<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. (FEE REQUIRED)
For the fiscal year ended December 31, 1995
--------------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. (NO FEE REQUIRED)
For the transition period from_____________ to ________________
Commission file number 2-78580
-------------
PNB FINANCIAL GROUP
(Name of small business issuer in its charter)
CALIFORNIA 95-3847640
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4665 MACARTHUR COURT, NEWPORT BEACH, CA. 92660
(Address of principal executive offices) (Zip Code)
Issuers telephone number, including area code: (714) 851-1033
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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
----- -----
Issuer's revenue for its most recent fiscal year ending December 31, 1995 is
$19,445,000. The aggregate market value of the voting stock held by
nonaffiliates, which excludes shares held by officers, directors, and 10%
stockholders of the registrant as of March 29, 1996 was approximately
$3,700,000.
The number of shares of common stock outstanding as of March 29, 1996, was
2,162,933.
Documents incorporated by reference - None.
This document contains 68 pages. The index to exhibits appears on page 66.
<PAGE>
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 28-29
Item 3. LEGAL PROCEEDINGS 29
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 29
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 30
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30-35
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES 35
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS 36
Item 10. EXECUTIVE COMPENSATION 37-38
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 38-39
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 39-64
SIGNATURES 65
</TABLE>
<PAGE>
PART I
Item 1. BUSINESS
- -----------------
PNB Financial Group
-------------------
PNB Financial Group (the "Company") was organized on June 3, 1982 as a
California corporation and is registered as a bank holding company under the
federal Bank Holding Company Act of 1956, as amended (the "Act"). The Company
commenced business on April 29, 1983 when, pursuant to a reorganization, it
acquired all of the voting stock of Pacific National Bank ("PNB" or the
"Bank"). At this time, the Company's principal business is to serve as a
holding company for the Bank.
Pacific National Bank
---------------------
PNB was organized as a national banking association in 1980. PNB's business
consists primarily of attracting deposits from the public and using such
deposits, together with capital and other funds, to make loans to individuals
and small and medium-size businesses. In 1995, PNB operated four loan and
depository regional offices, a mortgage loan office and two mortgage loan
production offices. With the exception of one mortgage loan production office
in Phoenix, Arizona, all of the offices are in the Southern California
marketplace with locations in Newport Beach, Irvine Spectrum, Beverly Hills,
Orange, Irvine (mortgage division office) and Riverside (mortgage loan
production office). On December 31, 1995 the Bank employed 154 full time
equivalent people including 20 commissioned mortgage brokers. The Bank's
residential mortgage division accounted for 76 of the employees of the Bank.
Several of the Bank's employees also provide services for the Company.
PNB's lending activities are conducted primarily in the Southern California
marketplace. As of December 31, 1995, PNB's loan portfolio totalled
approximately $104 million of which approximately 53% consisted of commercial
loans, 38% in real estate loans and the remainder in consumer loans. The
Bank's revenues are derived principally from interest earned on its loan
portfolio and other investments, loan fees and income derived from the
origination and sale of mortgage and SBA loans. Interest on deposits,
salaries, occupancy, and general and administrative costs are the Bank's major
expense items.
In August 1991, the Bank acquired certain assets and liabilities of the
Beverly Hills, California branch of Unity Savings and Loan Association, F.A.
("Unity"). This purchase enabled the Bank to obtain a presence in the Beverly
Hills marketplace and, at December 31, 1995, this regional office had
approximately $22 million in loans and $24 million in deposits.
In 1986, the Bank opened a residential mortgage division for the origination
and sale of mortgage loans. All of the mortgage loans it originates are sold
to institutional investors. These loans are funded by the Bank and generally
delivered to the purchaser within twenty days after funding. The Bank does
not maintain the servicing on the loans which it sells. The Bank's mortgage
division operates both a wholesale and retail department. The wholesale
department accounts for the majority of the loans originated. Most of the
loans generated by the Bank's residential mortgage division are FHA insured or
VA guaranteed loans. For additional information concerning this segment of
the Company, please see footnote 8 of the Company's consolidated financial
statements on page 59 of this report.
In 1992, in order to increase its lending activities to the small business
market and increase its fee income, the Bank established a Small Business
Administration ("SBA") loan department. The SBA department originates loans
which are underwritten within guidelines established by the Bank and the U.S.
