    |   |  | 2.0   | %
|Telephone, postage, supplies   |  |                           | 1,029    |                |          | 1,017          |  |        | 1,056  |         |   | 12     |   |         | 1.2   | % |   | (39   | ) |  | -3.7  | %
|Advertising expense            |  |                           | 686      |                |          | 942            |  |        | 770    |         |   | (256   | ) |         | -27.2 | % |   | 172   |   |  | 22.3  | %
|Bankcard expenses              |  |                           | 697      |                |          | 708            |  |        | 797    |         |   | (11    | ) |         | -1.6  | % |   | (89   | ) |  | -11.2 | %
|Data processing expense        |  |                           | 495      |                |          | 503            |  |        | 452    |         |   | (8     | ) |         | -1.6  | % |   | 51    |   |  | 11.3  | %
|Surety insurance               |  |                           | 842      |                |          | 502            |  |        | 479    |         |   | 340    |   |         | 67.7  | % |   | 23    |   |  | 4.8   | %
|Director expense               |  |                           | 180      |                |          | 195            |  |        | 207    |         |   | (15    | ) |         | -7.7  | % |   | (12   | ) |  | -5.8  | %
|Other                          |  |                           | 1,920    |                |          | 1,639          |  |        | 1,028  |         |   | 281    |   |         | 17.1  | % |   | 611   |   |  | 59.4  | %
|                               |  |                           |          |                |          |                |  |        |        |         |   |        |   |         |       |   |   |       |   |  |       |  
|Total noninterest expense      |  | $                         | 25,344   |                | $        | 23,182         |  | $      | 21,760 |         | $ | 2,162  |   |         | 9.3   | % | $ | 1,422 |   |  | 6.5   | %
|                               |  |                           |          |                |          |                |  |        |        |         |   |        |   |         |       |   |   |       |   |  |       |  

Total
noninterest expenses for the year ended December 31, 2008 were $25,344,000
compared to $23,182,000 and $21,760,000 for the years ended December 31, 2007
and 2006. Salaries and employee benefits were $14,335,000 in 2008, $12,778,000
in 2007, and $12,300,000 in 2006. Salaries and employee benefits represent over
50% of noninterest expense. They increased by 12.2% in 2008 over 2007 and 3.9%
in 2007 over 2006. During the third quarter of 2008, a Call Center was
established; there were also support staff increases in the loan area during
2008. In an effort to stem the increasing salaries and employee benefits costs,
the company instituted a downsizing program, whereby eight staff positions were
eliminated in the fourth quarter. In a further effort to reduce expenses,
advertising expense decreased by $256,000 in 2008 compared to 2007. Within this
category, efficiencies were achieved by decreasing advertising in the media,
community and through advertising agencies, which decreased $185,000. Surety
insurance increased $340,000 in 2008 over 2007. The principal item in this
expense is FDIC insurance, which increased by $378,000, while the remaining
items (Office of the Comptroller of the Currency assessment, Local Agency
assessment and regular insurance) declined $38,000 net in the same period.
Other expense, which includes numerous smaller accounts, increased $281,000 in
2008 over 2007. The principal increase was an Other Real Estate Owned
write-down of $218,000. which is primarily related to a single family residence
in San Jose, while the remaining thirty-seven expense categories increased a
net $63,000. Other expense increased $611,000 in 2007 over 2006, due primarily
to Low Income Housing investment expenses of $219,000. The remaining
thirty-seven expense categories increased a net $392,000.

Balance Sheet Analysis

Total
assets of the Company were $660,957,000, an increase of 2.6% over 2007. Total
assets were $644,465,000 at December 31, 2007, an increase of 10.9% over 2006.
Assets averaged $658.1 million in 2008, compared to $623.4 million in 2007 and
$575.1 million in 2006. Average earning assets increased from $520.9 million in
2006 to $567.2 in 2007 and $598.4 million in 2008. Average earning assets represented
90.6% of total average assets in 2006, 91.0% in 2007 and 90.9% in 2008. Average
interest-bearing liabilities were $386.3 million in 2006, $426.4 million in
2007 and $463.5 million in 2008.

47

---



Loans

The
loan portfolio is the principal earning asset of the Bank. Loans outstanding at
December 31, 2008 increased by $9.8 million or 2.0% over December 31, 2007.
December 31, 2007 increased by $70.8 million or 16.7% over December 31, 2006.

Real
estate loans increased by $1.0 million or 0.3% in 2008 compared to 2007, and
they increased by $33.4 million or 10.5% in 2007 compared to 2006. Construction
loans increased by $8.3 million or 14.4% in 2008 compared to 2007, and they
increased by $20.3 million or 54.6% in 2007 compared to 2006. This increase
occurred despite a tightening in our underwriting standards. Commercial loans
increased by $1.2 million in 2008 or 1.5% compared to 2007, and increased by
$16.1 million in 2007 or 24.3% compared to 2006. Consumer loans represent a
nominal portion of total loans. They decreased by $0.5 million in 2008 or 13.6%
compared to 2007, and they increased $0.4 million in 2007 or 10.9% compared to
2006.

Table
8 presents a detailed analysis of loans outstanding at December 31, 2004
through December 31, 2008.

TABLE 8

|                               |  |                |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|------------------------------ |  | -------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                               |  | Loan Portfolio |        
|                               |  |                |        
|                               |  | December 31    |        
|                               |  |                |        
|(Dollar
 amounts in thousands) |  | 2008           |         | 2007 |   | 2006    |   | 2005 |         | 2004 |  
|                               |  |                |         |      |   |         |   |      |         |      |  
|Real Estate loans              |  | $              | 353,011 |      | $ | 352,050 |   | $    | 318,655 |      | $ | 302,813 |   | $ | 255,433 |  
|Construction loans             |  |                | 65,647  |      |   | 57,362  |   |      | 37,094  |      |   | 26,243  |   |   | 28,997  |  
|Commercial loans               |  |                | 83,442  |      |   | 82,228  |   |      | 66,139  |      |   | 53,070  |   |   | 58,849  |  
|Consumer loans                 |  |                | 3,136   |      |   | 3,636   |   |      | 3,279   |      |   | 3,420   |   |   | 2,589   |  
|                               |  |                |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Sub total                      |  |                | 505,236 |      |   | 495,276 |   |      | 425,167 |      |   | 385,546 |   |   | 345,868 |  
|Net deferred loan fees         |  |                | (177    | )    |   | (64     | ) |      | (728    | )    |   | (948    | ) |   | (1,628  | )
|                               |  |                |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total                          |  | $              | 505,059 |      | $ | 495,212 |   | $    | 424,439 |      | $ | 384,598 |   | $ | 344,240 |  
|                               |  |                |         |      |   |         |   |      |         |      |   |         |   |   |         |  

The
following table shows the Banks loan maturities and sensitivities to changes
in interest rates as of December 31, 2008.

TABLE 9

|                               |  |                            |         |                                             |   |                             |   |       |        |   |   |         |  
|------------------------------ |  | -------------------------- | ------- | ------------------------------------------- | - | --------------------------- | - | ----- | ------ | - | - | ------- | -
|(Dollar
 amounts in thousands) |  | Maturing
 Within One
 Year |         | Maturing
 After One
 But Within
 Five Years |   | Maturing
 After Five
 Years |   | Total |       
|                               |  |                            |         |                                             |   |                             |   |       |       
|Real Estate loans              |  | $                          | 184,190 |                                             |   | 114,207                     |   |       | 54,614 |   | $ | 353,011 |  
|Construction loans             |  |                            | 34,252  |                                             |   | 21,239                      |   |       | 10,156 |   |   | 65,647  |  
|Commercial loans               |  |                            | 43,538  |                                             |   | 26,995                      |   |       | 12,909 |   |   | 83,442  |  
|Consumer loans                 |  |                            | 1,636   |                                             |   | 1,015                       |   |       | 485    |   |   | 3,136   |  
|                               |  |                            |         |                                             |   |                             |   |       |        |   |   |         |  
|Sub total                      |  |                            | 263,616 |                                             |   | 163,456                     |   |       | 78,164 |   |   | 505,236 |  
|Net deferred loan fees         |  |                            | (92     | )                                           |   | (58                         | ) |       | (27    | ) |   | (177    | )
|                               |  |                            |         |                                             |   |                             |   |       |        |   |   |         |  
|Total                          |  | $                          | 263,524 |                                             | $ | 163,398                     |   | $     | 78,137 |   | $ | 505,059 |  
|                               |  |                            |         |                                             |   |                             |   |       |        |   |   |         |  

48

---



Investment Portfolio

Investments
at December 31, 2008 were $99,221,000, an increase of $4,789,000 or 5.1% over
December 31, 2007. At December 31, 2007, they were $94,432,000, a decrease of
$513,000 or 0.5% from 2006.

Available
funds are first used to fund Loans, purchase investments, pay down borrowings,
or sold as Federal Funds. The Companys primary source of funds is the deposit
base. If more funds are needed, investment maturities, calls and sales from the
Investment Portfolio may be used, which accounts for the volume variances in
Investments year over year. The Banks investment portfolio is concentrated in
debt securities of U. S. Government Agencies and in obligations of States and
their political subdivisions. The Bank believes this provides for an
appropriate liquidity level.

The following
table sets forth the maturity distribution and interest rate sensitivity of
investment securities at December 31, 2008:

TABLE 10

|                                 |  |                            |        |       |  |                                        |  |       |        |                                         |  |       |  |                        |        |       |  |             |  |                     |        |                |  |       |  |   |        |  |  |      |  |  |       | 
|-------------------------------- |  | -------------------------- | ------ | ----- |  | -------------------------------------- |  | ----- | ------ | --------------------------------------- |  | ----- |  | ---------------------- | ------ | ----- |  | ----------- |  | ------------------- | ------ | -------------- |  | ----- |  | - | ------ |  |  | ---- |  |  | ----- | 
|(Dollar amounts
 in thousands)   |  | Due
 In One
 Year
 Or Less |        | Yield |  | After
 One
 Year
 Through
 Five
 Years |  | Yield |        | After
 Five
 Years
 Through
 Ten
 Years |  | Yield |  | Due
 After
 Ten
 Years |        | Yield |  | Fair
 Value |  | Maturity
 In
 Years |        | Average
 Yield | 
|                                 |  |                            |        |       |  |                                        |  |       |        |                                         |  |       |  |                        |        |       |  |             |  |                     |        |                | 
|U. S. Government
 Agencies       |  | $                          | 7,723  |       |  | 3.08%                                  |  | $     | 37,589 |                                         |  | 3.56% |  |                        | 1,878  |       |  | 4.46%       |  | $                   | 12,252 |                |  | 5.57% |  | $ | 59,442 |  |  | 2.46 |  |  | 3.94% | 
|States &
 Political Subdivisions |  |                            | 3,817  |       |  | 3.85%                                  |  |       | 23,934 |                                         |  | 3.76% |  |                        | 12,028 |       |  | 3.81%       |  |                     |       |                |  |      |  |   | 39,779 |  |  | 4.23 |  |  | 3.78% | 
|Total                            |  | $                          | 11,540 |       |  | 3.34%                                  |  | $     | 61,523 |                                         |  | 3.64% |  | $                      | 13,906 |       |  | 3.89%       |  | $                   | 12,252 |                |  | 5.57% |  | $ | 99,221 |  |  | 5.31 |  |  | 3.88% | 

The following
table shows the securities portfolio mix at December 31, 2008, 2007 and 2006.

|                                |  |                 |        |             |  |                 |  |             |        |                 |  |             |  |  |        |  |  |        | 
|------------------------------- |  | --------------- | ------ | ----------- |  | --------------- |  | ----------- | ------ | --------------- |  | ----------- |  |  | ------ |  |  | ------ | 
|                                |  |                 |       
|                                |  | 2008            |        |             |  | 2007            |  |             |        | 2006            |  |             | 
|                                |  |                 |       
|(Dollar amounts in
 thousands)  |  | Amortized
 Cost |        | Fair
 Value |  | Amortized
 Cost |  | Fair
 Value |        | Amortized
 Cost |  | Fair
 Value | 
|                                |  |                 |        |             |  |                 |  |             |        |                 |  |             | 
|U.S. Government Agencies        |  | $               | 57,995 |             |  | 59,442          |  |             | 38,370 |                 |  | 38,672      |  |  | 29,197 |  |  | 29,132 | 
|States & Political Subdivisions |  |                 | 38,918 |             |  | 39,779          |  |             | 52,357 |                 |  | 52,760      |  |  | 59,693 |  |  | 59,761 | 
|Corporate Debt                  |  |                 |       |             |  |                |  |             | 2,999  |                 |  | 3,000       |  |  | 3,984  |  |  | 3,974  | 
|Other Securities                |  |                 |       |             |  |                |  |             |       |                 |  |            |  |  | 2,078  |  |  | 2,078  | 
|                                |  |                 |        |             |  |                 |  |             |        |                 |  |             | 
|Total                           |  | $               | 96,913 |             |  | 99,221          |  |             | 93,726 |                 |  | 94,432      |  |  | 94,952 |  |  | 94,945 | 
|                                |  |                 |        |             |  |                 |  |             |        |                 |  |             | 

49

---



Deposits

The
increase in average earning assets in 2008 was funded by increases in average
deposits and from increased Federal Home Loan Bank advances. During 2008,
average deposits were $508,023,000, a decrease of $1,473,000, or 0.3% over
2007. During 2007, average deposits were $509,496,000, an increase of
$18,916,000, or 3.9% over 2006. In 2008, average interest-bearing deposits were
$389,239,000, an increase of $3,509,000, or 0.9% over 2007. In 2007, average
interest-bearing deposits were $385,730,000, an increase of $17,107,000, or
4.6% over 2006. The prime lending rate rose from 5.25% at the beginning of 2005
to 7.25% at the end of 2005 and 8.25% at the end of 2006. The rate did not
change again until September 18, 2007, when it dropped to 7.75%, followed by a
decrease to 7.50% on October 31, 2007 and 7.25% on December 11, 2007. Time
deposits lagged the prime rate changes because their rates changed only as
certificates matured or new certificates were issued. Thus, interest-bearing
demand costs averaged 0.3% in 2005, 0.5% in 2006 and 0.7% in 2007. Money market
deposit costs averaged 2.9% in 2006, 3.4% in 2007 and 2.3% in 2008. Savings
rates averaged 0.5% in 2006 and 2007 and 0.3% in 2008. Finally, average
interest on time certificates of deposit of $100,000 or more was 4.0% in 2006,
4.9% in 2007 and 3.6% in 2008. On certificates under $100,000, average rates
were 3.1% in 2006, 3.7% in 2007 and 2.8% in 2008.

The
following table summarizes the distribution of average deposits and the average
rates paid for them in the periods indicated:

TABLE 12

|                                 |  |                                                                             |         |               |  |                      |   |                  |      |               |   |                      |  |                  |     |               |  |                      |   |   |         |  |  |     |   |  |      |  
|-------------------------------- |  | --------------------------------------------------------------------------- | ------- | ------------- |  | -------------------- | - | ---------------- | ---- | ------------- | - | -------------------- |  | ---------------- | --- | ------------- |  | -------------------- | - | - | ------- |  |  | --- | - |  | ---- | -
|                                 |  | Average Deposits and Average Rates paid for the
 period ending December 31, |        
|                                 |  | 2008                                                                        |         | 2007          |  | 2006                 |  
|                                 |  |                                                                             |         |               |  |                      |  
|(Dollar
 amounts in thousands)   |  | Average
 Balance                                                            |         | Average
 Rate |  | % of total
 Deposits |   | Average
 Balance |      | Average
 Rate |   | % of total
 Deposits |  | Average
 Balance |     | Average
 Rate |  | % of total
 Deposits |  
|                                 |  |                                                                             |         |               |  |                      |  
|Deposits:                        |  |                                                                             |         |               |  |                      |   |                  |      |               |   |                      |  |                  |     |               |  |                      |   |   |         |  |  |     |   |  |      |  
|Interest-bearing demand          |  | $                                                                           | 59,472  |               |  | 0.6                  | % |                  | 11.7 | %             | $ | 59,491               |  |                  | 0.7 | %             |  | 11.7                 | % | $ | 62,382  |  |  | 0.5 | % |  | 12.2 | %
|Money market                     |  |                                                                             | 140,177 |               |  | 2.3                  | % |                  | 27.6 |               |   | 136,672              |  |                  | 3.4 | %             |  | 26.8                 |   |   | 119,779 |  |  | 2.9 | % |  | 23.5 |  
|Savings                          |  |                                                                             | 46,695  |               |  | 0.3                  | % |                  | 9.2  |               |   | 48,633               |  |                  | 0.5 | %             |  | 9.5                  |   |   | 53,965  |  |  | 0.5 | % |  | 10.6 |  
|Time deposits $100,000 or more   |  |                                                                             | 89,705  |               |  | 3.6                  | % |                  | 17.7 |               |   | 85,115               |  |                  | 4.9 | %             |  | 16.7                 |   |   | 73,061  |  |  | 4.0 | % |  | 14.3 |  
|Time deposits under $100,000     |  |                                                                             | 53,190  |               |  | 2.8                  | % |                  | 10.5 |               |   | 55,819               |  |                  | 3.7 | %             |  | 11.0                 |   |   | 59,436  |  |  | 3.1 | % |  | 11.7 |  
|                                 |  |                                                                             |         |               |  |                      |   |                  |      |               |   |                      |  |                  |     |               |  |                      |   |   |         |  |  |     |   |  |      |  
|Total interest bearing
 deposits |  | $                                                                           | 389,239 |               |  | 2.2                  | % |                  | 76.6 |               | $ | 385,730              |  |                  | 3.0 | %             |  | 75.7                 |   | $ | 368,623 |  |  | 2.4 | % |  | 72.4 |  

The following
table indicates the maturity schedule of time deposits of $100,000 or more:

TABLE 13

|                               |  |                                                                  |        |            |  |           |  |        |        |  |  |       | 
|------------------------------ |  | ---------------------------------------------------------------- | ------ | ---------- |  | --------- |  | ------ | ------ |  |  | ----- | 
|                               |  | Analysis of Time Deposits $100,000 or more at
 December 31, 2008 |       
|                               |  |                                                                  |       
|(Dollar
 amounts in thousands) |  |                                                                  |        | Over Three |  | Over Six  |  | Over   |       
|Total
 Deposits                |  | Three Months                                                     |        | To Six     |  | To Twelve |  | Twelve |       
|$100,000
 or more              |  | Or Less                                                          |        | Months     |  | Months    |  | Months |       
|                               |  |                                                                  |        |            |  |           |  |        |       
|90,176                         |  |                                                                  | 50,932 |            |  | 16,686    |  |        | 15,891 |  |  | 6,667 | 

Capital

At
December 31, 2008, shareholders equity of the Company was $68,149,000 an
increase of $1,604,000 or 2.4% over 2007; at December 31, 2007, shareholders
equity of the Company was $66,545,000, an increase of $4,482,000 or 7.2% over
2006. The increases were primarily attributable to retention of net income
after payment of cash dividends of $1,772,000 in 2008, $1,720,000 in 2007 and,
$1,633,000 in 2006.

50

---



In
1989, the Federal Deposit Insurance Corporation (FDIC) established risk-based
capital guidelines requiring banks to maintain certain ratios of qualifying
capital to risk-weighted assets. Under the guidelines, qualifying capital is
classified into two tiers, referred to as Tier 1 (core) and Tier 2
(supplementary) capital. Currently, the Companys Tier 1 capital consists of
common shareholders equity, though other instruments such as certain types of
preferred stock can also be included in Tier 1 capital. Tier 2 capital consists
of eligible reserves for possible loan losses and qualifying subordinated notes
and debentures. Total capital is the sum of Tier 1 plus Tier 2 capital.
Risk-weighted assets are calculated by applying risk percentages specified by
the FDIC to categories of both balance sheet assets and off-balance sheet
obligations. At year-end 1990, the FDIC also adopted a leverage ratio
requirement. This ratio supplements the risk-based capital ratios and is
defined as Tier 1 capital divided by quarterly average assets during the
reporting period. This requirement established a minimum leverage ratio of 3.0%
for the highest rated banks and ratios of 100 to 200 basis points higher for
most other banks. Furthermore, in 1993, the FDIC began assessing risk-based
deposit insurance assessments based on financial institutions capital
resources and management strength, as mandated by the FDIC Improvement Act of
1991. To qualify for the lowest insurance premiums as indicated in the
following table, well-capitalized financial institutions must maintain
risk-based Tier 1 and total capital ratios of at least 6.0% and 10.0%
respectively. Well-capitalized financial institutions must also maintain a
leverage ratio equal to or exceeding 5.0%.

The following
table shows the risk-based capital ratios and the leverage ratios at December
31, 2008, 2007 and 2006 for the Bank.

TABLE 14

|                           |  |       |   |      |       |      |  |       |   |  |                                           |   |  |       |   | 
|-------------------------- |  | ----- | - | ---- | ----- | ---- |  | ----- | - |  | ----------------------------------------- | - |  | ----- | - | 
|Risk-Based
 Capital Ratios |  | 2008  |   | 2007 |       | 2006 |  |       |   |  | Minimum
 Well Capitalized
 Requirements |  
|                           |  |       |   |      |       |      |  |       |   |  |                                           |  
|                          
|Total
 Capital             |  | 11.84 | % |      | 11.42 | %    |  | 11.98 | % |  |                                           | ≥ |  | 10.00 | % | 
|Tier
 1 Capital            |  | 10.65 | % |      | 10.47 | %    |  | 11.03 | % |  |                                           | ≥ |  | 6.00  | % | 
|Leverage
 ratios           |  | 9.68  | % |      | 9.84  | %    |  | 10.06 | % |  |                                           | ≥ |  | 5.00  | % | 

Subsequent to
December 31, 2008, the Company accepted a $12 million dollar investment in
Preferred Shares issue to the U. S. Department of the Treasury. The funds were
subsequently contributed to the Bank. If this capital investment had been
received on December 31, 2008, the Banks risk-based capital ratios would have
been as follows:

|                           |  |                                 |   | 
|-------------------------- |  | ------------------------------- | - | 
|Risk-Based
 Capital Ratios |  | Pro Forma at
 December 31, 2008 |  
|                           |  |                                 |  
|Total
 Capital             |  | 13.78                           | % | 
|Tier 1
 Capital            |  | 12.59                           | % | 
|Leverage
 ratio            |  | 11.29                           | % | 

Liquidity

The
Companys primary source of liquidity on a stand-alone basis is dividends from
the Bank. The payment of dividends by the Bank is subject to regulatory
restrictions. Liquidity is a measure of the Companys ability to convert assets
into cash. Liquidity consists of cash and due from other banks accounts,
including time deposits, federal funds sold, and Securities Available-for-Sale.
The Companys policy is to maintain a liquidity ratio of 5% or greater of total
assets. As of December 31, 2008, the Companys primary liquidity was 17.26%,
compared to 17.10% in 2007 and 20.98% in 2006. Total Liquid Assets were
$114,086,000 in 2008, $110,182,000 in 2007 and $121,967,000 in 2006. The
objective of liquidity management is to ensure that the Company has funds
available to meet all present and future financial obligations and to take
advantage of business opportunities as they occur. Financial obligations arise
from withdrawals of deposits, repayment on maturity of purchased funds,
extension of loans or other forms of credit, payment of operating expenses and
payments of dividends.

51

---



Core
deposits, which consist of all deposits other than time deposits, have provided
the Company with a sizable source of relatively stable low-cost funds. The
Companys average core deposits represented 61.8% of average total liabilities
of $590,620,000 for the year ended December 31, 2008, 65.9% of average total
liabilities of $559,097,000 for the year ended December 31, 2007 and 69.4% of
average total liabilities of $516,155,000 for the year ended December 31, 2006.

As
of December 31, 2008, the Company had contractual obligations and other commercial
commitments totaling approximately $205,553,000. The following table sets forth
the Companys contractual obligations and other commercial commitments as of
December 31, 2008. These obligations and commitments will be funded primarily
by loan repayments and the Companys liquidity sources, such as cash and due
from other banks, federal funds sold, securities available for sale, as well as
time deposits.

TABLE 15

|                                                        |  |                        |        |                 |   |                    |  |                    |       |               |   |     |  |   |     | 
|------------------------------------------------------- |  | ---------------------- | ------ | --------------- | - | ------------------ |  | ------------------ | ----- | ------------- | - | --- |  | - | --- | 
|                                                        |  | Payments Due by Period |       
|(Dollar
 amounts in thousands)
 Contractual Obligations |  | Total                  |        | 1 year
 or less |   | Over 1 to
 3 years |  | Over 3 to
 5 years |       | Over
 5 years |  
|                                                        |  |                        |        |                 |   |                    |  |                    |       |               |  
|                                                       
|Federal Home Loan Bank Advances                         |  | $                      | 86,100 |                 | $ | 81,100             |  | $                  | 5,000 |               |   |    |  |   |    | 
|Operating Leases                                        |  |                        | 1,798  |                 |   | 566                |  |                    | 740   |               |   | 492 |  |   |    | 
|Salary Continuation Agreements                          |  |                        | 1,834  |                 |   | 418                |  |                    | 260   |               |   | 260 |  | $ | 896 | 
|                                                        |  |                        |        |                 |   |                    |  |                    |       |               |   |     |  |   |     | 
|Total Contractual Cash Obligations                      |  | $                      | 89,732 |                 | $ | 82,084             |  | $                  | 6,000 |               | $ | 752 |  | $ | 896 | 
|                                                        |  |                        |        |                 |   |                    |  |                    |       |               |   |     |  |   |     | 

|                                                             |  |                                             |         |                 |   |                    |  |                    |        |               |   |       |  |   |       | 
|------------------------------------------------------------ |  | ------------------------------------------- | ------- | --------------- | - | ------------------ |  | ------------------ | ------ | ------------- | - | ----- |  | - | ----- | 
|                                                             |  | Amount of Commitment Expirations Per Period |        
|(Dollar
 amounts in thousands)
 Other Commercial Commitments |  | Total
 Amounts
 Committed                   |         | 1 year
 or less |   | Over 1 to
 3 years |  | Over 3 to
 5 years |        | Over
 5 years |  
|                                                             |  |                                             |         |                 |   |                    |  |                    |        |               |  
|Lines of Credit                                              |  | $                                           | 73,735  |                 | $ | 60,486             |  | $                  | 6,666  |               | $ | 4,320 |  | $ | 2,263 | 
|Standby Letters of Credit                                    |  |                                             | 2,743   |                 |   | 2,643              |  |                    |       |               |   | 100   |  |   |      | 
|Guarantees                                                   |  |                                             |        |                 |   |                   |  |                    |       |               |   |      |  |   |      | 
|Other Commercial Commitments                                 |  |                                             | 39,343  |                 |   | 29,948             |  |                    | 7,895  |               |   | 1,500 |  |   |      | 
|                                                             |  |                                             |         |                 |   |                    |  |                    |        |               |   |       |  |   |       | 
|Total Commercial Commitments                                 |  | $                                           | 115,821 |                 | $ | 93,077             |  | $                  | 14,561 |               | $ | 5,920 |  | $ | 2,263 | 
|                                                             |  |                                             |         |                 |   |                    |  |                    |        |               |   |       |  |   |       | 

The
largest component of the Companys earnings is net interest income, which can
fluctuate widely when significant interest rate movements occur. The prime
lending rate rose from 5.25% at the beginning of 2005 to 7.25% at the end of
2005 and 8.25% at the end of 2006. The rate decreased to 7.25% at the end of
2007, and to 3.25% at the end of 2008. The Companys management is responsible
for minimizing the Banks exposure to interest rate risk and assuring an
adequate level of liquidity. This is accomplished by developing objectives,
goals and strategies designed to enhance profitability and performance.

52

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Ongoing
management of the Companys interest rate sensitivity in order to keep interest
rate risk levels within acceptable limits. Management can adjust the Banks
interest rate by controlling the mix and maturity of assets and liabilities.
Management regularly reviews the Companys position and evaluates alternative
sources and uses of funds as well as changes in external factors. Various
methods are used to achieve and maintain the desired rate sensitivity position
including the sale or purchase of assets and product pricing.

In
order to ensure that sufficient funds are available for loan growth and deposit
withdrawals, as well as to provide for general needs, the Company must maintain
an adequate level of liquidity. Asset liquidity comes from the Companys
ability to convert short-term investments into cash and from the maturity and
repayment of loans and investment securities. Liability liquidity is provided
by the Companys ability to attract deposits and obtain short term credit
through established borrowing lines. The primary source of liability liquidity
is the Banks customer base, which provides core deposit growth. The overall
liquidity position of the Company is closely monitored and evaluated regularly.
The Company has federal fund borrowing facilities for a total of $40,000,000, a
Federal Home Loan Bank line of credit of up to 30% of total assets, and a Federal
Reserve Bank borrowing facility. Management believes the Companys liquidity
sources at December 31, 2008 are adequate to meet its operating needs in 2009
and into the foreseeable future. Subsequent to December 31, 2008, the Company
received a $12,000,000 investment in Company Preferred Stock from the U. S.
Department of the Treasury. This investment was then contributed to the Bank as
an additional capital contribution. These funds are intended to fund loan
workout programs and to bolster lending activity of the Bank.

Effect of Changing Prices

The
results of operations and financial conditions presented in this report are
based on historical cost information and are not adjusted for the effects of
inflation.

Since
the assets and liabilities of banks are primarily monetary in nature (payable
in fixed, determinable amounts), the performance of the Company is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same.

The
effect of inflation on banks is normally not as significant as its influence on
those businesses that have large investments in plant and inventories. During
periods of high inflation, there are normally corresponding increases in the
money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, increases in the price of goods and services
will result in increased operating expenses.

53

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The
following table includes key ratios, including returns on average assets and
equity.

TABLE 16

|                               |  |                                                                                      |   |      |       |      |  |       |   | 
|------------------------------ |  | ------------------------------------------------------------------------------------ | - | ---- | ----- | ---- |  | ----- | - | 
|                               |  | Return on Equity and Assets
 (Key financial ratios are computed on average balances) |  
|                               |  | Year Ended December 31,                                                              |  
|                               |  | 2008                                                                                 |   | 2007 |       | 2006 | 
|                               |  |                                                                                      |   |      |       |      | 
|Return on average assets       |  | 0.60                                                                                 | % |      | 1.07  | %    |  | 1.32  | % | 
|Return on average equity       |  | 5.87                                                                                 | % |      | 10.39 | %    |  | 12.86 | % | 
|Dividend payout ratio          |  | 44.71                                                                                | % |      | 25.69 | %    |  | 21.43 | % | 
|Average equity to assets ratio |  | 10.25                                                                                | % |      | 10.31 | %    |  | 10.25 | % | 

ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Closely
related to the concept of liquidity is the concept of interest rate sensitivity
(i. e., the extent to which assets and liabilities are sensitive to changes in
interest rates). Management uses an asset/liability model that considers the
relative sensitivities of the balance sheet, including the effect of interest
rate caps on adjustable rate mortgages and the relatively stable aspects of
core deposits. As such, management can model a net interest income simulation
that is designed to address the probability of interest rate changes and
behavioral response of the balance sheet to those changes. Market value of
portfolio equity represents the fair value of the net present value of assets,
liabilities and off-balance sheet items. The starting point (or base case)
for the following table is the Companys net portfolio at December 31, 2008,
using current discount rates, and an estimate of net interest income for 2009
assuming that both interest rates and the Companys interest-sensitive assets
and liabilities remain at December 31, 2008 levels. The rate shock
information in the table shows estimates of net portfolio value at December 31,
2008 and net interest income for 2009 assuming fluctuations or rate shocks of
minus 100 and 200 basis points and plus 100 and 200 basis points. Rate shocks
assume that current interest rates change immediately. The information set
forth in the following table is based on significant estimates and assumptions,
and constitutes a forward-looking statement within the meaning of that term set
forth in Rule 175 under the Securities Act of 1933 and Rule 3b-6(c) of the
Securities Exchange Act of 1934.

54

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TABLE 17

|                              |  |                                                                    |       |      |   |                |  |     |       |     |    |       |   |    |       |  
|----------------------------- |  | ------------------------------------------------------------------ | ----- | ---- | - | -------------- |  | --- | ----- | --- | -- | ----- | - | -- | ----- | -
|(Dollar amounts in thousands) |  | Market Risk in SecuritiesInterest Rate Shock
 At December 31, 2008 |      
|Available for Sale securities |  |                                                                    |       |      |   |                |  |     |       |     |   
|                              |  | Rates Decline                                                      |       |      |   | Rates Increase | 
|                              |  |                                                                    |       |      |   |                | 
|Rate change                   |  | (2%)                                                               |       | (1%) |   | Current        |  | +1% |       | +2% |   
|                              |  |                                                                    |       |      |   |                |  |     |       |     |   
|Unrealized gain (loss)        |  | $                                                                  | 4,708 |      | $ | 3,609          |  | $   | 2,308 |     | $  | 872   |   | $  | (988  | )
|Change from current           |  | $                                                                  | 2,400 |      | $ | 1,301          |  |     |       |     | ($ | 1,436 | ) | ($ | 3,296 | )

|                              |  |                                                          |        |      |   |                |  |     |        |     |   |        |  |   |        | 
|----------------------------- |  | -------------------------------------------------------- | ------ | ---- | - | -------------- |  | --- | ------ | --- | - | ------ |  | - | ------ | 
|(Dollar amounts in thousands) |  | Market Risk on Net Interest Income
 At December 31, 2008 |       
|                              |  | Rates Decline                                            |        |      |   | Rates Increase | 
|                              |  |                                                          |        |      |   |                | 
|Rate change                   |  | (2%)                                                     |        | (1%) |   | Current        |  | +1% |        | +2% |  
|                              |  |                                                          |        |      |   |                |  |     |        |     |  
|Change in net interest income |  | $                                                        | 28,963 |      | $ | 28,380         |  | $   | 27,920 |     | $ | 28,292 |  | $ | 28,776 | 
|Change from current           |  | $                                                        | 1,043  |      | $ | 460            |  |     |        |     | $ | 372    |  | $ | 856    | 

55

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ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

|                                                                                                                                           |  |     
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|INDEX TO
 FINANCIAL STATEMENTS                                                                                                             |  | Page
|                                                                                                                                           |  |     
|Report of Independent Registered Public Accounting
 Firm                                                                                   |  | 57  
|                                                                                                                                           |  |     
|Consolidated Balance Sheets, December 31, 2008 and
 2007                                                                                   |  | 58  
|                                                                                                                                           |  |     
|Consolidated Statements of Earnings for the years
 ended December 31, 2008, 2007 and 2006                                                  |  | 59  
|                                                                                                                                           |  |     
|Consolidated Statements of Changes in Stockholders
 Equity and Comprehensive Income for the years ended December 31, 2008, 2007
 and 2006 |  | 60  
|                                                                                                                                           |  |     
|Consolidated Statements of Cash Flows for the years
 ended December 31, 2008, 2007 and 2006                                                |  | 61  
|                                                                                                                                           |  |     
|Notes to Consolidated Financial Statements                                                                                                 |  | 62  

56

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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
FNB Bancorp and Subsidiary

We have
audited the accompanying consolidated balance sheets of FNB Bancorp and
subsidiary, (the Company) as of December 31, 2008 and 2007 and the related
statements of earnings, changes in stockholders equity and comprehensive
income and cash flows for each of the years in the three year period ended
December 31, 2008. We have also audited FNB Bancorps internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). FNB Bancorps management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility is to express
an opinion on these financial statements and an opinion on the effectiveness of
the Companys internal control over financial reporting based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. An audit of
internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinion.

A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of FNB Bancorp and subsidiary as of
December 31, 2008 and 2007 and the results of its operations and cash flows for
each of the three years in the three year period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion FNB Bancorp maintained, in all material
respects, effective internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control  Integrated
Framework issued by the COSO.

As discussed
in Note 1 to the consolidated financial statements, effective January 1, 2008,
the Company adopted Statement of Financial Accounting Standard No. 157, Fair
Value Measurements.

/s/ Moss Adams, LLP

Stockton, California
March 13, 2009

57

---



FNB
BANCORP AND SUBSIDIARYConsolidated Balance Sheets
December 31, 2008 and 2007

|                                                                                                                                                              |  |      |         |      |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|(Dollar amounts in thousands)                                                                                                                                 |  | 2008 |         | 2007 |  
|                                                                                                                                                              |  |      |         |      |  
|Assets                                                                                                                                                        |  |      |         |      |   |         | 
|Cash and due from banks                                                                                                                                       |  | $    | 14,865  |      | $ | 15,750  | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Cash and cash equivalents                                                                                                                                     |  |      | 14,865  |      |   | 15,750  | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Securities available-for-sale                                                                                                                                 |  |      | 99,221  |      |   | 94,432  | 
|Loans, net of allowance for loan losses of
 $7,075 and $5,638 on December 31, 2008 and 2007                                                                   |  |      | 497,984 |      |   | 489,574 | 
|Bank premises, equipment & leasehold
 improvements                                                                                                            |  |      | 13,030  |      |   | 13,686  | 
|Other real estate owned                                                                                                                                       |  |      | 3,557   |      |   | 440     | 
|Goodwill                                                                                                                                                      |  |      | 1,841   |      |   | 1,841   | 
|Accrued interest receivable & other
 assets                                                                                                                   |  |      | 30,459  |      |   | 28,742  | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Total Assets                                                                                                                                                  |  | $    | 660,957 |      | $ | 644,465 | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Liabilities & Stockholders
 Equity                                                                                                                           |  |      |         |      |   |         | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Deposits:                                                                                                                                                     |  |      |         |      |   |         | 
|Demand, noninterest bearing                                                                                                                                   |  | $    | 121,237 |      | $ | 120,423 | 
|Demand, interest bearing                                                                                                                                      |  |      | 58,451  |      |   | 61,215  | 
|Savings                                                                                                                                                       |  |      | 179,382 |      |   | 181,276 | 
|Time                                                                                                                                                          |  |      | 141,840 |      |   | 136,341 | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Total deposits                                                                                                                                                |  |      | 500,910 |      |   | 499,255 | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Federal Home Loan Bank advances                                                                                                                               |  |      | 86,100  |      |   | 66,000  | 
|Federal funds purchased                                                                                                                                       |  |      |        |      |   | 5,595   | 
|Accrued expenses & other liabilities                                                                                                                          |  |      | 5,798   |      |   | 7,070   | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Total liabilities                                                                                                                                             |  |      | 592,808 |      |   | 577,920 | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Commitments and contingencies (notes 10 and
 14)                                                                                                              |  |      |         |      |   |         | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Stockholders equity:                                                                                                                                         |  |      |         |      |   |         | 
|Common stock, no par value: authorized
 10,000,000 shares; issued and outstanding 3,030,000 and 2,965,000 shares on
 December 31, 2008 and 2007, respectively |  |      | 43,827  |      |   | 43,089  | 
|Retained earnings                                                                                                                                             |  |      | 22,960  |      |   | 23,039  | 
|Accumulated other comprehensive income                                                                                                                        |  |      | 1,362   |      |   | 417     | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Total stockholders equity                                                                                                                                    |  |      | 68,149  |      |   | 66,545  | 
|                                                                                                                                                              |  |      |         |      |   |         | 
|Total liabilities and stockholders equity                                                                                                                    |  | $    | 660,957 |      | $ | 644,465 | 
|                                                                                                                                                              |  |      |         |      |   |         | 

See accompanying notes to consolidated
financial statements.