SBA program. Under this program, a portion of the loan is guaranteed by the
U.S. Government's agency. The Bank typically sells the guaranteed portion of
the loan into the secondary market and earns a fee from the sales. The Bank
retains the
3
<PAGE>
remaining portion of the loan in its portfolio and continues to service the
total loan. As of December 31, 1995, the Bank was servicing approximately
$10.5 million of SBA loans for others. The Bank has a certified lending
status with the SBA in Orange County and is presently applying for a preferred
lending status. The preferred lending status gives the Bank designated
underwriting from the SBA and may enable the Bank to increase its volume of
SBA lending.
The deposit services offered by the Bank include those traditionally offered
by commercial banks, such as checking, savings and time deposits. As of
December 31, 1995, approximately 39% of the Bank's deposits were noninterest
bearing demand deposits and 31% of the total deposits were interest bearing
demand deposits. A portion of the noninterest bearing demand accounts consist
of demand accounts maintained by escrow companies and title insurance
companies. It is against California state law to pay interest on these types
of accounts. Consistent with banking industry practice, the Bank provides an
earnings allowance for these types of accounts and usually provides external
services not offered by the Bank to compensate for these deposits. As of
December 31, 1995, the Bank maintained approximately $23 million of escrow and
title insurance companies noninterest bearing accounts (37% of the total
noninterest bearing deposits). As has been the practice during the past, the
Bank has not acquired, does not have, and does not seek to have, deposits
placed by brokers, commonly referred to as "brokered deposits".
Consistent with prudent banking philosophy, Management seeks to invest a large
portion of the Bank's assets by making commercial, consumer/installment, short
and long-term real estate loans. In addition, a portion of the Bank's assets
are invested in its inventory of mortgage loans held for sale. The balance of
the Bank's investable funds are placed in short-term insured certificates of
deposit, a combination of short and medium-term securities of the United
States government and its agencies, mortgage backed securities, and in other
short-term money market instruments, including the sale of federal funds to
other banks.
During 1995, Management continued to emphasize the Bank's marketing efforts
through the extensive use of personal solicitations by the Bank's officers and
directors. All officers are responsible for making regular calls on potential
customers to solicit business as well as on existing customers to obtain
referrals. Through the combined efforts of its employees, officers and
directors, the Bank offers its customers the opportunity to deal on an
individual basis with professional bankers who have commercial and real estate
lending experience, lending authority, and the resources to promptly serve
customers' banking needs. To ensure timely decisions on lending transactions,
the Bank's loan committee meets on a regular basis and is available for
special meetings where an expedited evaluation of a loan is requested by the
customer, and the proposed loan is appropriate for our expedited review
evaluation.
The banking business in California, generally, and in the Bank's primary
market area in Los Angeles and Orange Counties, in particular, is highly
competitive with respect to both deposits and loans. The area is dominated by
a relatively small number of major banks which have many offices operating
over a wide geographic area. Many of the major commercial banks operating in
the Bank's market area offer certain services which the Bank currently does
not offer. These competitors, which are more highly capitalized than the Bank
in terms of absolute dollars, also have higher lending limits.
During 1994, several community banks located in the Bank's primary marketing
area were taken over by the F.D.I.C. and, subsequently, sold to other banking
institutions. During 1995 and 1994, several other transactions took place
where banks were merged or sold. The last two years have seen the number of
independent banks in Orange County decrease from 28 to 19, and there are
several mergers/acquisitions not yet completed which will reduce this number
further. As of December 31, 1995, the Bank ranks sixth in total asset size of
all independent banks headquartered in Orange county. This consolidation in
the local marketplace has created certain opportunities for the Bank to
increase its market share. It has also created a situation where some Bank
customers are concerned as to the financial stability of smaller community
banks and have elected, or might elect, to deal with the larger multi-regional
banks.
4
<PAGE>
The Bank competes for deposits primarily on the basis of interest rates paid
and the quality of service provided to its customers. The Bank faces strong
competition for all types of deposits, including deposits from escrow and
title insurance companies which it has actively marketed. The majority of
deposits are placed by depositors in the geographic areas in which the Bank's
branches are located. The Bank competes for loans principally on the basis of
the quality of services it provides borrowers, the interest rates and loan
fees charged and the types of loans it originates. The Bank believes it
attracts customers by offering a higher degree of professionalism and service
than that offered by its competition.
In order to compete effectively with the other financial institutions in its
primary market area, the Bank relies principally upon personal contacts by its
officers, directors and employees in addition to customer referrals. The
Bank's personnel emphasize highly personalized services and the advantages of
dealing with a smaller institution attuned to the particular needs of the
borrower. For customers whose loan demands exceed the Bank's lending limit,
the Bank may arrange for the funding of such loans on a participation basis
with other banks. The Bank also assists customers requiring services not
offered by the Bank to obtain these services from its correspondent banks.