58

---



FNB BANCORP AND SUBSIDIARYConsolidated Statements of Earnings
Years ended December 31, 2008, 2007 and 2006

|                                                            |  |      |        |      |   |        |  |   |        |  
|----------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|(Amounts
 in thousands, except per share)                   |  | 2008 |        | 2007 |   | 2006   | 
|                                                            |  |      |        |      |   |        | 
|Interest income:                                            |  |      |        |      |   |        |  |   |        |  
|Interest and fees on loans                                  |  | $    | 35,515 |      | $ | 38,035 |  | $ | 31,898 |  
|Interest and dividends on taxable
 securities               |  |      | 2,243  |      |   | 1,733  |  |   | 2,576  |  
|Interest on tax-exempt securities                           |  |      | 1,563  |      |   | 2,035  |  |   | 2,039  |  
|Federal funds sold                                          |  |      | 106    |      |   | 487    |  |   | 683    |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Total interest income                                       |  |      | 39,427 |      |   | 42,290 |  |   | 37,196 |  
|Interest expense:                                           |  |      |        |      |   |        |  |   |        |  
|Deposits                                                    |  |      | 8,404  |      |   | 11,529 |  |   | 8,839  |  
|Federal Home Loan Bank advances                             |  |      | 3,084  |      |   | 2,070  |  |   | 880    |  
|Fed funds purchased                                         |  |      | 19     |      |   | 58     |  |   | 102    |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Total interest expense                                      |  |      | 11,507 |      |   | 13,657 |  |   | 9,821  |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Net interest income                                         |  |      | 27,920 |      |   | 28,633 |  |   | 27,375 |  
|Provision for loan losses                                   |  |      | 3,045  |      |   | 690    |  |   | 683    |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Net interest income after provision for
 loan losses        |  |      | 24,875 |      |   | 27,943 |  |   | 26,692 |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Noninterest income:                                         |  |      |        |      |   |        |  |   |        |  
|Service charges                                             |  |      | 2,888  |      |   | 2,580  |  |   | 2,463  |  
|Death benefit bank owned life insurance
 policy             |  |      | 760    |      |   |       |  |   |       |  
|Credit card fees                                            |  |      | 749    |      |   | 778    |  |   | 839    |  
|Gain on sale of other equity securities                     |  |      |       |      |   |       |  |   | 1,352  |  
|(Loss) gain on sale of other real estate owned              |  |      | (2     | )    |   |       |  |   | 756    |  
|(Loss) gain on impairment and called
 investment securities |  |      | (290   | )    |   | 4      |  |   | (11    | )
|Other                                                       |  |      | 938    |      |   | 938    |  |   | 860    |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Total noninterest income                                    |  |      | 5,043  |      |   | 4,300  |  |   | 6,259  |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Noninterest expense:                                        |  |      |        |      |   |        |  |   |        |  
|Salaries and employee benefits                              |  |      | 14,335 |      |   | 12,778 |  |   | 12,300 |  
|Occupancy expense                                           |  |      | 2,081  |      |   | 1,975  |  |   | 1,728  |  
|Equipment expense                                           |  |      | 1,930  |      |   | 1,620  |  |   | 1,665  |  
|Professional fees                                           |  |      | 1,149  |      |   | 1,303  |  |   | 1,278  |  
|Telephone, postage, supplies                                |  |      | 1,029  |      |   | 1,017  |  |   | 1,056  |  
|Advertising expense                                         |  |      | 686    |      |   | 942    |  |   | 770    |  
|Bankcard expense                                            |  |      | 697    |      |   | 708    |  |   | 797    |  
|Data processing expense                                     |  |      | 495    |      |   | 503    |  |   | 452    |  
|Surety insurance                                            |  |      | 842    |      |   | 502    |  |   | 479    |  
|Director expense                                            |  |      | 180    |      |   | 195    |  |   | 207    |  
|Other                                                       |  |      | 1,920  |      |   | 1,639  |  |   | 1,028  |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Total noninterest expense                                   |  |      | 25,344 |      |   | 23,182 |  |   | 21,760 |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Earnings before income tax expense                          |  |      | 4,574  |      |   | 9,061  |  |   | 11,191 |  
|Income tax expense                                          |  |      | 611    |      |   | 2,382  |  |   | 3,609  |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Net earnings                                                |  | $    | 3,963  |      | $ | 6,679  |  | $ | 7,582  |  
|                                                            |  |      |        |      |   |        |  |   |        |  
|Earnings per share data:                                    |  |      |        |      |   |        |  |   |        |  
|Basic                                                       |  | $    | 1.29   |      | $ | 2.13   |  | $ | 2.42   |  
|Diluted                                                     |  | $    | 1.28   |      | $ | 2.10   |  | $ | 2.37   |  
|Weighted average shares outstanding:                        |  |      |        |      |   |        |  |   |        |  
|Basic                                                       |  |      | 3,077  |      |   | 3,139  |  |   | 3,133  |  
|Diluted                                                     |  |      | 3,099  |      |   | 3,173  |  |   | 3,203  |  

See
accompanying notes to consolidated financial statements.

59

---



FNB
BANCORP AND SUBSIDIARY

Consolidated Statement of Changes in
Stockholders Equity and Comprehensive Income

Years ended December 31, 2008, 2007 and 2006

|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|--------------------------------------------------------------- |  | ------------- | ----- | -------- | - | ------------- | - | ------------- | ------ | ------ | - | ----- | - | - | ----- |  | - | ------ | -
|                                                                |  |               |       |          |   |               |   | Accumulated   |        |        |   |       |  
|                                                                |  |               |       |          |   |               |   | other         |        |        |   |       |  
|                                                                |  | Common
 stock |       | Retained |   | comprehensive |   | Comprehensive |        |        |  
|(Dollar amounts in
 thousands)                                  |  | Shares        |       | Amount   |   | earnings      |   | income(Loss)  |        | income |   | Total |  
|                                                                |  |               |       |          |   |               |   |               |       
|Balance at December 31, 2005                                    |  |               | 2,700 |          | $ | 34,812        |   | $             | 20,832 |        | $ | (401  | ) |   |       |  | $ | 55,243 |  
|Net earnings                                                    |  |               |      |          |   |              |   |               | 7,582  |        |   |      |   | $ | 7,582 |  |   | 7,582  |  
|Other comprehensive income:                                     |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Unrealized gain on securities, net of tax provision of $276     |  |               |      |          |   |              |   |               |       |        |   | 397   |   |   | 397   |  |   | 397    |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Comprehensive income                                            |  |               |       |          |   |               |   |               |        |        |   |       |   | $ | 7,979 |  |   |        |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Cash dividends of $0.15 per share, quarterly                    |  |               |      |          |   |              |   |               | (1,625 | )      |   |      |   |   |       |  |   | (1,625 | )
|Stock dividend of 5%                                            |  |               | 136   |          |   | 4,679         |   |               | (4,679 | )      |   |      |   |   |       |  |   |       |  
|Cash on fractional shares related to stock dividend             |  |               |      |          |   |              |   |               | (8     | )      |   |      |   |   |       |  |   | (8     | )
|Stock-based compensation expense                                |  |               |      |          |   | 39            |   |               |       |        |   |      |   |   |       |  |   | 39     |  
|Stock repurchased and retired                                   |  |               | (2    | )        |   | (73           | ) |               |       |        |   |      |   |   |       |  |   | (73    | )
|Stock options exercised, including tax benefit of $83           |  |               | 19    |          |   | 508           |   |               |       |        |   |      |   |   |       |  |   | 508    |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Balance at December 31, 2006                                    |  |               | 2,853 |          |   | 39,965        |   |               | 22,102 |        |   | (4    | ) |   |       |  |   | 62,063 |  
|Net earnings                                                    |  |               |       |          |   |               |   |               | 6,679  |        |   |       |   | $ | 6,679 |  |   | 6,679  |  
|Other comprehensive income:                                     |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Unrealized gain on securities, net of tax provision of $292     |  |               |      |          |   |              |   |               |       |        |   | 421   |   |   | 421   |  |   | 421    |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Comprehensive income                                            |  |               |       |          |   |               |   |               |        |        |   |       |   | $ | 7,100 |  |   |        |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Cash dividends of $0.15 per share, quarterly                    |  |               |      |          |   |              |   |               | (1,716 | )      |   |      |   |   |       |  |   | (1,716 | )
|Stock dividend of 5%                                            |  |               | 141   |          |   | 4,022         |   |               | (4,022 | )      |   |      |   |   |       |  |   |       |  
|Cash on fractional shares related to stock dividend             |  |               |      |          |   |              |   |               | (4     | )      |   |      |   |   |       |  |   | (4     | )
|Stock-based compensation expense                                |  |               |      |          |   | 68            |   |               |       |        |   |      |   |   |       |  |   | 68     |  
|Stock repurchased and retired                                   |  |               | (46   | )        |   | (1,334        | ) |               |       |        |   |      |   |   |       |  |   | (1,334 | )
|Stock options exercised, including tax benefit of $22           |  |               | 17    |          |   | 368           |   |               |       |        |   |      |   |   |       |  |   | 368    |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Balance at December 31, 2007                                    |  |               | 2,965 |          |   | 43,089        |   |               | 23,039 |        |   | 417   |   |   |       |  |   | 66,545 |  
|Net earnings                                                    |  |               |      |          |   |              |   |               | 3,963  |        |   |      |   | $ | 3,963 |  |   | 3,963  |  
|Other comprehensive income:                                     |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Unrealized gain on securities, net of tax provision of $657,000 |  |               |      |          |   |              |   |               |       |        |   | 945   |   |   | 945   |  |   | 945    |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Comprehensive income                                            |  |               |       |          |   |               |   |               |        |        |   |       |   | $ | 4,908 |  |   |        |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Cash dividends of $0.15 per share, quarterly                    |  |               |      |          |   |              |   |               | (2,226 | )      |   |      |   |   |       |  |   | (2,226 | )
|Stock dividend of 5%                                            |  |               | 146   |          |   | 1,816         |   |               | (1,816 | )      |   |      |   |   |       |  |   |       |  
|Stock-based compensation expense                                |  |               |      |          |   | 171           |   |               |       |        |   |      |   |   |       |  |   | 171    |  
|Stock repurchased and retired                                   |  |               | (92   | )        |   | (1,464        | ) |               |       |        |   |      |   |   |       |  |   | (1,464 | )
|Stock options exercised, including tax benefit of $8            |  |               | 11    |          |   | 215           |   |               |       |        |   |      |   |   |       |  |   | 215    |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  
|Balance at December 31, 2008                                    |  |               | 3,030 |          | $ | 43,827        |   | $             | 22,960 |        | $ | 1,362 |   |   |       |  | $ | 68,149 |  
|                                                                |  |               |       |          |   |               |   |               |        |        |   |       |   |   |       |  |   |        |  

See accompanying
notes to consolidated financial statements.

60

---



FNB BANCORP AND SUBSIDIARYConsolidated Statements of Cash Flows
Years ended December 31, 2008, 2007 and 2006

|                                                                                            |  |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                            |  | 2008 |         | 2007 |   | 2006    |  
|                                                                                            |  |      |         |      |   |         |  
|(Dollar amounts in thousands)                                                               |  |      |         |      |   |         |   |   |         |  
|Cash flows from operating activities:                                                       |  |      |         |      |   |         |   |   |         |  
|Net earnings                                                                                |  | $    | 3,963   |      | $ | 6,679   |   | $ | 7,582   |  
|Adjustments to reconcile net earnings to
 net cash provided by operating activities:        |  |      |         |      |   |         |   |   |         |  
|Depreciation, amortization and accretion                                                    |  |      | 1,928   |      |   | 1,264   |   |   | 1,220   |  
|Loss (gain) on sale or impairment of
 securities available-for-sale                         |  |      | 290     |      |   | (4      | ) |   | 11      |  
|Gain on sale of other equity securities                                                     |  |      |        |      |   |        |   |   | (1,352  | )
|Loss (gain) on sale of other real estate
 owned                                             |  |      | 2       |      |   |        |   |   | (756    | )
|Write-down of other real estate owned                                                       |  |      | 398     |      |   |        |   |   |        |  
|Stock-based compensation expense                                                            |  |      | 171     |      |   | 68      |   |   | 39      |  
|Provision for loan losses                                                                   |  |      | 3,045   |      |   | 690     |   |   | 683     |  
|Deferred taxes                                                                              |  |      | (470    | )    |   | (306    | ) |   | (7      | )
|(Increase) decrease in interest receivable
 and other assets                                |  |      | (1,249  | )    |   | (1,806  | ) |   | 669     |  
|(Decrease) increase in accrued expenses and
 other liabilities                              |  |      | (2,385  | )    |   | (861    | ) |   | 1,011   |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Net cash provided by operating activities                                                   |  |      | 5,693   |      |   | 5,724   |   |   | 9,100   |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                       |  |      |         |      |   |         |   |   |         |  
|Proceeds from matured/called securities
 available-for-sale                                 |  |      | 58,445  |      |   | 37,159  |   |   | 65,092  |  
|Purchases of securities available-for-sale                                                  |  |      | (62,253 | )    |   | (38,005 | ) |   | (45,949 | )
|Proceeds from sale of other real estate
 owned                                              |  |      |        |      |   |        |   |   | 3,356   |  
|Net increase in loans                                                                       |  |      | (14,970 | )    |   | (71,267 | ) |   | (40,069 | )
|Proceeds from sales of bank premises,
 equipment, and leasehold improvements                |  |      | 15      |      |   |        |   |   | 541     |  
|Purchases of bank premises, equipment, and
 leasehold improvements                          |  |      | (956    | )    |   | (1,479  | ) |   | (3,172  | )
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Net cash used in investing activities                                                       |  |      | (19,719 | )    |   | (73,592 | ) |   | (20,201 | )
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Cash flows from financing activities:                                                       |  |      |         |      |   |         |   |   |         |  
|Net (decrease) increase in demand and
 savings deposits                                     |  |      | (3,843  | )    |   | 15,736  |   |   | (19,534 | )
|Net increase (decrease) in time deposits                                                    |  |      | 5,499   |      |   | 1,951   |   |   | (6,443  | )
|Increase in FHLB advances                                                                   |  |      | 20,100  |      |   | 36,000  |   |   | 30,000  |  
|Net (decrease) increase in federal funds
 purchased                                         |  |      | (5,595  | )    |   | 5,595   |   |   |        |  
|Cash dividends paid                                                                         |  |      | (1,771  | )    |   | (1,720  | ) |   | (1,633  | )
|Exercise of stock options including tax
 benefit of $8 in 2008, $22 in 2007 and $83 in 2006 |  |      | 215     |      |   | 368     |   |   | 508     |  
|Repurchases of common stock                                                                 |  |      | (1,464  | )    |   | (1,334  | ) |   | (73     | )
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Net cash provided by financing activities                                                   |  |      | 13,141  |      |   | 56,596  |   |   | 2,825   |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Net increase (decrease) in cash and cash
 equivalents                                       |  |      | (885    | )    |   | (11,272 | ) |   | (8,276  | )
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Cash and cash equivalents at beginning of
 year                                             |  |      | 15,750  |      |   | 27,022  |   |   | 35,298  |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                                    |  | $    | 14,865  |      | $ | 15,750  |   | $ | 27,022  |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|                                                                                            |  |      |         |      |   |         |   |   |         |  
|Additional cash flow information:                                                           |  |      |         |      |   |         |   |   |         |  
|Interest paid                                                                               |  | $    | 12,226  |      | $ | 13,215  |   | $ | 9,533   |  
|Income taxes paid                                                                           |  |      | 1,590   |      |   | 2,335   |   |   | 4,020   |  
|Noncash - stock dividend                                                                    |  |      | 4,141   |      |   | 4,022   |   |   | 4,679   |  
|Change in unrealized gain(loss) in
 securities available-for-sale                           |  |      | 945     |      |   | 421     |   |   | 397     |  
|Loans transferred to Other Real Estate Ow
 ned                                              |  |      | 3,515   |      |   | 440     |   |   |        |  

See
accompanying notes to consolidated financial statements.

61

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FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company and Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | FNB Bancorp
 (the Company) is a bank holding company registered under the Bank Holding
 Company Act of 1956, as amended. The Company was incorporated under the laws
 of the State of California on February 28, 2001. The consolidated financial
 statements include the accounts of FNB Bancorp and its wholly owned subsidiary,
 First National Bank of Northern California (the Bank). The Bank provides
 traditional banking services in San Mateo and San Francisco counties.                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The
 preparation of consolidated financial statements in conformity with
 accounting principles generally accepted in the United States of America
 requires management to make estimates and assumptions that affect the
 reported amounts of assets and liabilities and the disclosure of contingent
 assets and liabilities at the date of the financial statements and revenue
 and expenses during the reporting period. Actual results could differ from
 those estimates. For the Bank, the significant accounting estimate is the
 allowance for loan losses (note 1f). A summary of the significant accounting
 policies applied in the preparation of the accompanying consolidated
 financial statements follows.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Basis of
 Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The
 accounting and reporting policies of the Company and its wholly owned
 subsidiary are in accordance with accounting principles generally accepted in
 the United States of America. All intercompany balances and transactions have
 been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Cash and Cash
 Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Cash and
 cash equivalents include cash on hand, amounts due from banks, and federal
 funds sold. Generally, federal funds are sold for one-day periods. The cash
 equivalents are readily convertible to known amounts of cash and present
 insignificant risk of changes in value due to original maturity dates of 90
 days or less. Included in cash and cash equivalents are amounts restricted
 for the Federal Reserve requirement of approximately $3,046,000 and $791,000
 at December 31, 2008 and 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Investment
 Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Investment
 securities consist of U.S. Treasury securities, U.S. agency securities,
 obligations of states and political subdivisions, obligations of U.S.
 corporations, mortgage-backed securities and other securities. At the time of
 purchase of a security, the Company designates the security as
 held-to-maturity or available-for-sale, based on its investment objectives,
 operational needs, and intent to hold. The Company does not purchase
 securities with the intent to engage in trading activity. Held to maturity
 securities are recorded at amortized cost, adjusted for amortization of
 premiums or accretion of discounts. The Company did not have any investments
 in the held-to-maturity portfolio at December 31, 2008 or 2007. Securities
 available-for-sale are recorded at fair value with unrealized holding gains
 or losses, net of the related tax effect, reported as a separate component of
 stockholders equity until realized. A decline in the market value of any
 security available-for-sale or held-to-maturity below cost that is deemed
 other than temporary results in a charge to earnings and the corresponding
 establishment of a new cost basis for the security. Amortization of premiums
 and accretion of discounts on debt securities are included in interest income
 over the life of the related security held-to-maturity or available-for-sale using
 the effective interest method. Dividend and interest income are recognized
 when earned. Realized gains and losses for securities classified as
 available-for-sale and held-to-maturity are included in earnings and are
 derived using the specific identification method for determining the cost of
 securities sold.

62

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (d) | Derivatives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | All
 derivatives contracts are recognized as either assets or liabilities in the
 balance sheet and measured at fair value. The Company did not hold any
 derivative contracts at December 31, 2008 and 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (e) | Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Loans are
 reported at the principal amount outstanding, net of deferred loan fees and
 the allowance for loan losses. A loan is considered impaired when, based on
 current information and events, it is probable that the Company will be
 unable to collect all amounts due according to the contractual terms of the
 loan agreement, including scheduled interest payments. For a loan that has
 been restructured, the contractual terms of the loan agreement refer to the
 contractual terms specified by the original loan agreement, not the
 contractual terms specified by the restructuring agreement. An impaired loan
 is measured based upon the present value of future cash flows discounted at
 the loans effective rate, the loans observable market price, or the fair
 value of collateral if the loan is collateral dependent. Interest on impaired
 loans is recognized on a cash basis. If the measurement of the impaired loan
 is less than the recorded investment in the loan, an impairment is recognized
 by a charge to the allowance for loan losses. An unearned discount on
 installment loans is recognized as income over the terms of the loans by the
 interest method. Interest on other loans is calculated by using the simple
 interest method on the daily balance of the principal amount outstanding.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Loan fees
 net of certain direct costs of origination, which represent an adjustment to
 interest yield, are deferred and amortized over the contractual term of the
 loan using the interest method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

63

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | Loans on
 which the accrual of interest has been discontinued are designated as
 nonaccrual loans. Accrual of interest on loans is discontinued either when
 reasonable doubt exists as to the full and timely collection of interest or
 principal when a loan becomes contractually past due by 90 days or more with
 respect to interest or principal. When a loan is placed on nonaccrual status,
 all interest previously accrued but not collected is reversed against current
 period interest income. Interest accruals are resumed on such loans only when
 they are brought fully current with respect to interest and principal and
 when, in the judgment of management, the loans are estimated to be fully
 collectible as to both principal and interest. Restructured loans are loans
 on which concessions in terms have been granted because of the borrowers
 financial difficulties. Interest is generally accrued on such loans in
 accordance with the new terms. Net interest written off in 2008 was $692,000
 (see Allowance for Loan Losses discussed in the Management Discussion and
 Analysis section).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (f) | Allowance for Loan
 Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The
 allowance for loan losses is established through a provision for loan losses
 charged to expense. Loans are charged off against the allowance for loan
 losses when management believes that the collectibility of the principal is
 unlikely. The allowance is an amount that management believes will be
 adequate to absorb probable losses inherent in existing loans, standby
 letters of credit, overdrafts, and commitments to extend credit based on
 evaluations of collectibility and prior loss experience. The evaluations take
 into consideration such factors as changes in the nature and volume of the
 portfolio, overall portfolio quality, loan concentrations, specific problem
 loans and current and anticipated economic conditions that may affect the
 borrowers ability to pay. While management uses these evaluations to
 determine the level of the allowance for loan losses, future provisions may
 be necessary based on changes in the factors used in the evaluations.
 Material estimates relating to the determination of the allowance for loan
 losses are particularly susceptible to significant change in the near term.
 Management believes that the allowance for loan losses is adequate as of
 December 31, 2008. While management uses available information to recognize
 losses on loans, future additions to the allowance may be necessary based on
 changes in economic conditions, and our borrowers ability to pay. In
 addition, the banking regulators, as an integral part of its examination
 process, periodically review the Banks allowance for loan losses. The
 banking regulators may require the Bank to recognize additions to the
 allowance based on their judgment about information available to them at the
 time of their examination.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (g) | Premises and
 Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Premises and
 equipment are reported at cost less accumulated depreciation using the
 straight-line method over the estimated service lives of related assets
 ranging from 3 to 50 years original life. Leasehold improvements are
 amortized over the estimated lives of the respective leases or the service
 lives of the improvements, whichever is shorter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

64

---



FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (h) | Cash Dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The
 Companys ability to pay cash dividends is subject to restrictions set forth
 in the California General Corporation Law. Funds for payment of any cash
 dividends by the Company would be obtained from its investments as well as dividends
 and/or management fees from First National Bank. First National Banks
 ability to pay cash dividends is subject to restrictions imposed under the
 National Bank Act and regulations promulgated by the Office of the
 Comptroller of the Currency.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (i) | Stock Dividend                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | On October
 24, 2008, the Company announced that its Board of Directors had declared a
 five percent (5%) stock dividend resulting in approximately 145,310 shares,
 payable at the rate of one share of Common Stock for every twenty (20) shares
 of Common Stock owned. The stock dividend was paid on December 15, 2008, to
 shareholders of record on November 28, 2008. The earnings per share data for
 all periods presented has been adjusted for this stock dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (j) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Deferred
 income taxes are determined using the assets and liabilities method. Under
 this method, the net deferred tax asset or liability is recognized for tax
 consequences of temporary differences by applying current tax rates to
 differences between the financial reporting and the tax basis of existing
 assets and liabilities. Deferred tax assets and liabilities are reflected at
 currently enacted income tax rates applicable to the period in which the
 deferred tax assets or liabilities are expected to be realized or settled. A
 valuation allowance is established through the provision for income taxes for
 any deferred tax assets where the collectibility of the asset is in doubt.
 During 2008, the Company recorded a tax valuation of $368,000. As changes in
 tax laws or rates are enacted, deferred tax assets and liabilities are
 adjusted through the provision for income taxes.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Accounting for
 Income Tax Uncertainties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The Company
 adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
 in Income Taxes, on January 1, 2007. The Company had no unrecognized tax
 benefits which would require adjustment to the January 1, 2007 beginning
 balance of retained earnings. The Company had unrecognized tax benefits of
 $37,500 at December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The Company
 recognizes interest accrued and penalties related to unrecognized tax
 benefits in tax expense. During the years ended December 31, 2008 and 2007
 the Company believes that any penalties and interest penalties that may exist
 are not material and have not been accrued for.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

65

---



FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (k) | Earnings per Share                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Basic
 earnings per share is computed by dividing net income by the weighted average
 common shares outstanding. Diluted earnings per share reflects potential
 dilution from outstanding stock options, using the treasury stock method.
 There were 305,258 and 44,290 antidilutive shares in the years ended December
 31, 2008 and 2007, respectively. There were no antidilutive shares in the
 year ended December 31, 2006.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | For each of
 the years presented, net income is the same for basic and diluted earnings
 per share. Reconciliation of weighted average shares used in computing basic
 and diluted earnings per share is as follows:                                                                                                                                                                                                              

|                                                                                       |  |       |  |      |       |      |  |       |  | 
|-------------------------------------------------------------------------------------- |  | ----- |  | ---- | ----- | ---- |  | ----- |  | 
|(Number
 of shares in thousands)                                                       |  | 2008  |  | 2007 |       | 2006 | 
|                                                                                       |  |       |  |      |       |      | 
|Weighted average common shares
 outstanding-used in computing basic earnings per share |  | 3,077 |  |      | 3,139 |      |  | 3,133 |  | 
|Dilutive effect of stock options
 outstanding, using the treasury stock method         |  | 22    |  |      | 34    |      |  | 70    |  | 
|                                                                                       |  |       |  |      |       |      |  |       |  | 
|Shares used in computing diluted earnings
 per share                                   |  | 3,099 |  |      | 3,173 |      |  | 3,203 |  | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (l) | Stock Option Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Effective
 January 1, 2006, the Company adopted SFAS No. 123(R) Share-Based Payment.
 Measurement of the cost of stock options granted is based on the grant-date
 fair value of each stock option granted using the Black-Scholes valuation
 model. The cost is then amortized to expense on a straight-line basis over
 each options vesting period. The amortized expense of the stock options
 fair value has been included in salaries and employee benefits expense for
 the three years ended December 31, 2008, 2007 and 2006. The expected term of
 options granted is derived from the output of the option valuation model and
 represents the period of time that options granted are expected to be
 outstanding. The risk-free rate for periods within the contractual life of
 the option is based on the U. S. Treasury yield curve in effect at the time
 of the grant. FNB Bancorp stock has limited liquidity and limited trading
 activity. Volatility was calculated using historical price changes on a
 monthly basis over the expected life of the option.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (m) | Fair Values of
 Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Effective
 January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements,
 which requires enhanced disclosures about financial instruments carried at
 fair value. SFAS No. 157 establishes a disclosure framework that quantifies
 fair value estimates by the level of pricing precision. The degree of
 judgment utilized in measuring the fair value of assets generally correlates
 to the level of pricing precision. Financial instruments rarely traded or not
 quoted will generally have a higher degree of judgment utilized in measuring
 fair value. Pricing precision is impacted by a number of factors including
 the type of asset, the availability of the asset, the market demand for the
 asset, and other conditions that were considered at the time of the
 valuation. See Fair Value Measurements for additional information about the
 level of pricing transparency associated with the financial instruments
 carried at fair value.                                                                                                     

66

---



FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fair Value
 Measurement. The following tables present
 information about the Companys assets and liabilities measured at fair value
 as of December 31, 2008, and indicates the fair value techniques used by the
 Company to determine such fair value. In general, fair values determined by
 Level 1 inputs utilize quoted prices (unadjusted) in active markets for
 identical assets or liabilities that the Company has the ability to access.
 Level 2 inputs include quoted prices for similar assets and liabilities in
 active markets, and inputs other than quoted prices that are observable for
 the asset or liability, such as interest rates and yield curves that are
 observable at commonly quoted intervals. Level 3 inputs are unobservable inputs
 for the asset or liability, and include situations where there is little, if
 any, market activity for the asset or liability. In certain cases, the inputs
 used to measure fair value may fall into different levels of the fair value
 hierarchy. In such cases, the level in the fair value hierarchy within which
 the fair value measurement in its entirety falls has been determined based on
 the lowest level input that is significant to the fair value measurement in
 its entirety. The Companys assessment of the significance of a particular
 input to the fair value measurement in its entirety requires judgment, and
 considers factors specific to the asset or liability.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The
 following table presents the recorded amounts of assets measured at fair
 value on a recurring basis:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                    |  |                        |        |                                                                    |   |                                      |  |                                              |        |  |   |   | 
|----------------------------------- |  | ---------------------- | ------ | ------------------------------------------------------------------ | - | ------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|(Dollar amounts in thousands)       |  |                        |        | Fair Value Measurements
 at December 31, 2008, Using               |  
|                                    |  |                        |        |                                                                    |  
|Description                         |  | Fair Value
 12/31/2008 |        | Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1) |   | Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|Available-for-sale securities       |  | $                      | 99,221 |                                                                    | $ |                                     |  | $                                            | 99,221 |  | $ |  | 
|                                    |  |                        |        |                                                                    |   |                                      |  |                                              |        |  |   |   | 
|Total assets measured at fair value |  | $                      | 99,221 |                                                                    | $ |                                     |  | $                                            | 99,221 |  | $ |  | 
|                                    |  |                        |        |                                                                    |   |                                      |  |                                              |        |  |   |   | 

67

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

| |  |                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
 following methods were used to estimate the fair value of each class of
 financial instrument above:                                                                                                                                   
| |  |                                                                                                                                                                                                                                             
| |  | Available-for-sale-Securities.
 Fair values established for available-for-sale investment securities are
 based on estimates of fair values quoted for similar types of securities with
 similar maturities, risk and yield characteristics.
| |  |                                                                                                                                                                                                                                             
| |  | The
 following table presents the recorded amount of assets measured at fair value
 on a non-recurring basis:                                                                                                                               

|                                            |  |                                                      |        |                                                                    |   |                                      |  |                                              |   |               |   |        |  |   |      |  
|------------------------------------------- |  | ---------------------------------------------------- | ------ | ------------------------------------------------------------------ | - | ------------------------------------ |  | -------------------------------------------- | - | ------------- | - | ------ |  | - | ---- | -
|                                            |  |                                                      |        |                                                                    |   |                                      |  |                                              |   |               |  
|(Dollar amounts in thousands)               |  | Fair Value Measurements
 at December 31, 2008, Using |        |                                                                    |  
|                                            |  |                                                      |        |                                                                    |   |                                      | 
|Description                                 |  | Fair Value
 12/31/2008                               |        | Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1) |   | Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |   | Total
 losses |  
|Impaired loans                              |  | $                                                    | 13,440 |                                                                    | $ |                                     |  | $                                            |  |               | $ | 13,440 |  | $ | (678 | )
|                                            |  |                                                      |        |                                                                    |   |                                      |  |                                              |   |               |   |        |  |   |      |  
|Total impaired loans measured at fair value |  | $                                                    | 13,440 |                                                                    | $ |                                     |  | $                                            |  |               | $ | 13,440 |  | $ | (678 | )
|                                            |  |                                                      |        |                                                                    |   |                                      |  |                                              |   |               |   |        |  |   |      |  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Impaired
 Loans. The Bank does not record loans at fair value.
 However, from time to time, if a loan is considered impaired, and a specific
 allowance for loan losses is established, 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. Once a loan
 is identified as individually impaired, management measures impairment in
 accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
 Loan. In accordance with SFAS No. 157, impaired loans where a specific
 allowance is established based on the fair value of collateral 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 2. 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 records the impaired loans as nonrecurring
 Level 3. Specific reserves of $678,000 have been established for impaired
 loans as of December 31, 2008.

68

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (n) | Income Tax Credits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | At December
 31, 2008, the Bank had a $2,529,000 equity investment in three partnerships,
 which own low-income affordable housing projects that generate tax benefits
 in the form of federal and state housing tax credits. As a limited partner
 investor in these partnerships, the Company receives tax benefits in the form
 of tax deductions from partnership operating losses and federal and state
 income tax credits. The federal and state income tax credits are earned over
 a 10-year period as a result of the investment properties meeting certain
 criteria and are subject to recapture for noncompliance with such criteria
 over a 15-year period. The expected benefit resulting from the low-income
 housing tax credits is recognized in the period for which the tax benefit is
 recognized in the Companys consolidated tax returns. These investments are
 accounted for using the effective yield method and are recorded in other
 assets on the balance sheet. Under the effective yield method, the Company
 recognizes tax credits as they are allocated and amortizes the initial cost
 of the investments to provide a constant effective yield over the period that
 tax credits are allocated to the Company. The effective yield is the internal
 rate of return on the investment, based on the cost of the investment and the
 tax credits allocated to the Company. The expected residual value of the
 investment is zero and therefore was excluded from the effective yield
 calculation. Cash received from operations of the limited partnership or sale
 of the properties, if any, will be included in earnings when realized.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (o) | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | Certain
 prior year information has been reclassified to conform to current year
 presentation. The reclassifications had no impact on net income or retained
 earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (p) | Bank Owned Life Insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The Company
 purchased insurance on the lives of certain executives. The policies
 accumulate asset values to meet future liabilities including the payment of
 employee benefits such as the deferred compensation plan. Increases in the
 cash surrender value are recorded as other noninterest income in the
 consolidated statements of income. The cash surrender value of bank owned
 life insurance is reflected in other assets on the consolidated balance
 sheets in the amount of $10,781,000 and $9,617,000 at December 31, 2008 and
 2007, respectively. During 2008, the Company realized $760,000 in death
 benefits from a life insurance contract covering a former executive of the
 Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (q) | Federal Home Loan Bank Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The Bank
 maintains a collateralized line of credit with the Federal Home Loan Bank
 (FHLB) of San Francisco. Under this line, the Bank may borrow on a short
 term or a long term (over one year) basis. FHLB advances are recorded and
 carried at their historical cost. FHLB advances are not transferable and may
 contain prepayment penalties. In addition to the collateral pledged, the
 Company is required to hold prescribed amounts of FHLB stock that vary with
 the usage of FHLB credits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

69

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                 
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (r) | Recently Issued Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                 
| |     | In February
 2007, the Financial Accounting Standards Board (FASB) issued Statement No.
 159 The Fair Value Option for Financial Assets and Financial Liabilities 
 Including an amendment of FASB Statement No. 115. Statement No. 159
 establishes a fair value option that allows an entity to designate individual
 financial assets and liabilities as fair value option instruments. Under the
 fair value option, the change in unrealized gains and losses created by the change
 in fair value of financial instruments shall be reported in an entitys
 earnings for each reporting period. Additional disclosures regarding fair
 value for financial assets and liabilities accounting for under the fair
 value option are also required. This statement is effective as of the
 beginning of an entitys first fiscal year that begins after November 15,
 2007. The Company did not elect the fair value option for any of its
 financial assets or liabilities and therefore the adoption did not have a material
 effect.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                 
| |     | In December
 2007, the Financial Accounting Standards Board (FASB) announced that it had
 revised Statement 141, Business Combinations, with 141(R). The revised
 Statement No. 141 was written to improve the relevance, representational
 faithfulness and comparability of the information that a reporting entity
 provides in its financial reports about a business combination and its
 effects. This Statement establishes principles and requirements for how the
 acquirer:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | a) | Recognizes
 and measures in its financial statements the identifiable assets acquired,
 the liabilities assumed, and any noncontrolling interest in the acquiree
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | b) | Recognizes
 and measures the goodwill acquired in the business combination or a gain from
 a bargain purchase                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | c) | Determines
 what information to disclose to enable users of the financial statements to
 evaluate the nature and financial effects of the business combination  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                 
| |     | This
 Statement applies prospectively to business combinations for which the
 acquisition date is on or after the beginning of the first annual reporting
 period beginning on or after December 15, 2008. The Company does not expect
 this Standard to have a material effect on the Companys financial
 statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

70

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

|    |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                     | In December
 2007, the Financial Accounting Standards Board (FASB) issued Statement No.
 160, Noncontrolling Interest in Consolidated Financial Statements  an
 amendment of ARB No. 51. Statement No. 160 clarifies reporting and
 disclosure requirements related to noncontrolling interest included in an
 entitys consolidated financial statements. This Statement clarifies that
 noncontrolling interests are to be reported in the noncontrolling section of
 the balance sheet and requires net income to include amounts from both the
 parent and the noncontrolling interest. This Statement also requires the
 parent company to recognize a gain or loss in net income when a subsidiary is
 deconsolidated. This Statement is effective for fiscal years (and interim
 periods within those years), beginning on or after December 15, 2008. The
 Company will apply this Statement prospectively and does not expect the
 Statement to have a material impact on the Companys financial statements.
|    |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(2) | Restricted Cash Balance                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                    
|    | Cash and due
 from banks includes balances with the Federal Reserve Bank (the FRB). The
 Bank is required to maintain specified minimum average balances with the FRB,
 based primarily upon the Banks deposit balances. As of December 31, 2008 and
 2007, the Bank maintained deposits in excess of the FRB reserve requirement.
|    |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(3) | Securities Available-for-Sale                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                    
|    | The
 amortized cost and carrying values of securities available-for-sale are as
 follows:                                                                                                                                                                                                                                          

|                                                  |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 
|------------------------------------------------- |  | --------------- | ------ | ----------------- | - | ------------------ |  | --------------- | --- | - | - | ------ | 
|(Dollar
 amounts in thousands)                    |  | Amortized
 cost |        | Unrealized
 gains |   | Unrealized
 losses |  | Carrying
 value |    
|                                                  |  |                 |        |                   |   |                    |  |                 |    
|December 31, 2008:                                |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 
|Obligations of U.S. Government agencies           |  | $               | 57,995 |                   | $ | 1,447              |  | $               |    |   | $ | 59,442 | 
|Obligations of states and political
 subdivisions |  |                 | 38,918 |                   |   | 914                |  |                 | (53 | ) |   | 39,779 | 
|                                                  |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 
|                                                  |  | $               | 96,913 |                   | $ | 2,361              |  | ($              | 53  | ) | $ | 99,221 | 
|                                                  |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 
|                                                  |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 
|December 31, 2007:                                |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 
|Obligations of U.S. Government agencies           |  | $               | 38,370 |                   | $ | 302                |  | $               |    |   | $ | 38,672 | 
|Obligations of states and political
 subdivisions |  |                 | 52,357 |                   |   | 440                |  |                 | (37 | ) |   | 52,760 | 
|Corporate debt                                    |  |                 | 2,999  |                   |   | 2                  |  |                 | (1  | ) |   | 3,000  | 
|                                                  |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 
|                                                  |  | $               | 93,726 |                   | $ | 744                |  | ($              | 38  | ) | $ | 94,432 | 
|                                                  |  |                 |        |                   |   |                    |  |                 |     |   |   |        | 

71

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | An analysis
 of gross unrealized losses of the available for sale investment securities
 portfolio as of December 31, 2008 and December 31, 2007 follows.