Effect of Governmental Policies and Recent Legislation
------------------------------------------------------
The assets of a commercial banking institution consist largely of interest
earning assets, including loans and investment securities. The liabilities of
a commercial banking institution consist largely of interest bearing
liabilities, including time deposits, money market accounts, and other bank
borrowings. The value and yields of these assets, and the rates paid on these
liabilities, are sensitive to changes in prevailing market rates of interest.
The earnings and growth of the Bank, and, therefore, the Company, are
partially dependent upon its ability to increase the amount and net yield of
its interest earning assets, which in turn depends upon growth and the ability
of the Bank to maintain a favorable differential or "spread" between the yield
on interest earning assets and the rate paid on deposits and other interest
bearing liabilities. The earnings and growth of the Bank and the Company are
also impacted by the fees and commissions generated by the Bank's mortgage and
SBA division. The market place in which the mortgage division operates is
also very sensitive to changes in the prevailing market rates of interest.
The earnings and growth of the Company and the Bank are substantially
influenced by general economic conditions, the monetary and fiscal policies of
the federal government, and the policies of regulatory agencies, particularly
the Federal Reserve Board ("FRB") and the Comptroller of the Currency
("Comptroller"), the primary regulator of the Bank. The FRB implements
national monetary policies by its open-market operations in United States
Government securities, by adjusting the required level of reserves for
financial institutions subject to its reserve requirements, and by varying the
discount rate for borrowings by banks which are members of the Federal Reserve
System. The Comptroller regulates daily operations of the Bank through an
extensive system of regulation, reporting, and accounting. The Comptroller's
accounting guidelines and policies are not always the same as generally
accepted accounting principles. The actions of the FRB and the Comptroller in
these areas influence the growth of Bank loans, investments and deposits and
also affect interest rates charged on loans and deposits. The nature and
impact of any future changes in monetary, regulatory and accounting policies
cannot be predicted.
The Bank's SBA department, together with the residential mortgage division
utilize federal governmental agencies in providing loans to its customers. On
two occasions in November and December, 1995, the U. S. Federal Government was
forced to shut down various non-essential agencies due to the Federal budget
impasse. During these two occasions, the SBA department and Housing and Urban
Development ("HUD") were shut down. A prolonged shutdown of these departments
could have a material effect on the Bank's ability to guarantee and/or insure
SBA loans and FHA/VA loans. This inability may lead to the Bank limiting or
temporarily stopping these lending programs which could have a material effect
on the operation of the Bank's SBA department and
5
<PAGE>
residential mortgage loan department. The budget impasse is still not
resolved and this could lead to another furlough of these agencies in 1996.
The Bank's SBA department is substantially impacted by the policies,
guidelines and funding availability established by the U. S. Government's SBA.
Periodically, Congress sets the amount of SBA funds available. The level of
funding could severely effect the operation of the Bank's SBA department. In
January, 1995, the SBA, in an effort to reduce the Federal Government's
subsidy of the program, changed several of its rules. Also during 1995,
legislation was introduced in Congress to abolish the SBA agency. This
legislation did not pass, but the Bank's SBA department is subject to
operational effects of the changes in the SBA. Below is a list of changes
which were enacted by the SBA in 1995 which could effect the level of SBA
lending at the Bank.
* Maximum amount of SBA guarantee lowered from $750,000 to $500,000
* Debt refinancing eliminated on SBA 7(a) program
* SBA guaranty fee raised from 2% to 3.5%
* SBA guaranty amount changed from a range of 70% - 90% of total loans, to
80% on loans less than $100,000 and 75% on loans greater than $100,000
* SBA servicing fee increased from .40% to .50%
The full impact of these changes cannot be predicted at this time.
Potential legislation is also being discussed (or has been proposed) which
also could affect the business activities of the Company and the Bank. It is
probable that other bills affecting the banking industry will be introduced in
the future. Such legislation includes wide-ranging proposals to limit the
scope and amount of deposit insurance, to provide greater regulatory freedom
for well-capitalized banks while increasing the level of supervision for
inadequately capitalized institutions, to allow the banking industry to sell
insurance to customers, consolidation of the regulatory agencies and to move
the industry closer to an "interstate banking" system. The extent to which
the present or future business of the Company or Bank may be affected thereby
cannot be predicted.
California law currently permits the acquisition of California banks or bank
holding companies by out-of-state bank holding companies on a nationwide
reciprocal basis. These interstate banking measures could have an impact on
the competitive relationships among California financial institutions, since
out-of-state institutions, some with relatively large financial and managerial
resources, are now able to acquire California banks and thereby engage in a
banking business in California. The extent to which interstate banking will
affect the banking industry in California cannot be predicted.