|                                                     |  |                    |       |                                          |    |                    |   |                                          |       |                    |   |                           |   |   |        |  |    |    |  
|---------------------------------------------------- |  | ------------------ | ----- | ---------------------------------------- | -- | ------------------ | - | ---------------------------------------- | ----- | ------------------ | - | ------------------------- | - | - | ------ |  | -- | -- | -
|December
 31, 2008:
 (Dollar amounts in thousands)   |  | Total
 Fair
 Value |       | Less than
 12 Months
 Unrealized
 Losses |    | Total
 Fair
 Value |   | 12 Months
 or Longer
 Unrealized
 Losses |       | Total
 Fair
 Value |   | Total
 Unrealized
 Losses |  
|Obligations of states and political
 subdivisions    |  | $                  | 3,039 |                                          | ($ | 53                 | ) | $                                        |      |                    | $ |                          |   | $ | 3,039  |  | ($ | 53 | )
|                                                     |  |                    |       |                                          |    |                    |   |                                          |       |                    |   |                           |   |   |        |  |    |    |  
|Total                                                |  | $                  | 3,039 |                                          | ($ | 53                 | ) | $                                        |      |                    | $ |                          |   | $ | 3,039  |  | ($ | 53 | )
|                                                     |  |                    |       |                                          |    |                    |   |                                          |       |                    |   |                           |   |   |        |  |    |    |  
|                                                     |  |                    |       |                                          |    |                    |   |                                          |       |                    |   |                           |   |   |        |  |    |    |  
|At
 December 31, 2007: (Dollar amounts in thousands) |  | Fair Value         |       | Less than
 12 Months
 Unrealized
 Losses |    | Total
 Fair
 Value |   | 12 Months
 or Longer
 Unrealized
 Losses |       | Total
 Fair
 Value |   | Total
 Unrealized
 Losses |  
|Obligations of states and political
 subdivisions    |  | $                  | 2,007 |                                          | ($ | 13                 | ) | $                                        | 8,486 |                    | $ | (24                       | ) | $ | 10,493 |  | ($ | 37 | )
|Corporate debt                                       |  |                    | 996   |                                          |    | (1                 | ) |                                          |      |                    |   |                          |   |   | 996    |  |    | (1 | )
|                                                     |  |                    |       |                                          |    |                    |   |                                          |       |                    |   |                           |   |   |        |  |    |    |  
|Total                                                |  | $                  | 3,003 |                                          | ($ | 14                 | ) | $                                        | 8,486 |                    | $ | (24                       | ) | $ | 11,489 |  | ($ | 38 | )
|                                                     |  |                    |       |                                          |    |                    |   |                                          |       |                    |   |                           |   |   |        |  |    |    |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December
 31, 2008, there were no securities in an unrealized loss position for greater
 than 12 consecutive months. Management periodically evaluates each security
 in an unrealized loss position to determine if the impairment is temporary or
 other-than-temporary. Management has determined that no investment security
 is other-than-temporarily impaired at December 31, 2008. The unrealized
 losses are due solely to interest rate changes and the Company has the
 ability and intent to hold all investment securities with identified
 impairments resulting from interest rate changes to the earliest of
 forecasted recovery or the maturity of the underlying investment security.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The
 amortized cost and carrying value of debt securities as of December 31, 2008,
 by contractual maturity, are shown below. Expected maturities may differ from
 contractual maturities because borrowers may have the right to call or prepay
 obligations with or without call or prepayment penalties.                                                                                                                                                                                                                                                                                                                                                                                                

|                                       |  |                 |        |                 |   |        | 
|-------------------------------------- |  | --------------- | ------ | --------------- | - | ------ | 
|(Dollar
 amounts in thousands)         |  | Amortized
 Cost |        | Carrying
 Value |  
|Available-for-sale:                    |  |                 |        |                 |   |        | 
|Due in one year or less                |  | $               | 11,384 |                 | $ | 11,540 | 
|Due after one through five years       |  |                 | 59,995 |                 |   | 61,523 | 
|Due after five years through ten years |  |                 | 13,681 |                 |   | 13,906 | 
|Due after ten years                    |  |                 | 11,853 |                 |   | 12,252 | 
|                                       |  |                 |        |                 |   |        | 
|                                       |  | $               | 96,913 |                 | $ | 99,221 | 
|                                       |  |                 |        |                 |   |        | 

72

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FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

|    |                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | For the
 years ended December 31, 2008, 2007 and 2006, gross realized gains amounted
 to $205,000, $4,000 and $185,000, respectively. For the years ended December
 31, 2008, 2007 and 2006, gross realized losses amounted to $495,000, $0 and
 $196,000, respectively.               
|    |                                                                                                                                                                                                                                                                                        
|    | At December
 31, 2008 and 2007, securities with an amortized cost of $91,456,000 and
 $83,874,000, and fair value of $93,635,000 and $84,505,000, respectively,
 were pledged as collateral for public deposits and for other purposes
 required by law.                               
|    |                                                                                                                                                                                                                                                                                        
|    | As of
 December 31, 2008 and 2007, the Bank had investments in Federal Reserve Bank
 stock classified as other assets in the accompanying balance sheets of
 $702,000. These investments in Federal Reserve Bank stock are carried at
 cost, and evaluated periodically for impairment.
|    |                                                                                                                                                                                                                                                                                        
|(4) | Loans, Net                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                        
|    | Loans are
 summarized as follows at December 31:                                                                                                                                                                                                                                       

|                               |  |      |         |      |   |         |  
|------------------------------ |  | ---- | ------- | ---- | - | ------- | -
|(Dollar
 amounts in thousands) |  | 2008 |         | 2007 |  
|                               |  |      |         |      |  
|Real Estate                    |  | $    | 353,011 |      | $ | 352,050 |  
|Construction                   |  |      | 65,647  |      |   | 57,362  |  
|Commercial                     |  |      | 83,442  |      |   | 82,228  |  
|Consumer                       |  |      | 3,136   |      |   | 3,636   |  
|                               |  |      |         |      |   |         |  
|Gross loans                    |  |      | 505,236 |      |   | 495,276 |  
|                              
|Net deferred loan fees         |  |      | (177    | )    |   | (64     | )
|Allowance for loan losses      |  |      | (7,075  | )    |   | (5,638  | )
|                               |  |      |         |      |   |         |  
|Net loans                      |  | $    | 497,984 |      | $ | 489,574 |  
|                               |  |      |         |      |   |         |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Bank had
 total impaired loans of $14,118,000 and $12,158,000 at December 31, 2008 and
 2007, respectively. The allowance for loan losses related to the impaired
 loans was $678,000 and $707,000 as of December 31, 2008 and 2007,
 respectively. The amount of the recorded investment in impaired loans for
 which there is no related allowance is $2,558,000 and $11,451,000 as of
 December 31, 2007 and 2006. The average recorded investment in impaired loans
 during 2008, 2007 and 2006 was $12,193,000, $6,036,000 and $610,000,
 respectively. Interest income on impaired loans of $64,000, $69,000 and
 $3,000 was recognized for cash payments received in 2008, 2007, and 2006,
 respectively. The amount of interest on impaired loans not collected in 2008,
 2007 and 2006, was $692,000, $547,000 and $70,000, respectively. The
 cumulative amount of unpaid interest on impaired loans was $1,022,000,
 $547,000 and $70,000 at December 31, 2008, 2007 and 2006, respectively.

73

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(5) | Allowance for Loan Losses                                                                            
|    |                                                                                                      
|    | Changes in
 the allowance for loan losses are summarized as follows for the years ended
 December 31:

|                               |  |      |        |      |   |       |   |   |       |  
|------------------------------ |  | ---- | ------ | ---- | - | ----- | - | - | ----- | -
|(Dollar
 amounts in thousands) |  |      |        |      |   |       |   |   |       |  
|                               |  | 2008 |        | 2007 |   | 2006  |  
|                               |  |      |        |      |   |       |  
|Balance, beginning of year     |  | $    | 5,638  |      | $ | 5,002 |   | $ | 4,374 |  
|Loans charged off              |  |      | (1,788 | )    |   | (80   | ) |   | (59   | )
|Recoveries                     |  |      | 180    |      |   | 26    |   |   | 4     |  
|                               |  |      |        |      |   |       |   |   |       |  
|Net loans charged off          |  |      | (1,608 | )    |   | (54   | ) |   | (55   | )
|                               |  |      |        |      |   |       |   |   |       |  
|Provision for loan losses      |  |      | 3,045  |      |   | 690   |   |   | 683   |  
|                               |  |      |        |      |   |       |   |   |       |  
|                               |  | $    | 7,075  |      | $ | 5,638 |   | $ | 5,002 |  
|                               |  |      |        |      |   |       |   |   |       |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In the
 ordinary course of business, the Bank made loans and advances under lines of
 credit to directors, officers, and their related interests. The Banks
 policies require that all such loans be made at substantially the same terms
 as those prevailing at the time for comparable transactions with unrelated parties
 and do not involve more than normal risk or unfavorable features. The
 following summarizes activities of loans to such parties in 2008 and 2007:

|                               |  |      |        |      |   |        | 
|------------------------------ |  | ---- | ------ | ---- | - | ------ | 
|(Dollar
 amounts in thousands) |  | 2008 |        | 2007 |  
|                               |  |      |        |      |  
|Balance,
 beginning of year    |  | $    | 10,374 |      | $ | 3,521  | 
|Additions                      |  |      | 8,624  |      |   | 7,706  | 
|Repayments                     |  |      | 3,468  |      |   | 853    | 
|                               |  |      |        |      |   |        | 
|Balance,
 end of year          |  | $    | 15,530 |      | $ | 10,374 | 
|                               |  |      |        |      |   |        | 

|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | Bank Premises, Equipment, and Leasehold Improvements                                                                                                                    
|    |                                                                                                                                                                         
|    | Bank
 premises, equipment and leasehold improvements are stated at cost, less
 accumulated depreciation and amortization, and are summarized as follows at
 December 31:

|                                          |  |      |         |      |   |        |  
|----------------------------------------- |  | ---- | ------- | ---- | - | ------ | -
|(Dollar
 amounts in thousands)            |  | 2008 |         | 2007 |  
|                                          |  |      |         |      |  
|                                          |  |      |         |      |   |        |  
|Buildings                                 |  | $    | 9,134   |      | $ | 9,032  |  
|Equipment                                 |  |      | 8,701   |      |   | 8,667  |  
|Leasehold improvements                    |  |      | 1,043   |      |   | 1,010  |  
|                                          |  |      |         |      |   |        |  
|                                          |  |      | 18,878  |      |   | 18,709 |  
|Accumulated depreciation and amortization |  |      | (10,266 | )    |   | (9,437 | )
|                                          |  |      |         |      |   |        |  
|                                          |  |      | 8,612   |      |   | 9,272  |  
|Land                                      |  |      | 4,418   |      |   | 4,414  |  
|                                          |  |      |         |      |   |        |  
|                                          |  | $    | 13,030  |      | $ | 13,686 |  
|                                          |  |      |         |      |   |        |  

| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation
 expense for the years ended December 31, 2008, 2007, and 2006 was $1,597,000,
 $1,270,000, and $1,183,000, respectively.

74

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(8) | Deposits                                                                                                                                                                              
|    |                                                                                                                                                                                       
|    | The
 aggregate amount of jumbo time certificates, each with a minimum denomination
 of $100,000 or more, was $90,176,000 and $81,169,000 at December 31, 2008 and
 2007, respectively.
|    |                                                                                                                                                                                       
|    | At December
 31, 2008, the scheduled maturities of all time certificates of deposit are as
 follows:                                                                                  

|                               |  |   |         | 
|------------------------------ |  | - | ------- | 
|(Dollar
 amounts in thousands) |  |   |         | 
|                               |  |   |         | 
|Year
 endind December 31:      |  |   |         | 
|2009                           |  | $ | 125,475 | 
|2010                           |  |   | 12,330  | 
|2011                           |  |   | 4,034   | 
|2012                           |  |   | 1       | 
|                               |  |   |         | 
|                               |  | $ | 141,840 | 
|                               |  |   |         | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(9)  | Federal Home Loan Bank Advances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | As of
 December 31, 2008, Federal Home Loan Bank (FHLB) advances consisted of
 $81,100,000 in short-term advances due in one year or less, and $5,000,000 in
 long-term advances due in two years. The interest rate on total advances
 ranged from 0.05% to 5.57% at year end December 31, 2008. As of December 31,
 2007, the short-term advances consisted of $36,000,000 due in one year or
 less, and in $30,000,000 in long-term advances due in over one to three
 years. The interest rate on total advances ranged from 3.82% to 5.57% at year
 end December 31, 2007. Average FHLB advances were $73,777,000 and $39,482,000
 in 2008 and 2007, respectively. Weighted average rates were 4.18% and 5.24%
 in 2008 and 2007, respectively. The maximum amount borrowed during 2008 and
 2007 was $93,200,000 and $66,000,000, respectively. At December 31, 2008, the
 Bank had a maximum borrowing capacity under Federal Home Loan Bank advances
 of $134,112,000, of which $48,012,000 was available. The Federal Home Loan
 Bank advances are secured by a blanket collateral agreement by a pledge of
 FHLB stock and certain other qualifying collateral, such as commercial and
 mortgage loans.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(10) | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The Bank
 leases a portion of its facilities and equipment under noncancelable
 operating leases expiring at various dates through 2013. Some of these leases
 provide that the Bank pay taxes, maintenance, insurance, and other occupancy
 expenses applicable to leased premises. Generally, the leases provide for
 renewal for various periods at stipulated rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

75

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | The minimum
 rental commitments under the operating leases as of December 31, 2008 are as
 follows:

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|(Dollars
 in thousands)   |  |   |       | 
|                          |  |   |       | 
|Year
 ending December 31: |  |   |       | 
|2009                      |  | $ | 576   | 
|2010                      |  |   | 403   | 
|2011                      |  |   | 342   | 
|2012                      |  |   | 333   | 
|2013                      |  |   | 148   | 
|                          |  |   |       | 
|                          |  | $ | 1,802 | 
|                          |  |   |       | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | Total rent
 expense for operating leases was $630,000, $591,000 and $554,000, in 2008,
 2007, and 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | The Bank is
 engaged in various lawsuits either as plaintiff or defendant in the ordinary
 course of business and, in the opinion of management, based upon the advice
 of counsel, the ultimate outcome of these lawsuits will not have a material
 effect on the Banks financial statements.                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(11) | Bank Savings Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | The Bank
 maintains a salary deferral 401(k) plan covering substantially all employees,
 known as the First National Bank Savings Plan (the Plan). The Plan allows
 employees to make contributions to the Plan up to a maximum allowed by law
 and the Banks contribution is discretionary. Beginning in 2008, the Board
 approved a safe harbor election related to the Plan which requires the
 Company to contribute 3% of qualifying employees wages as a profit sharing
 contribution. The Banks contribution to the Plan for the years ended
 December 31, 2008, 2007, and 2006 was $400,000, $600,000 and $602,000,
 respectively.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(12) | Salary Continuation and Deferred Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | The Bank
 maintains a Salary Continuation Plan for certain Bank officers. Officers
 participating in the Salary Continuation Plan are entitled to receive a
 monthly payment for a period of fifteen to twenty years upon retirement. The
 Company accrues such post-retirement benefits over the individuals
 employment period. The Salary Continuation Plan expense for the years ended
 December 31, 2008, 2007, and 2006 was $238,000, $181,000 and $239,000,
 respectively. Accrued compensation payable under the salary continuation plan
 totaled $1,833,000 and $2,010,000 at December 31, 2008 and 2007,
 respectively.           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | The Deferred
 Compensation Plan allows eligible officers to defer annually their
 compensation up to a maximum 80% of their base salary and 100% of their cash
 bonus. The officer will be entitled to receive distribution upon reaching a
 specified age, passage of at least five years or termination of employment.
 As of December 31, 2008 and 2007, the related liability included in accrued
 expenses and other liabilities was $848,000 and $1,715,000, respectively. The
 decrease in 2008 was due to withdrawals by employees in the Plan.                                                                                       

76

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

|     |                                                                                             
|---- | --------------------------------------------------------------------------------------------
|(13) | Income Taxes                                                                                
|     |                                                                                             
|     | The
 provision for income taxes for the years ended December 31, consists of the
 following:

|                               |  |      |       |      |   |       |   |   |       |  
|------------------------------ |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|(Dollar
 amounts in thousands) |  | 2008 |       | 2007 |   | 2006  |  
|                               |  |      |       |      |   |       |  
|Current:                       |  |      |       |      |   |       |   |   |       |  
|Federal                        |  | $    | 750   |      | $ | 1,961 |   | $ | 2,789 |  
|State                          |  |      | 331   |      |   | 727   |   |   | 827   |  
|                               |  |      |       |      |   |       |   |   |       |  
|                               |  | $    | 1,081 |      | $ | 2,688 |   | $ | 3,616 |  
|                               |  |      |       |      |   |       |   |   |       |  
|                               |  |      |       |      |   |       |   |   |       |  
|Deferred:                      |  |      |       |      |   |       |   |   |       |  
|Federal                        |  | $    | (352  | )    | $ | (252  | ) | $ | (69   | )
|State                          |  |      | (118  | )    |   | (54   | ) |   | 62    |  
|                               |  |      |       |      |   |       |   |   |       |  
|                               |  |      | (470  | )    |   | (306  | ) |   | (7    | )
|                               |  |      |       |      |   |       |   |   |       |  
|                               |  | $    | 611   |      | $ | 2,382 |   | $ | 3,609 |  
|                               |  |      |       |      |   |       |   |   |       |  

| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The reason
 for the differences between the statutory federal income tax rate and the
 effective tax rates for the years ending December 31, are summarized as
 follows:

|                                               |  |      |       |      |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | ----- | ---- |  | ---- | - |  | ---- | -
|                                               |  | 2008 |       | 2007 |  | 2006 |  
|                                               |  |      |       |      |  |      |  
|Statutory rates                                |  |      | 34.0  | %    |  | 34.0 | % |  | 34.0 | %
|                                               |  |      |       |      |  |      |   |  |      |  
|Increase (decrease) resulting from:            |  |      |       |      |  |      |   |  |      |  
|Tax exempt Income for federal purposes         |  |      | (19.1 | )    |  | (6.8 | ) |  | (6.1 | )
|State taxes on income, net of federal
 benefit |  |      | 3.3   |      |  | 4.9  |   |  | 5.2  |  
|Benefits from low income housing credits       |  |      | (2.7  | )    |  | (4.8 | ) |  | (1.3 | )
|Other, net                                     |  |      | (2.2  | )    |  | (1.0 | ) |  | 0.4  |  
|                                               |  |      |       |      |  |      |   |  |      |  
|Effective tax rate                             |  |      | 13.3  | %    |  | 26.3 | % |  | 32.2 | %
|                                               |  |      |       |      |  |      |   |  |      |  

77

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | The tax
 effect of temporary differences giving rise to the Banks net deferred tax
 asset is as follows:

|                                                             |  |              |       |      |   |       | 
|------------------------------------------------------------ |  | ------------ | ----- | ---- | - | ----- | 
|                                                             |  | December 31, |      
|                                                             |  |              |      
|(Dollar
 amounts in thousands)                               |  | 2008         |       | 2007 |  
|                                                             |  |              |       |      |  
|                                                            
|Deferred tax assets                                          |  |              |       |      |   |       | 
|Allowance for loan losses                                    |  | $            | 3,162 |      | $ | 2,463 | 
|Accrued salaries and officers compensation                   |  |              | 1,390 |      |   | 1,423 | 
|Capitalized interest on buildings                            |  |              | 23    |      |   | 25    | 
|Expenses accrued on books, not yet
 deductible in tax return |  |              | 803   |      |   | 706   | 
|Depreciation                                                 |  |              | 448   |      |   | 586   | 
|Net operating loss carryforward                              |  |              | 887   |      |   | 1,046 | 
|Tax credit carryforwards                                     |  |              | 429   |      |   |      | 
|                                                             |  |              |       |      |   |       | 
|                                                             |  |              | 7,142 |      |   | 6,249 | 
|Less: deferred tax asset valuation
 allowance                |  |              | (368  | )    |   |      | 
|                                                             |  |              |       |      |   |       | 
|                                                             |  |              | 6,774 |      |   | 6,249 | 
|                                                             |  |              |       |      |   |       | 
|Deferred tax liabilities                                     |  |              |       |      |   |       | 
|Unrealized appreciation on
 available-for-sale securities    |  | $            | 950   |      | $ | 292   | 
|State income taxes                                           |  |              | 478   |      |   | 405   | 
|Core deposit intangible                                      |  |              | 269   |      |   | 374   | 
|Income reflected on books, not on tax
 return                |  |              | 93    |      |   |      | 
|Expenses and credits deducted on tax
 return, not books      |  |              | 8     |      |   | 14    | 
|                                                             |  |              |       |      |   |       | 
|Total deferred tax liabilities                               |  |              | 1,798 |      |   | 1,085 | 
|                                                             |  |              |       |      |   |       | 
|Net deferred tax asset (included in other
 assets)           |  | $            | 4,976 |      | $ | 5,164 | 
|                                                             |  |              |       |      |   |       | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
 December 31, 2008, the Bank had no state tax credit carryforwards for income
 tax purposes as these were all used during 2005. Accordingly, there is no
 valuation allowance related to these credits as of December 31, 2008 or 2007.
 Additionally, management believes that it is more likely than not that the
 deferred tax assets will be realized through recovery of taxes previously
 paid and/or future taxable income, with the exception of a portion of low
 income housing credit carryforwards. The Bank has federal net operating loss
 carryforwards resulting from the acquisition of Sequoia National Bank which
 expire from December 31, 2011 through December 31, 2020, for a total balance
 of $2,609,000 as of December 31, 2008. These losses are limited to
 approximately $469,000 per year under IRS regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In assessing
 the Companys ability to realize the tax benefits of deferred tax assets,
 management considers whether it is more likely than not that some portion or
 all of the deferred tax assets will be realized. The ultimate realization of
 deferred tax assets is dependent upon the generation of future taxable income
 during the periods in which those temporary differences become deductible.
 Management considers the scheduled reversal of deferred tax liabilities,
 projected future taxable income, and tax planning strategies in making this
 assessment. Based upon the level of historical taxable income and projections
 for future taxable income over the periods which the deferred tax assets are
 deductible, management believes it is more likely than not that the Company
 will realize the recorded benefits of these deductible differences, with the
 possible exception of our low income housing tax credit carryforwards. In the
 opinion of management, a valuation allowance of $368,000 was necessary as of
 December 31, 2008. This valuation allowance only became necessary during
 2008, and is equivalent to 100% of the low income housing credit
 carryforwards that existed as of December 31, 2008. There was no tax
 valuation allowance in 2007 or 2006.

78

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(14) | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | The Bank is
 a party to financial instruments with off-balance-sheet risk in the normal
 course of business to meet the financing needs of its customers. These
 financial instruments include commitments to extend credit in the form of
 loans or through standby letters of credit. These instruments involve, to
 varying degrees, elements of credit and interest-rate risk in excess of the
 amount recognized in the balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | The Banks
 exposure to credit loss is represented by the contractual amount of those
 instruments and is usually limited to amounts funded or drawn. The contract
 or notional amounts of these agreements, which are not included in the
 balance sheets, are an indicator of the Banks credit exposure. Commitments
 to extend credit generally carry variable interest rates and are subject to
 the same credit standards used in the lending process for on-balance-sheet
 instruments. Additionally, the Bank periodically reassesses the customers
 creditworthiness through ongoing credit reviews. The Bank generally requires
 collateral or other security to support commitments to extend credit. The
 following table provides summary information on financial institutions whose
 contract amounts represent credit risk as of December 31:

|                                                                     |  |             |         |      |   |         | 
|-------------------------------------------------------------------- |  | ----------- | ------- | ---- | - | ------- | 
|                                                                     |  | December 31 |        
|                                                                     |  |             |        
|(Dollars
 amounts in thousands)                                      |  | 2008        |         | 2007 |  
|                                                                     |  |             |         |      |  
|Financial instruments whose contract
 amounts represent credit risk: |  |             |         |      |   |         | 
|Undisbursed loan commitments                                         |  | $           | 35,403  |      | $ | 70,116  | 
|Lines of credit                                                      |  |             | 73,735  |      |   | 72,211  | 
|Mastercard lines                                                     |  |             | 3,940   |      |   | 3,677   | 
|Standby letters of credit                                            |  |             | 2,743   |      |   | 3,157   | 
|                                                                     |  |             |         |      |   |         | 
|                                                                     |  | $           | 115,821 |      | $ | 149,161 | 
|                                                                     |  |             |         |      |   |         | 

79

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Commitments
 to extend credit are agreements to lend to a customer as long as there is no
 violation of any condition established in the contract. Commitments generally
 have fixed expiration dates or other termination clauses and may require
 payment of a fee. Since many of the commitments are expected to expire
 without being drawn upon, the total commitment amounts do not necessarily
 represent future cash requirements. The Bank evaluates each customers
 creditworthiness on a case-by-case basis. The amount of collateral obtained,
 if deemed necessary by the Bank upon extension of credit, is based on
 managements credit evaluation. Collateral held varies but may include
 accounts receivable, inventory, property, plant and equipment, and
 income-producing commercial and residential properties.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Equity
 reserve and unused credit card lines are additional commitments to extend
 credit. Many of these customers are not expected to draw down their total
 lines of credit, and therefore, the total contract amount of these lines does
 not necessarily represent future cash requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Standby letters
 of credit are conditional commitments issued by the Bank to guarantee the
 performance of a customer to a third party. The credit risk involved in
 issuing letters of credit is essentially the same as that involved in
 extending loan facilities to customers. The Bank issues both financial and
 performance standby letters of credit. The financial standby letters of
 credit are primarily to guarantee payment to third parties. As of December
 31, 2008, there were $1,841,000 issued in financial standby letters of
 credit. The performance standby letters of credit are typically issued to
 municipalities as specific performance bonds. As of December 31, 2008 there
 were $902,000 issued in performance standby letters of credit. The terms of
 the guarantees will expire in 2009.          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Bank has
 experienced no draws on these letters of credit, and does not expect to in
 the future; however, should a triggering event occur, the Bank either has
 collateral in excess of the letters of credit or embedded agreements of
 recourse from the customer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

80

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The
 following table provides summary information on the estimated fair value of
 financial instruments at December 31, 2008:

|                                                                                              |  |                  |         |             |   |         | 
|--------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ----------- | - | ------- | 
|(Dollar
 amounts in thousands)                                                                |  | Carrying
 amount |         | Fair
 value |  
|                                                                                              |  |                  |         |             |  
|Financial assets:                                                                             |  |                  |         |             |   |         | 
|Cash and cash equivalents                                                                     |  | $                | 14,865  |             | $ | 14,865  | 
|Securities available for sale                                                                 |  |                  | 99,221  |             |   | 99,221  | 
|Loans, net                                                                                    |  |                  | 497,984 |             |   | 533,277 | 
|Bank owned life insurance                                                                     |  |                  | 10,781  |             |   | 10,781  | 
|                                                                                             
|Financial liabilities:                                                                        |  |                  |         |             |   |         | 
|Deposits                                                                                      |  |                  | 500,910 |             |   | 501,436 | 
|Federal Home Loan Bank advances                                                               |  |                  | 86,100  |             |   | 86,753  | 
|                                                                                             
|Off-balance-sheet liabilities:                                                                |  |                  |         |             |   |         | 
|Undisbursed loan commitments, lines of
 credit, Mastercard line and standby letters of credit |  |                  |        |             |   | 4,343   | 

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The
 following table provides summary information on the estimated fair value of
 financial instruments at December 31, 2007:

|                                                                              |  |                  |         |             |   |         | 
|----------------------------------------------------------------------------- |  | ---------------- | ------- | ----------- | - | ------- | 
|(Dollar
 amounts in thousands)                                                |  | Carrying
 amount |         | Fair
 value |  
|                                                                              |  |                  |         |             |  
|Financial assets:                                                             |  |                  |         |             |   |         | 
|Cash and cash equivalents                                                     |  | $                | 15,750  |             | $ | 15,750  | 
|Securities available for sale                                                 |  |                  | 94,432  |             |   | 94,432  | 
|Loans, net                                                                    |  |                  | 489,574 |             |   | 507,981 | 
|Bank owned life insurance                                                     |  |                  | 9,617   |             |   | 9,617   | 
|                                                                             
|Financial liabilities:                                                        |  |                  |         |             |   |         | 
|Deposits                                                                      |  |                  | 499,255 |             |   | 499,719 | 
|Federal Home Loan Bank advances                                               |  |                  | 66,000  |             |   | 66,783  | 
|                                                                             
|Off-balance-sheet liabilities:                                                |  |                  |         |             |   |         | 
|Undisbursed loan commitments, lines of
 credit, and standby letters of credit |  |                  |        |             |   | 987     | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The carrying
 amounts of loans include $14,118,000 and $11,465,000 of nonaccrual loans
 (loans that are not accruing interest) at December 31, 2008 and 2007,
 respectively. Management has determined that primarily because of the
 uncertainty of predicting an observable market interest rate, excessive
 amounts of time and money would be incurred to estimate the fair values of
 nonperforming loans. As such, these loans are recorded at their carrying
 amount in the estimated fair value columns.

81

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | The
 following aggregate information is provided at December 31, about the
 contractual provisions of these loans:

|                                |  |      |           |      |   |           |  
|------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|(Dollars
 amounts in thousands) |  | 2008 |           | 2007 |  
|                                |  |      |           |      |  
|Aggregate
 carrying amount      |  | $    | 14,102    |      | $ | 11,465    |  
|Effective
 rate                 |  |      | 7.60      | %    |   | 9.67      | %
|Average
 term to maturity       |  |      | 10 months |      |   | 16 months |  

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(15) | Significant Group Concentrations of Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     | Most of the
 Banks business activity is with customers located within San Mateo and San
 Francisco counties. Generally, the loans are secured by assets of the
 borrowers. The loans are expected to be repaid from cash flows or proceeds
 from the sale of selected assets of the borrowers. The Bank does not have
 significant concentrations of loans to any one industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     | The
 distribution of commitments to extend credit approximates the distribution of
 loans outstanding. Commercial and standby letters of credit were granted
 primarily to commercial borrowers. The contractual amounts of credit-related
 financial instruments such as commitments to extend credit, credit-card
 arrangements, and letters of credit represent the amounts of potential
 accounting loss should the contract be fully drawn upon, the customer
 default, and the value of any existing collateral become worthless.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(16) | Regulatory matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     | The Company,
 as a bank holding company, is subject to regulation by the Board of Governors
 of the Federal Reserve System under the Bank Holding Company Act of 1956, as
 amended. The Bank is subject to various regulatory capital requirements
 administered by the federal banking agencies. Failure to meet minimum capital
 requirements can initiate certain mandatory and possibly additional discretionary
 actions by regulators that, if undertaken, could have a direct material
 effect on the Companys financial statements. Under capital adequacy
 guidelines and the regulatory framework for prompt corrective action, the
 Company and the Bank must meet specific capital guidelines that involve
 quantitative measures of the Companys and the Banks assets, liabilities and
 certain off balance-sheet items as calculated under regulatory accounting
 practices. The capital amounts and classification are also subject to
 qualitative judgments by the regulators about components, risk weightings and
 other factors.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     | Quantitative
 measures established by regulation to ensure capital adequacy require the
 Company and the Bank to maintain minimum amounts and ratios (set forth in the
 table below) of total and Tier 1 capital (as defined in the regulations) to
 risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
 average assets (as defined). Management believes, as of December 31, 2008,
 that the Company and the Bank have met all regulatory capital requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

82

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
 December 31, 2008, the most recent notification from the regulatory agencies
 categorized the Bank as well capitalized under the regulatory framework for
 prompt corrective action. To be categorized as well capitalized the Bank must
 maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
 ratios as set forth in the table. There are no conditions or events since
 that notification that management believes have changed the Banks
 categories.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
 consolidated actual capital amounts and ratios of FNB Bancorp and Subsidiary
 are also presented in the following table:                                                                                                                                                                                                                                                                                                                                                         

|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|--------------------------------------------------- |  | ------ | ------ | ------------------------------- |  | ------------------------------------------------------------------- |  | ----- | ------ | ------ |  | ----- |  |  | ------ | - | ----- | - | 
|                                                    |  | Actual |        | For capital
 adequacy
 purposes |  | To be well
 capitalized under
 prompt corrective
 action provisions | 
|                                                    |  |        |        |                                 |  |                                                                     | 
|(Dollar
 amounts in thousands)                      |  | Amount |        | Ratio                           |  | Amount                                                              |  | Ratio |        | Amount |  | Ratio | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       | 
|December 31, 2008:                                  |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Total risk-based capital (to risk weighted
 assets) |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Consolidated Company                                |  | $      | 71,531 |                                 |  | 11.86%                                                              |  |       | 48,250 | ≥      |  | 8.00% |  |  | 60,308 | ≥ | n/a   |   | 
|Bank                                                |  | $      | 71,405 |                                 |  | 11.84%                                                              |  |       | 48,247 | ≥      |  | 8.00% |  |  | 60,308 | ≥ | 10.00 | % | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Tier 1 capital (to risk weighted assets)            |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Consolidated Company                                |  | $      | 64,346 |                                 |  | 10.67%                                                              |  |       | 24,122 | ≥      |  | 4.00% |  |  | 36,180 | ≥ | n/a   |   | 
|Bank                                                |  | $      | 64,220 |                                 |  | 10.65%                                                              |  |       | 24,120 | ≥      |  | 4.00% |  |  | 36,180 | ≥ | 6.00  | % | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Tier 1 leverage capital (to total average
 assets)  |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Consolidated Company                                |  | $      | 64,346 |                                 |  | 9.70%                                                               |  |       | 26,534 | ≥      |  | 4.00% |  |  | 33,171 | ≥ | n/a   |   | 
|Bank                                                |  | $      | 64,220 |                                 |  | 9.68%                                                               |  |       | 26,537 | ≥      |  | 4.00% |  |  | 33,171 | ≥ | 5.00  | % | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 

83

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|--------------------------------------------------- |  | ------ | ------ | ------------------------------- |  | ------------------------------------------------------------------- |  | ----- | ------ | ------ |  | ----- |  |  | ------ | - | ----- | - | 
|                                                    |  | Actual |        | For capital
 adequacy
 purposes |  | To be well
 capitalized under
 prompt corrective
 action provisions | 
|                                                    |  |        |        |                                 |  |                                                                     | 
|(Dollar
 amounts in thousands)                      |  | Amount |        | Ratio                           |  | Amount                                                              |  | Ratio |        | Amount |  | Ratio | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       | 
|December
 31, 2007:                                 |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Total risk-based capital (to risk weighted
 assets) |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Consolidated
 Company                               |  | $      | 69,455 |                                 |  | 11.47%                                                              |  |       | 48,443 | ≥      |  | 8.00% |  |  | 60,533 | ≥ | n/a   |   | 
|Bank                                                |  | $      | 69,129 |                                 |  | 11.42%                                                              |  |       | 48,443 | ≥      |  | 8.00% |  |  | 60,533 | ≥ | 10.00 | % | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Tier
 1 capital (to risk weighted assets)           |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Consolidated
 Company                               |  | $      | 63,707 |                                 |  | 10.52%                                                              |  |       | 24,221 | ≥      |  | 4.00% |  |  | 36,321 | ≥ | n/a   |   | 
|Bank                                                |  | $      | 63,381 |                                 |  | 10.47%                                                              |  |       | 24,221 | ≥      |  | 4.00% |  |  | 36,321 | ≥ | 6.00  | % | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Tier
 1 leverage capital (to total average assets)  |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 
|Consolidated
 Company                               |  | $      | 63,707 |                                 |  | 9.89%                                                               |  |       | 25,757 | ≥      |  | 4.00% |  |  | 32,206 | ≥ | n/a   |   | 
|Bank                                                |  | $      | 63,381 |                                 |  | 9.84%                                                               |  |       | 25,757 | ≥      |  | 4.00% |  |  | 32,206 | ≥ | 5.00  | % | 
|                                                    |  |        |        |                                 |  |                                                                     |  |       |        |        |  |       |  |  |        |   |       |   | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(17) | Stock Option Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | In 1997, the
 Company adopted an incentive employee stock option plan, known as the 1997
 FNB Bancorp Plan. In 2002, the Company adopted an incentive employee option
 plan known as the 2002 FNB Bancorp Plan. In 2008, the Company adopted an
 incentive employee stock option plan known as the 2008 FNB Bancorp Stock
 Option Plan. The Plans allow the Company as of December 31, 2008 to grant
 options to employees covering 378,600 shares. Incentive stock options
 currently outstanding become exercisable in one to five years from the grant
 date, based on a vesting schedule of 20% per year and expire 10 years after
 the grant date. Nonqualified options to directors become vested on the date
 of grant. The options exercise price is the fair value of the per share price
 of the underlying stock options at the grant date.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | The amount
 of compensation expense for options recorded in the years ended December 31,
 2008, December 31, 2007, and December 31 2006 was $171,000, $68,000 and
 $39,000, respectively. The income tax benefit related to stock option
 exercises was $14,000 for 2008, under $3,000 for 2007 and under $1,000 for
 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

84

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There were
 no options exercised during the year ended December 31, 2008 under the 2008
 Stock Option Plan. The intrinsic value of options exercised during 2008 was
 $37,000 under the 1997 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The total
 intrinsic value of options exercised during the year ended December 31, 2007
 was $158,000 which includes $62,000 under the 2002 Plan and $96,000 under the
 1997 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The total
 intrinsic value of options exercised during the year ended December 31, 2006 was
 $263,000 which includes $60,000 under the 2002 Plan and $203,000 under the
 1997 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The amount
 of total unrecognized compensation expense related to non-vested options at
 December 31, 2008 was $420,000, and the weighted average period it will be
 amortized over is 2.5 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The fair
 value of each option granted is estimated on the date of grant using the fair
 value method with the following weighted average assumptions used for grants
 in 2008; dividend yield of 4.86% for the year; risk-free interest rate of
 3.51%; expected volatility of 50.92%; expected life of 8.8 years; and
 weighted average fair value of $4.22 per share. The assumptions for grants in
 2007; dividend yield of 1.97% for the year; risk-free interest rate of 5.11%;
 expected volatility of 11.32%; expected life of 6.4 years; and weighted
 average fair value of $5.82 per share. The assumptions for grants in 2006;
 dividend yield of 6.66% for the year; risk-free interest rate of 5.19%;
 expected volatility of 10%; expected life of 6.5 years; and weighted average
 fair value of $1.50 per share.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | A summary of
 option activity under the 2008 FNB Bancorp Plan as of December 31, 2008 and
 changes during the year then ended is presented below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

2008
FNB Bancorp Plan

|                                 |  |        |        |                                    |   |                                                              |  |                                    |     |  |   |   | 
|-------------------------------- |  | ------ | ------ | ---------------------------------- | - | ------------------------------------------------------------ |  | ---------------------------------- | --- |  | - | - | 
|Options                          |  | Shares |        | Weighted
 Average
 Exercise
 Price |   | Weighted-
 Average
 Remaining
 Contractual
 Term
 (in years) |  | Aggregate
 Intrinsic
 Value
 (000) |    
|                                 |  |        |        |                                    |   |                                                              |  |                                    |    
|Outstanding at January 1, 2008   |  |        |       |                                    | $ | 0.00                                                         |  |                                    |     |  |   |   | 
|Granted                          |  |        | 63,242 |                                    | $ | 11.76                                                        |  |                                    |     |  |   |   | 
|Exercised                        |  |        | 0      |                                    | $ | 0.00                                                         |  |                                    |     |  |   |   | 
|Forfeited or expired             |  |        | (1,628 | )                                  | $ | 11.76                                                        |  |                                    |     |  |   |   | 
|                                 |  |        |        |                                    |   |                                                              |  |                                    |     |  |   |   | 
|Outstanding at December 31, 2008 |  |        | 61,614 |                                    | $ | 11.76                                                        |  |                                    | 9.7 |  | $ | 0 | 
|Exercisable at December 31, 2008 |  |        | 9,450  |                                    | $ | 11.76                                                        |  |                                    | 0.0 |  | $ | 0 | 

85

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | A summary of
 option activity under the 2002 FNB Bancorp Plan as of December 31, 2008 and
 changes during the year then ended is presented below.