In August 1989, the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") was enacted. This legislation was adopted in order to
reform the regulation and supervision of financial institutions and the
insurance of deposits of financial institutions. Among the major changes made
by this law is a measure requiring the Federal Deposit Insurance Corporation
("FDIC") to assume responsibility for insuring the deposits of financial
institutions formerly insured by the Federal Savings and Loan Insurance
Corporation. FIRREA establishes two separate insurance funds to be
administered by the FDIC. Premiums on deposit insurance will be assessed by
the FDIC independently for the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF").
In September 1992, the FDIC agreed on a system that will charge higher
insurance rates to banks that pose greater risks to the deposit insurance
funds. The new rules went into effect January 1, 1993 and provide that each
institution will be assigned to one of three groups (well capitalized,
adequately capitalized, or undercapitalized) based upon its capital ratios.
The FDIC will then assign each institution to one of three subgroups based on
an evaluation based upon reviews by the institution's primary supervisor,
statistical analyses of financial statements and other information relevant to
the ongoing risk posed by the institution. During the second quarter of 1995,
6
<PAGE>
the BIF reached its predetermined goal of 1.25% of total insured deposits.
Due to this level, the FDIC established a lower risk based premium schedule
ranging from 4 cents to 27 cents per $100 of deposits depending on the Bank's
risk classification. On November 14, 1995, the FDIC Board of Directors voted
to again reduce the insurance premiums paid on deposits covered by the BIF.
The new rate schedule became effective on January 1, 1996 and ranges from a
statutory annual minimum of $2,000 to 27 cents per $100 of deposits depending
on the Bank's risk classification. In addition to the rate reductions, on
July 1, 1995, the Bank's FDIC risk classification was upgraded to reflect the
improved financial condition of the Bank. These two changes lowered the
Bank's BIF deposit premiums from 29 cents per $100 during the first quarter of
1995, to 7 cents per $100 of BIF deposits during 1996.
Due to the 1991 acquisition of Unity deposits, some of the deposit base of the
Bank is insured under SAIF. Until the second quarter of 1995, deposit
premiums on both the BIF and SAIF have been identical. Although the BIF
premiums have been reduced, institutions insured by the SAIF have continued to
pay premiums on a risk-related basis of 23 cents per $100 of deposits to 31
cents per $100 of deposits. SAIF insured deposits will continue to pay higher
rates than BIF insured deposits because the SAIF remains seriously
undercapitalized. Congress is currently working on legislation that proposes
a one time recapitalization fee on SAIF insured institutions which would
recapitalize the SAIF to an adequate level. Once the recapitalization has
occurred, the legislation proposes that the deposit premiums of the SAIF will
become equivalent to the BIF and that a merger of the two funds would
eventually occur. If the legislation is adopted, the Bank expects to pay a
recapitalization fee of approximately $350,000 to $450,000. In the long term,
this one time fee will be offset by lower SAIF deposit premiums.
FIRREA also strengthens the FDIC's regulatory enforcement authority in the
following ways: (1) it expands the categories of persons over whom enforcement
powers may be exercised; (2) it reduces the threshold for the imposition of
civil monetary penalties, including allowing such penalties to be imposed for
an inadvertent failure to file a regulatory report in a timely fashion; (3) it
substantially increases criminal and civil monetary penalties; (4) it expands
available remedies, including "reimbursement" by parties committing a wrong
and orders requiring the sale of assets; (5) it enhances provisions for
immediate remedies; (6) it expands the FDIC's power to appoint conservators
and receivers; and (7) it allows the FDIC to proceed against "commonly
controlled insured financial institutions" in the event that the FDIC is
required to provide assistance to a troubled financial institution.
FIRREA also gives the FDIC authority to approve or require changes in an
institution's management in certain circumstances; imposes new limitations on
certain investment activities and on certain deposit-generating activities;
amends the Act to permit the acquisition of both healthy and failing savings
associations by bank holding companies; and prohibits a bank which does not
meet the applicable minimum capital requirements from accepting brokered
deposits.
The FDIC Improvement Act of 1991 ("FDICIA") followed on the heels on FIRREA
and further served to curb perceived abuses and laxness in the financial
institutions marketplace. It established certain safety and soundness
guidelines, including accounting reforms, establishing a program for "least
cost resolution" when dealing with failing institutions, and other mechanisms
to allow prompt corrective action. In addition, FDICIA was enacted to improve
certain existing regulations by clarifying or amending a bank's
responsibilities and liabilities under the Equal Credit Opportunity Act,
Expedited Funds Availability Act, branch closing requirements, Truth In
Savings Act and others.