2002
FNB Bancorp Plan

|                                 |  |        |         |                                    |   |                                                              |  |                                   |     |  |   |   | 
|-------------------------------- |  | ------ | ------- | ---------------------------------- | - | ------------------------------------------------------------ |  | --------------------------------- | --- |  | - | - | 
|Options                          |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted-
 Average
 Remaining
 Contractual
 Term
 (in years) |  | Aggregate
 Intrinsic
 Value
 (000 |    
|                                 |  |        |         |                                    |   |                                                              |  |                                   |    
|Outstanding at January 1, 2008   |  |        | 224,163 |                                    | $ | 24.93                                                        |  |                                   |     |  |   |   | 
|Granted                          |  |        |        |                                    | $ | 0.00                                                         |  |                                   |     |  |   |   | 
|Exercised                        |  |        |        |                                    | $ | 0.00                                                         |  |                                   |     |  |   |   | 
|Forfeited or expired             |  |        | (4,141  | )                                  | $ | 28.17                                                        |  |                                   |     |  |   |   | 
|                                 |  |        |         |                                    |   |                                                              |  |                                   |     |  |   |   | 
|Outstanding at December 31, 2008 |  |        | 220,022 |                                    | $ | 24.87                                                        |  |                                   | 6.0 |  | $ | 0 | 
|Exercisable at December 31, 2008 |  |        | 153,197 |                                    | $ | 23.46                                                        |  |                                   | 5.4 |  | $ | 0 | 

The following
supplemental information applies to the three years ended December 31:

|                                                        |  |               |  |               |  |              
|------------------------------------------------------- |  | ------------- |  | ------------- |  | -------------
|                                                        |  | 2008          |  | 2007          |  | 2006         
|                                                        |  |               |  |               |  |              
|Options outstanding                                     |  | 220,022       |  | 224,163       |  | 216,176      
|Range of exercise prices                                |  | $18.66-$31.31 |  | $18.66-$31.31 |  | $18.66-$31.31
|Weighted average remaining contractual life             |  | 6.0           |  | 7.1           |  | 7.5          
|Fully vested options                                    |  | 153,197       |  | 116,528       |  | 85,768       
|Weighted average exercise price                         |  | $23.46        |  | $22.81        |  | $21.67       
|Aggregate intrinsic value                               |  | $0            |  | $250,629      |  | $1,858,325   
|Weighted average remaining contractual life
 (in years) |  | 5.4           |  | 6.2           |  | 6.5          

86

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements 
December 31, 2008, 2007 and 2006

A summary of
option activity under the 1997 FNB Bancorp Plan as of December 31, 2008, and
changes during the year then ended is presented below.

1997
First National Bank Plan

|                                 |  |        |         |                                    |   |                                                              |  |                                    |     |  |   |   | 
|-------------------------------- |  | ------ | ------- | ---------------------------------- | - | ------------------------------------------------------------ |  | ---------------------------------- | --- |  | - | - | 
|Options                          |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted-
 Average
 Remaining
 Contractual
 Term
 (in years) |  | Aggregate
 Intrinsic
 Value
 (000) |    
|                                 |  |        |         |                                    |   |                                                              |  |                                    |    
|Outstanding at January 1, 2008   |  |        | 77,766  |                                    | $ | 20.31                                                        |  |                                    |     |  |   |   | 
|Granted                          |  |        |        |                                    | $ | 0.00                                                         |  |                                    |     |  |   |   | 
|Exercised                        |  |        | (11,610 | )                                  | $ | 18.50                                                        |  |                                    |     |  |   |   | 
|Forfeited or expired             |  |        |        |                                    | $ | 0.00                                                         |  |                                    |     |  |   |   | 
|                                 |  |        |         |                                    |   |                                                              |  |                                    |     |  |   |   | 
|Outstanding at December 31, 2008 |  |        | 66,156  |                                    | $ | 20.63                                                        |  |                                    | 4.1 |  | $ | 0 | 
|Exercisable at December 31, 2008 |  |        | 47,275  |                                    | $ | 17.82                                                        |  |                                    | 2.4 |  | $ | 0 | 

The following
supplemental information applies to the three years ended December 31:

|                                                        |  |               |  |               |  |              
|------------------------------------------------------- |  | ------------- |  | ------------- |  | -------------
|                                                        |  | 2008          |  | 2007          |  | 2006         
|                                                        |  |               |  |               |  |              
|Options outstanding                                     |  | 47,275        |  | 77,766        |  | 64,893       
|Range of exercise prices                                |  | $16.20-$27.66 |  | $16.20-$27.66 |  | $16.20-$18.71
|Weighted average remaining contractual life             |  | 2.4           |  | 4.4           |  | 3.2          
|Fully vested options                                    |  | 47,275        |  | 54,170        |  | 64,893       
|Weighted average exercise price                         |  | $17.82        |  | $17.11        |  | $17.16       
|Aggregate intrinsic value                               |  | $0            |  | $337,166      |  | $1,113,368   
|Weighted average remaining contractual life
 (in years) |  | 2.4           |  | 2.3           |  | 3.2          

87

---



FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

|     |                            
|---- | ---------------------------
|(18) | Quarterly
 Data (Unaudited)

|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|----------------------------------------------------- |  | ----- | ------ | ------ | - | ----- |  | ------ | ----- |  | - | ----- | 
|(Dollars
 in thousands)                               |  | First |        | Second |   | Third |  | Fourth |      
|                                                      |  |       |        |        |   |       |  |        |      
|2008:                                                 |  |       |        |        |   |       |  |        |       |  |   |       | 
|Interest income                                       |  | $     | 10,371 |        | $ | 9,657 |  | $      | 9,787 |  | $ | 9,612 | 
|Interest expense                                      |  |       | 3,322  |        |   | 2,841 |  |        | 2,725 |  |   | 2,619 | 
|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|Net interest income                                   |  |       | 7,049  |        |   | 6,816 |  |        | 7,062 |  |   | 6,993 | 
|Provision for loan losses                             |  |       | 990    |        |   | 300   |  |        | 300   |  |   | 1,455 | 
|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|Net interest income, after provision for
 loan losses |  |       | 6,059  |        |   | 6,516 |  |        | 6,762 |  |   | 5,538 | 
|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|Non-interest income                                   |  |       | 1,261  |        |   | 1,137 |  |        | 769   |  |   | 1,876 | 
|Non-interest expense                                  |  |       | 6,177  |        |   | 6,286 |  |        | 6,481 |  |   | 6,400 | 
|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|Income before income taxes                            |  |       | 1,143  |        |   | 1,367 |  |        | 1,050 |  |   | 1,014 | 
|Provision for income taxes                            |  |       | 256    |        |   | 277   |  |        | 3     |  |   | 75    | 
|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|Net earnings                                          |  | $     | 887    |        | $ | 1,090 |  | $      | 1,047 |  | $ | 939   | 
|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|                                                      |  |       |        |        |   |       |  |        |       |  |   |       | 
|Basic earnings per share                              |  | $     | 0.28   |        | $ | 0.35  |  | $      | 0.34  |  | $ | 0.31  | 
|Diluted earnings per share                            |  | $     | 0.28   |        | $ | 0.35  |  | $      | 0.34  |  | $ | 0.31  | 

|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|----------------------------------------------------- |  | ----- | ----- | ------ | - | ------ |  | ------ | ------ |  | - | ------ | 
|(Dollars in thousands)                                |  | First |       | Second |   | Third  |  | Fourth |       
|                                                      |  |       |       |        |   |        |  |        |       
|2007:                                                 |  |       |       |        |   |        |  |        |        |  |   |        | 
|Interest income                                       |  | $     | 9,904 |        | $ | 10,654 |  | $      | 10,881 |  | $ | 10,851 | 
|Interest expense                                      |  |       | 3,086 |        |   | 3,429  |  |        | 3,531  |  |   | 3,611  | 
|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|Net interest income                                   |  |       | 6,818 |        |   | 7,225  |  |        | 7,350  |  |   | 7,240  | 
|Provision for loan losses                             |  |       | 150   |        |   | 180    |  |        | 180    |  |   | 180    | 
|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|Net interest income, after provision for
 loan losses |  |       | 6,668 |        |   | 7,045  |  |        | 7,170  |  |   | 7,060  | 
|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|Non-interest income                                   |  |       | 1,004 |        |   | 1,142  |  |        | 1,093  |  |   | 1,061  | 
|Non-interest expense                                  |  |       | 5,758 |        |   | 5,808  |  |        | 5,761  |  |   | 5,855  | 
|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|Income before income taxes                            |  |       | 1,914 |        |   | 2,379  |  |        | 2,502  |  |   | 2,266  | 
|Provision for income taxes                            |  |       | 455   |        |   | 652    |  |        | 707    |  |   | 568    | 
|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|Net earnings                                          |  | $     | 1,459 |        | $ | 1,727  |  | $      | 1,795  |  | $ | 1,698  | 
|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|                                                      |  |       |       |        |   |        |  |        |        |  |   |        | 
|Basic earnings per share                              |  | $     | 0.46  |        | $ | 0.55   |  | $      | 0.57   |  | $ | 0.54   | 
|Diluted earnings per share                            |  | $     | 0.46  |        | $ | 0.54   |  | $      | 0.57   |  | $ | 0.54   | 

There may be rounding
differences between the sum of the four quarters presented and the annual
amounts used throughout the annual report.

88

---



FNB BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

|     |                                                   
|---- | --------------------------------------------------
|(19) | Condensed
 Financial Information of Parent Company

The
parent company-only condensed balance sheets, condensed statements of income,
and condensed statements of cash flows information are presented as of and for
the year ended December 31, as follows:

|                                           |  |                          |        |  |  |      |  |   |        | 
|------------------------------------------ |  | ------------------------ | ------ |  |  | ---- |  | - | ------ | 
|FNB Bancorp                                |  | Condensed balance sheets |       
|                                           |  |                          |       
|(Dollars in thousands)                     |  | 2008                     |        |  |  | 2007 | 
|                                           |  |                          |        |  |  |      | 
|Assets:                                    |  |                          |        |  |  |      |  |   |        | 
|Cash and due from banks                    |  | $                        | 56     |  |  |      |  | $ | 55     | 
|Investments in subsidiary                  |  |                          | 68,023 |  |  |      |  |   | 66,473 | 
|Income tax receivable from subsidiary      |  |                          | 2      |  |  |      |  |   | 17     | 
|Dividend receivable from subsidiary        |  |                          | 455    |  |  |      |  |   |       | 
|Other assets                               |  |                          | 79     |  |  |      |  |   | 10     | 
|                                           |  |                          |        |  |  |      |  |   |        | 
|Total assets                               |  | $                        | 68,615 |  |  |      |  | $ | 66,555 | 
|                                           |  |                          |        |  |  |      |  |   |        | 
|Liabilities:                               |  |                          |        |  |  |      |  |   |        | 
|Dividend declared                          |  | $                        | 455    |  |  |      |  | $ |       | 
|Other liabilities                          |  |                          | 11     |  |  |      |  |   | 10     | 
|                                           |  |                          |        |  |  |      |  |   |        | 
|Total liabilities                          |  |                          | 466    |  |  |      |  |   | 10     | 
|Stockholdersequity                        |  |                          | 68,149 |  |  |      |  |   | 66,545 | 
|                                           |  |                          |        |  |  |      |  |   |        | 
|Total liabilities and stockholders equity |  | $                        | 68,615 |  |  |      |  | $ | 66,555 | 
|                                           |  |                          |        |  |  |      |  |   |        | 

|                                                                               |  |                                |       |   |      |       |      |   |       | 
|------------------------------------------------------------------------------ |  | ------------------------------ | ----- | - | ---- | ----- | ---- | - | ----- | 
|FNB Bancorp                                                                    |  | Condensed statements of income |      
|(Dollars
 in thousands)                                                        |  | 2008                           |       |   | 2007 |       | 2006 |  
|                                                                               |  |                                |       |   |      |       |     
|Income:                                                                        |  |                                |       |   |      |       |      |   |       | 
|Dividends from subsidiary                                                      |  | $                              | 3,473 |   | $    | 2,636 |      | $ | 1,172 | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|Total income                                                                   |  |                                | 3,473 |   |      | 2,636 |      |   | 1,172 | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|Expense:                                                                       |  |                                |       |   |      |       |      |   |       | 
|Other expense                                                                  |  |                                | 129   |   |      | 72    |      |   | 27    | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|Total expense                                                                  |  |                                | 129   |   |      | 72    |      |   | 27    | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|Income before income taxes and equity in
 undistributed earnings of subsidiary |  |                                | 3,344 |   |      | 2,564 |      |   | 1,145 | 
|Income tax expense (benefit)                                                   |  |                                | (14   | ) |      | (4    | )    |   | 1     | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|Income before equity in undistributed
 earnings of subsidiary                  |  |                                | 3,358 |   |      | 2,568 |      |   | 1,144 | 
|Equity in undistributed earnings of
 subsidiary                                |  |                                | 605   |   |      | 4,111 |      |   | 6,438 | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 
|Net earnings                                                                   |  | $                              | 3,963 |   | $    | 6,679 |      | $ | 7,582 | 
|                                                                               |  |                                |       |   |      |       |      |   |       | 

89

---



FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|FNB Bancorp                                                                                 |  | Condensed statement of cash flows |       
|                                                                                            |  |                                   |       
|(Dollars in thousands)                                                                      |  | 2008                              |        | 2007 |   | 2006   |  
|                                                                                            |  |                                   |        |      |   |        |  
|Net earnings                                                                                |  | $                                 | 3,963  |      | $ | 6,679  |   | $ | 7,582  |  
|Income tax receivable from subsidiary                                                       |  |                                   | 15     |      |   | 66     |   |   | (83    | )
|Change in other assets                                                                      |  |                                   | (69    | )    |   | (8     | ) |   | (1     | )
|Change in other liabilities                                                                 |  |                                   | 1      |      |   | 10     |   |   | (10    | )
|Undistributed earnings of subsidiary                                                        |  |                                   | (605   | )    |   | (4,111 | ) |   | (6,438 | )
|Stock-based compensation expense                                                            |  |                                   | 171    |      |   | 68     |   |   | 39     |  
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|Cash flows from operating activities                                                        |  |                                   | 3,476  |      |   | 2,704  |   |   | 1,089  |  
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|Stock options exercised, including tax
 benefits of $8 in 2008, $22 in 2007 and $83 in 2006 |  |                                   | 215    |      |   | 368    |   |   | 508    |  
|Dividend receivable from subsidiary                                                         |  |                                   | (455   | )    |   |       |   |   |       |  
|Dividends paid                                                                              |  |                                   | (1,771 | )    |   | (1,720 | ) |   | (1,633 | )
|Repurchases of common stock                                                                 |  |                                   | (1,464 | )    |   | (1,334 | ) |   | (73    | )
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|Cash flows provided by financing activities                                                 |  |                                   | (3,475 | )    |   | (2,686 | ) |   | (1,198 | )
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|Net (increase) decrease in cash                                                             |  |                                   | 1      |      |   | 18     |   |   | (109   | )
|Cash, beginning of year                                                                     |  |                                   | 55     |      |   | 37     |   |   | 146    |  
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  
|Cash, end of year                                                                           |  | $                                 | 56     |      | $ | 55     |   | $ | 37     |  
|                                                                                            |  |                                   |        |      |   |        |   |   |        |  

|     |                  
|---- | -----------------
|(20) | Subsequent
 Event

The Company decided to
participate in the U. S. Treasury Department Capital Purchase Program. The
additional funds will be used to increase the Companys lending capability in
the midst of the current recessionary environment. It will also act as a
cushion for future capital adequacy, should the economy continue to deteriorate
and adversely affect its borrowers ability to repay their loans.

The Company completed a
$12,000,000 capital transaction with the U. S. Department of the Treasury
through their Capital Purchase Program. The transaction was completed on
Friday, February 27, 2009. As a condition of the transaction, the Company
issued the Treasury Department 12,000 shares of senior preferred stock with a
5% stated coupon for 5 years, which would become 9% if not repaid in five
years. The shares have a liquidation value of $1,000 per share and must be
redeemed after ten years. In addition, the Company issued a warrant to purchase
600 shares of warrant preferred stock with a 9% stated coupon with a
liquidation value of $1,000 per share, and a purchase price of $0.01 per share.
The Treasury purchased these shares immediately as part of the transaction.

90

---



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTINGAND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure
Controls and Procedures. Disclosure controls and procedures are designed
with the objective of ensuring that information required to be disclosed in
reports filed by the Company under the Exchange Act, such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures are also designed with the objective of
ensuring that such information is accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Evaluation
of Disclosure Controls and Procedures and Internal Control over Financial
Reporting. The Companys management, including the Chief Executive Officer
and the Chief Financial Officer, evaluated the Companys disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of
December 31, 2008. Based on this evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the Companys disclosure controls
and procedures are effective. There was no change in the Companys internal
control over financial reporting that occurred during the quarter ended
December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.

Managements
Report on Internal Control over Financial Reporting. Management of the
Company is responsible for establishing and maintaining adequate internal
control over financial reporting. As defined in Rule 13a-15(f) under the
Exchange Act, internal control over financial reporting is a process designed
by, or under the supervision of, a companys principal executive and principal
financial officers and effected by a companys board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. It
includes those policies and procedures that:

| |    |                                                                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Pertain to the maintenance
 of records that in reasonable detail accurately and fairly reflect the
 transactions and dispositions of the assets of a company;                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                            
| | b) | Provide reasonable
 assurance that transactions are recorded as necessary to permit preparation
 of financial statements in accordance with generally accepted accounting
 principles, and that receipts and expenditures of a company are being made only
 in accordance with authorizations of management and the board of directors of
 the company, and
| |    |                                                                                                                                                                                                                                                                                                                                                            
| | c) | Provide reasonable
 assurance regarding prevention or timely detection of unauthorized
 acquisition, use or disposition of a companys assets that could have a
 material effect on its financial statements.                                                                                                                                              

Because of the inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

91

---



The Companys management has
used the criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) to evaluate the effectiveness of the Companys internal control over
financial reporting. Management has selected the COSO framework for its evaluation
as it is a control framework recognized by the SEC and the Public Company
Accounting Oversight Board, that is free from bias, permits reasonably
consistent qualitative and quantitative measurement of the Companys internal
controls, is sufficiently complete so that relevant controls are not omitted
and is relevant to an evaluation of internal controls over financial reporting.

Based on our assessment,
management has concluded that our internal control over financial reporting,
based on criteria established in Internal Control-Integrated Framework issued
by COSO was effective as of December 31, 2008.

Moss Adams LLP, the
registered public accounting firm that audited the consolidated financial
statements included in this Annual Report under Item 8, Financial Statements
and Supplementary Data, has issued a report with respect to the effectiveness
of the Companys internal control over financial reporting. This report appears
as part of the Report of Independent Registered Public Accounting Firm under
said Item 8 of this Annual Report and is incorporated here by reference.

Date: March 13, 2009

|                        |  |                        
|----------------------- |  | -----------------------
|/s/ Thomas C. Mc Graw   |  | /s/ David A. Curtis    
|                        |  |                        
|Thomas C. Mc Graw       |  | David A. Curtis        
|Chief Executive Officer |  | Chief Financial Officer

Inherent
Limitations on Effectiveness of Controls

The Companys management,
including the Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls or our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.

ITEM 9B. OTHER INFORMATION

Not applicable.

92

---



PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE

The information required by
Item 10 of Form 10-K is incorporated by reference to the applicable information
contained in the Companys Proxy Statement for the 2009 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

The information required by
Item 11 of Form 10-K is incorporated by reference to the applicable information
contained in the Companys Proxy Statement for the 2009 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information required by
Item 12 of Form 10-K is incorporated by reference to the applicable information
contained in the Companys Proxy Statement for the 2009 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by
Item 13 of Form 10-K is incorporated by reference to the applicable information
contained in the Companys Proxy Statement for the 2009 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by
Item 14 of Form 10-K is incorporated by reference to the applicable information
contained in the Companys Proxy Statement for the 2009 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14

93

---



PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES

|       |                                                                                                                                                                                                                                                                           
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)(1) | Financial Statements. Listed and included in
 Part II, Item 8.                                                                                                                                                                                                            
|       |                                                                                                                                                                                                                                                                           
|(2)    | Financial Statement
 Schedules. All schedules have been omitted since the required information is
 not present in amounts sufficient to require submission of the schedule or
 because the information required is included in the Financial Statements or
 notes thereto.
|       |                                                                                                                                                                                                                                                                           
|(3)    | Exhibits.                                                                                                                                                                                                                                                                 

|                |  |                                                                                                                                                                                                                                                                                                                                                   
|--------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Document
 Description                                                                                                                                                                                                                                                                                                                             
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|**2.1           |  | (deleted)                                                                                                                                                                                                                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|2.2             |  | Acquisition Agreement dated
 November 5, 2004, signed among First National Bank of Northern California,
 Sequoia National Bank and Hemisphere National Bank (incorporated by reference
 from Exhibit 2.2 to the Companys Current Report on Form 8-K filed with the
 Commission on November 9, 2004).                                             
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|2.3             |  | First Addendum to Acquisition
 Agreement, dated December 13, 2004, signed among First National Bank of
 Northern California, Sequoia National Bank, Hemisphere National Bank and
 Privee Financial, Inc. (incorporated by reference from Exhibit 2.5 to the
 Companys Current Report on Form 8-K filed with the Commission on December
 17, 2004)
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|2.4             |  | Second Addendum to
 Acquisition Agreement. Dated as of April 15, 2005, signed among First
 National Bank Of Northern California, Sequoia National Bank, Hemisphere
 National Bank and Privee Financial, Inc. (incorporated by reference from
 Exhibit 2.4 to the Companys Current Report on Form 8-K filed with the
 Commission on May 2, 2005)  
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|**3.1           |  | Articles of Incorporation
 of FNB Bancorp                                                                                                                                                                                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|3.2             |  | Certificate of
 Determination of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
 (Series A Preferred Stock), of FNB Bancorp (incorporated by reference from
 Exhibit 3.1 to the Companys Current Report on Form 8-K filed with the
 Commission on February 27, 2009)                                                                
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|3.3             |  | Certificate of Determination
 of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (Series B
 Preferred Stock), of FNB Bancorp (incorporated by reference from Exhibit 3.2
 to the Companys Current Report on Form 8-K filed with the Commission on
 February 27, 2009)                                                                
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|3.4             |  | Bylaws of FNB Bancorp (as
 amended through February 27, 2009).                                                                                                                                                                                                                                                                                    
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|**4.1           |  | Specimen of the
 Registrants common stock certificate.                                                                                                                                                                                                                                                                                           
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|4.2             |  | Form of Certificate for the
 Series A Preferred Stock (incorporated by reference from Exhibit 4.1 to the
 Companys Current Report on Form 8-K filed with the Commission on February
 27, 2009)                                                                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|4.3             |  | Warrant for Purchase of
 Shares of Series B Preferred Stock (Warrant) (incorporated by reference
 from Exhibit 4.2 to the Companys Current Report on Form 8-K filed with the Commission
 on February 27, 2009)                                                                                                                                 
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|4.4             |  | Form of Certificate for the
 Series B Preferred Stock (incorporated by reference from Exhibit 4.3 to the
 Companys Current Report on Form 8-K filed with the Commission on February
 27, 2009)                                                                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                   
|**10.1          |  | Lease agreement dated April
 24, 1995, as amended, for Eureka Square Branch Office of First National Bank
 of Northern California at Eureka Square Shopping Center, Pacifica, California                                                                                                                                                          

94

---



|                |  |                                                                                                                                                                                                                             
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Document
 Description                                                                                                                                                                                                       
|                |  |                                                                                                                                                                                                                             
|**10.2          |  | Lease agreement dated June
 8, 1999, as amended, for Linda Mar Branch Office of First National Bank of
 Northern California at Linda Mar Shopping Center, Pacifica, California.                                             
|                |  |                                                                                                                                                                                                                             
|10.3            |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|10.4            |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|10.5            |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|10.6            |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|10.7            |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|10.8(a)         |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|10.8(b)         |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|**10.9          |  | First National Bank Profit
 Sharing and 401(k) Plan dated August 26, 1969.*                                                                                                                                                 
|                |  |                                                                                                                                                                                                                             
|**10.10         |  | First National Bank
 Deferred compensation Plan dated November 1, 1997.*                                                                                                                                                    
|                |  |                                                                                                                                                                                                                             
|**10.11         |  | Salary Continuation
 Agreement between First National Bank of Northern California and Michael R.
 Wyman, dated December 20, 1996.*                                                                                          
|                |  |                                                                                                                                                                                                                             
|**10.12         |  | Salary Continuation
 Agreement between First National Bank of Northern California and Paul B.
 Hogan dated December 20, 1996.*                                                                                              
|                |  |                                                                                                                                                                                                                             
|**10.13         |  | Salary Continuation
 Agreement between First National Bank of Northern California and James B.
 Ramsey, dated December 23, 1999.*                                                                                           
|                |  |                                                                                                                                                                                                                             
|**10.14         |  | Form of Management
 Continuity Agreement signed on July 20, 2000, between First National Bank of
 Northern California and Jim D. Black, Charles R. Key and Anthony J.
 Clifford.*                                           
|                |  |                                                                                                                                                                                                                             
|10.15           |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|**10.16         |  | Communications Site Lease
 Agreement as amended dated March 30, 1999, between First National Bank of
 Northern California, as Lessor and Nextel of California, Inc., as Lessee,
 with respect to Redwood City Branch Office.
|                |  |                                                                                                                                                                                                                             
|10.17           |  | (deleted)                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                             
|**10.18         |  | Separation Agreement
 between First National Bank of Northern California and Paul B. Hogan, dated
 December 5, 2001.*                                                                                                       
|                |  |                                                                                                                                                                                                                             
|***10.19        |  | First Amendment to
 Separation Agreement between First National Bank of Northern California and
 Paul B. Hogan, dated March 22,
 2002.*                                                                                     
|                |  |                                                                                                                                                                                                                             
|****10.20       |  | FNB Bancorp Stock Option
 Plan (effective March 15, 2002).*                                                                                                                                                                 
|                |  |                                                                                                                                                                                                                             
|****10.21       |  | FNB Bancorp Stock Option
 Plan, Form of Incentive Stock Option Agreement.*                                                                                                                                                  
|                |  |                                                                                                                                                                                                                             
|****10.22       |  | FNB Bancorp Stock Option
 Plan, Form of Nonstatutory Stock Option Agreement.*                                                                                                                                               
|                |  |                                                                                                                                                                                                                             
|*****10.23      |  | FNB Bancorp 2002 Stock
 option Plan (adopted June 28, 2002).*                                                                                                                                                               
|                |  |                                                                                                                                                                                                                             
|*****10.24      |  | FNB Bancorp 2002 Stock
 Option Plan, Form of Incentive Stock Option Agreement.*                                                                                                                                             
|                |  |                                                                                                                                                                                                                             
|*****10.25      |  | FNB Bancorp 2002 Stock
 Option Plan, Form of Nonstatutory Stock option Agreement.*                                                                                                                                          

95

---



|                |  |                                                                                                                                                                                                                                                                                     
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Document
 Description                                                                                                                                                                                                                                                               
|                |  |                                                                                                                                                                                                                                                                                     
|******10.26     |  | Lease Agreement dated
 August 13, 2003, for San Mateo Branch Office of First National Bank of
 Northern California, located at 150 East Third Avenue, San Mateo, California.                                                                                                        
|                |  |                                                                                                                                                                                                                                                                                     
|10.27           |  | Salary Continuation
 Agreement and Split-Dollar Agreement for Jim D. Black (incorporated by
 reference from Exhibit 10.27 to the Companys Current Report on Form 8-K
 filed with the Commission on September 10, 2004).*                                                           
|                |  |                                                                                                                                                                                                                                                                                     
|10.28           |  | Salary Continuation
 Agreement and Split-Dollar Agreement for Anthony J. Clifford (incorporated by
 reference from Exhibit 10.28 to the Companys Current Report on Form 8-K
 filed with the Commission on September 10, 2004).*                                                    
|                |  |                                                                                                                                                                                                                                                                                     
|10.29           |  | Amended and Restated Salary
 Continuation and Split-Dollar Agreement for James B. Ramsey (incorporated by
 reference from Exhibit 10.29 o the companys current Report on Form 8-K filed
 with the Commission on September 10, 2004).*                                              
|                |  |                                                                                                                                                                                                                                                                                     
|*******10.30    |  | Lease Agreement dated May 1,
 2003 as amended by Assignment, Assumption and Consent Agreement for the
 Financial District Branch of First National Bank of Northern California
 located at 65 Post Street, San Francisco, California.                                               
|                |  |                                                                                                                                                                                                                                                                                     
|*******10.31    |  | Lease Agreement dated July
 1, 1999, as amended by Assignment, Assumption and Consent for the Portola
 Branch Office of First National Bank of Northern California located at 699
 Portola Drive, San Francisco, California.                                                        
|                |  |                                                                                                                                                                                                                                                                                     
|10.32           |  | Amendment to Salary
 Continuation Agreement for Jim D. Black (incorporated by reference from
 Exhibit 99.37 to the Companys Current Report on Form 8-K filed with the
 Commission on July 26, 2006).*                                                                              
|                |  |                                                                                                                                                                                                                                                                                     
|10.33           |  | Amendment to Salary
 Continuation Agreement for Anthony J. Clifford (incorporated by reference
 from Exhibit 99.38 to the Companys Current Report on Form 8-K filed with the
 Commission on July 26, 2006).*                                                                       
|                |  |                                                                                                                                                                                                                                                                                     
|10.34           |  | Amendment to Amended and
 Restated Salary Continuation Agreement for James B. Ramsey (incorporated by
 reference from Exhibit 99.39 to the Companys Current report on Form 8-K
 filed with the Commission on July 26, 2006).*                                                      
|                |  |                                                                                                                                                                                                                                                                                     
|10.35           |  | Lease Agreement dated
 February 3, 2006, for warehouse facility of First National Bank of Northern
 California (incorporated by reference from Exhibit 10.35 to the companys
 Annual Report on Form 10-K filed with the Commission on March 13, 2008).                             
|                |  |                                                                                                                                                                                                                                                                                     
|10.36           |  | First National Bank
 Deferred Compensation Plan dated December 1, 2007 (incorporated by reference
 from Exhibit 10.36 to the Companys Annual Report on Form 10-K filed with the
 Commission on March 13, 2008).*                                                                   
|                |  |                                                                                                                                                                                                                                                                                     
|10.37           |  | Amendment No. 5 to the
 First National Bank Profit Sharing and 401(k) Plan dated December 1, 2007
 (incorporated by reference from Exhibit 10.37 to the Companys Annual Report
 on Form 10-K filed with the Commission on March 13, 2008).*                                        
|                |  |                                                                                                                                                                                                                                                                                     
|10.38           |  | Executive Supplemental
 Compensation Agreement between First National Bank of Northern California and
 David A. Curtis dated March 3, 2008 (incorporated by reference from Exhibit
 10.38 to the Companys Current Report on Form 8-K filed with the Commission
 on March 6, 2008).*
|                |  |                                                                                                                                                                                                                                                                                     
|10.39           |  | Split-Dollar Life Insurance
 Agreement between First National Bank of Northern California and David A.
 Curtis dated March 3, 2008 (incorporated by reference from Exhibit 10.39 to
 the Companys Current Report on Form 8-K filed with the Commission on March
 6, 2008).*        
|                |  |                                                                                                                                                                                                                                                                                     
|********10.40   |  | FNB Bancorp 2008 Stock
 option Plan (adopted February 22, 2008).*                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                     
|10.41           |  | Second 409A Amendment to
 the Salary Continuation Agreement for Jim D. Black (incorporated by reference
 from Exhibit 99.66 to the Companys Current Report on Form 8-K filed with the
 Commission on December 22, 2008).*                                                          
|                |  |                                                                                                                                                                                                                                                                                     
|10.42           |  | Second 409A Amendment to
 the Salary Continuation Agreement for Anthony J. Clifford (incorporated by
 reference from Exhibit 99.67 to the Companys Current Report on Form 8-K
 filed with the Commission on December 22, 2008).*                                                   

96

---



|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Document
 Description                                                                                                                                                                                                                                                                                                                                                                                                                
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.43           |  | Amendment to the Executive
 Supplemental Compensation Agreement for David A. Curtis (incorporated by
 reference from Exhibit 99.68 to the Companys Current Report on Form 8-K
 filed with the Commission on December 22, 2008).*                                                                                                                                                                                                    
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.44           |  | Letter Agreement dated
 February 27, 2009, between FNB Bancorp and United States Department of the
 Treasury pertaining to the election of directors by the holder(s) of the
 Series A and Series B Preferred Stock (incorporated by reference from Exhibit
 4.4 to the Companys Current Report on Form 8-K filed with the Commission on
 February 27, 2009)                                                                        
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.45           |  | Letter Agreement, including
 Schedule A and Securities Purchase Agreement Standard Terms, dated February
 27, 2009, between FNB Bancorp and United States Department of the Treasury,
 with respect to the issuance and sale of the Series A and Series B
 Preferred Stock and the Warrant (incorporated by reference from Exhibit 10.1
 to the Companys Current Report on Form 8-K filed with the Commission on
 February 27, 2009)
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.46           |  | Letter Agreement dated
 February 27, 2009, between FNB Bancorp and United States Department of the
 Treasury pertaining to the American Recovery and Reinvestment Act of 2009
 (incorporated by reference from Exhibit 10.2 to the Companys Current Report
 on Form 8-K filed with the Commission on February 27, 2009)                                                                                                             
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.47           |  | Letter Agreement dated
 February 27, 2009, between FNB Bancorp and United States Department of the
 Treasury amending certain sections of the Securities Purchase Agreement
 Standard Terms (incorporated by
 reference from Exhibit 10.3 to the Companys Current Report on Form 8-K filed
 with the Commission on February 27, 2009)                                                                                               
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.48           |  | Form of Compensation
 Modification Agreement and Waiver, dated February 27, 2009, executed by each
 of:                                                                                                                                                                                                                                                                                                                              
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                |  | Thomas C. McGraw                                                                                                                                                                                                                                                                                                                                                                                                                     
|                |  | Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                              
|                |  | FNB Bancorp and First
 National Bank of Northern California                                                                                                                                                                                                                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                |  | Jim D. Black, President                                                                                                                                                                                                                                                                                                                                                                                                              
|                |  | FNB Bancorp and First
 National Bank of Northern California                                                                                                                                                                                                                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                |  | Anthony J. Clifford
 Executive Vice President and Chief Operating Officer
 FNB Bancorp and First National Bank of Northern California                                                                                                                                                                                                                                                                                                
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                |  | David A. Curtis
 Senior Vice President and Chief Financial Officer
 FNB Bancorp and First National Bank of Northern California                                                                                                                                                                                                                                                                                                       
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                |  | Randy R. Brugioni
 Senior Vice President and Senior Loan Officer
 FNB Bancorp and First National Bank of Northern California                                                                                                                                                                                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                |  | (incorporated by reference
 from Exhibit 10.4 to the Companys Current Report on Form 8-K filed with the
 Commission on February 27, 2009).                                                                                                                                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|******14.0      |  | Code of Ethics                                                                                                                                                                                                                                                                                                                                                                                                                       
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|21.1            |  | The Registrant has one
 subsidiary, First National Bank of Northern California.                                                                                                                                                                                                                                                                                                                                                      
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|23.1            |  | Consent of Moss Adams LLP                                                                                                                                                                                                                                                                                                                                                                                                            
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|31.1            |  | Rule 13a-14(a)/15d-14(a)
 Certification (principal executive officer)                                                                                                                                                                                                                                                                                                                                                                
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|31.2            |  | Rule 13a-14(a)/15d-14(a)
 Certification (principal financial officer)                                                                                                                                                                                                                                                                                                                                                                
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|32.0            |  | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                                                                                                          

97

---



|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|*        |  | Denotes management
 contracts, compensatory plans or arrangements.                                                                                                                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|**       |  | Incorporated by reference
 to registrants Quarterly Report on Form 10-Q filed with the Commission on
 May 15, 2002.                                                                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|***      |  | Incorporated by reference
 to registrants Annual Report on Form 10-K filed with the Commission on March
 31, 2002.                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|****     |  | Incorporated by reference
 to registrants Statement on Form S-8 (No. 333-91596) filed with the
 Commission on July 1, 2002.                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|*****    |  | Incorporated by reference
 to the registrants Registration Statement on Form S-8 (No. 333-98293) filed
 with the Commission on August 16, 2002.                                                                                                                                                                                                                  
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|******   |  | Incorporated by reference
 to registrants Annual Report on Form 10-K filed with the Commission on March
 30, 2003.                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|*******  |  | Incorporated by reference
 to registrants Annual Report on Form 10-K filed with the Commission on March
 29, 2006.                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|******** |  | Incorporated by reference
 from Appendix A to the Registrants Definitive Proxy Statement for its 2008
 Annual Meeting of Shareholders, filed with the Commission on April 21, 2008.                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                                                                                                                   
|         |  | An Annual Report
 for the fiscal year ended December 31, 2008, and Notice of Annual Meeting and
 Proxy Statement for the Companys 2009 Annual Meeting will be mailed to
 security holders subsequent to the date of filing this report. Copies of said
 materials will be furnished to the Commission in accordance with the
 Commissions Rules and Regulations.

98

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

|                       |     |                                | 
|---------------------- | --- | ------------------------------ | 
|                       |     | FNB BANCORP                    | 
|                       |     |                                | 
|Dated: March
 13, 2009 | By: | /s/ Thomas
 C. McGraw          | 
|                       |     |                                | 
|                       |     | Thomas C.
 McGraw              | 
|                       |     | Chief
 Executive Officer       | 
|                       |     | (Principal
 Executive Officer) | 

Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.

|                      |  |                                                                                                                    |  |                
|--------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ---------------
|Signature             |  | Title                                                                                                              |  | Date           
|                      |  |                                                                                                                    |  |                
|/s/ Michael R. Wyman  |  | Chairman of
 the Board of
 Directors                                                                               |  | March 13,
 2009
|                      |  |                                                                                                                    | 
|Michael R. Wyman      |  |                                                                                                                    | 
|                      |  |                                                                                                                    |  |                
|/s/ Thomas
 C. McGraw |  | Director,
 Chief Executive Officer and Secretary                                                                   |  | March 13,
 2009
|                      |  |                                                                                                                    | 
|Thomas C.
 McGraw     |  |                                                                                                                    | 
|                      |  |                                                                                                                    |  |                
|/s/ David A.
 Curtis  |  | Senior Vice
 President and Chief Financial Officer (Principal Financial Officer and Principal
 Accounting Officer) |  | March 13,
 2009
|                      |  |                                                                                                                    | 
|David A.
 Curtis      |  |                                                                                                                    | 

99

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|                            |  |                                                                    |  |                
|--------------------------- |  | ------------------------------------------------------------------ |  | ---------------
|Signature                   |  | Title                                                              |  | Date           
|                            |  |                                                                    |  |                
|/s/ Merrie
 Turner Lightner |  | Director                                                           |  | March 13,
 2009
|                            |  |                                                                    |  |                
|Merrie
 Turner Lightner     |  |                                                                    |  |                
|                            |  |                                                                    |  |                
|/s/ Michael
 Pacelli        |  | Director                                                           |  | March 13,
 2009
|                            |  |                                                                    |  |                
|Michael
 Pacelli            |  |                                                                    |  |                
|                            |  |                                                                    |  |                
|/s/ Edward
 J. Watson       |  | Director                                                           |  | March 13,
 2009
|                            |  |                                                                    |  |                
|Edward J.
 Watson           |  |                                                                    |  |                
|                            |  |                                                                    |  |                
|/s/ Lisa
 Angelot           |  | Director                                                           |  | March 13,
 2009
|                            |  |                                                                    |  |                
|Lisa Angelot                |  |                                                                    |  |                
|                            |  |                                                                    |  |                
|/s/ Anthony
 J. Clifford    |  | Director and
 Executive Vice President and Chief Operating Officer |  | March 13,
 2009
|                            |  |                                                                    | 
|Anthony J.
 Clifford        |  |                                                                    | 

100

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