A third piece of legislation which is of particular importance to the Bank is
the Community Reinvestment Act ("CRA"), which requires banking institutions to
address the credit needs of their entire communities including low and
moderate income areas in which they do business. The Comptroller periodically
conducts examinations of banking activities to determine the sufficiency of
efforts to meet the credit needs of the entire community, including low and
moderate income neighborhoods, consistent with safe and sound banking
practices. FIRREA provisions also require that certain aspects of the
Comptroller's CRA performance evaluation be made public.
7
<PAGE>
The Comptroller's evaluation of the Bank under CRA involves a variety of
factors, with banking institutions afforded flexibility in determining how to
best assist in meeting the community's credit needs. In brief, under the
current regulation, an assessment of the institution looks to twelve factors
in five performance categories, including the ascertainment of community
credit needs, the marketing of credit offered and extended, the geographic
distribution and record of office openings and closings, community
development, and any discriminatory or prohibited credit practices. The CRA
rating by the Comptroller is a consideration in reviewing and exercising
discretion to approve or disapprove a financial institution's application for
a deposit facility or proposed acquisition. In 1995, the Bank underwent a CRA
examination by the Comptroller and received a "satisfactory" CRA rating.
In December 1993, due to complaints that the implementation of CRA has focused
too much on paperwork and process and not enough on results the regulatory
agencies jointly proposed revisions to the CRA regulation. The new procedure
which is effective on January 1, 1996 seeks to emphasize performance rather
than promote consistency in assessments, reduce unnecessary compliance burden,
and permit more effective enforcement against institutions with poor
performance. The current twelve assessment standards which focus largely on
process and paperwork, are being replaced with more performance oriented
assessment standards. The rules include a streamlined assessment method that
would be used to evaluate "small institutions". A small institution is an
institution with total assets under $250 million as of December 31st of either
1994 or 1995 and is either independent or an affiliate of a holding company
with less than one billion of assets. The Bank qualifies as a small
institution, and will be subject to the streamlined assessment method.
Whether or not this streamlining will truly relieve the Bank from excessive
CRA compliance burden cannot be predicted at this time.
In December 1993, pursuant to the mandate of FDICIA, the federal banking
agencies issued an interagency policy statement regarding the allowance for
possible loan losses. Insured depository institutions are required to
maintain a level of the allowance for possible loan losses that is adequate to
absorb "estimated credit losses" associated with the loan portfolio, including
all binding commitments to lend. "Estimated credit losses" are defined as an
estimate of the current amount of the loan portfolio that is not likely to be
collected given the facts and circumstances as of the evaluation date. These
estimated credit losses should meet the criteria for accrual of a loss
contingency set forth in generally accepted accounting principles as stated in
Statement on Financial Accounting Standards No. 5 ("SFAS 5"). The policy
statement describes the responsibility of the Board of Directors and
Management to maintain the allowance for possible loan losses at an adequate
level and prescribes that the allowance for possible loan losses should be no
less than the sum of the following items:
(1) For loans and classified substandard or doubtful, whether analyzed and
provided individually or as part of pools, all estimated credit losses
over the remaining effective lives of these loans.
(2) For components of the loan portfolio not classified, all estimated credit
losses over the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international loans.
The Board of Directors and Management are also responsible to ensure:
(1) the institution has an effective loan review system;
(2) loans or portions of loans are promptly charged off if determined
uncollectible; and
(3) the process for determining an adequate level for the allowance for
possible loan losses is based on a comprehensive, adequately documented
and consistently applied analysis of the loan portfolio.
The policy statement describes components of the portfolio which should be
reviewed and factors to consider in the estimation of credit losses.
Furthermore, the policy statement specifies the steps which will be followed
by
8
<PAGE>
examiners of the federal banking regulatory agencies in examining the adequacy
of the allowance for possible loan losses for individual institutions. These
steps include analyzing an institution's policies, practices and historical
credit loss experience, and a further check of the reasonableness of
Management's methodology by comparing the reported allowance for possible loan
losses (after deduction of all loans, or portions thereof, classified as loss)
against the sum of the following amounts:
(1) 50 percent of the portfolio that is classified doubtful;
(2) 15 percent of the portfolio that is classified substandard; and
(3) for the portions of the portfolio that have not been classified (including
those loans designated special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of the
evaluation date (based on the institution's average annual rate of net
charge-offs experienced over the previous two or three years on similar
loans, adjusted for current conditions and trends).
The policy statement cautions that "the amount is neither a 'floor' nor a
'safe harbor' level for an institution's allowance for possible loan losses.
However, federal examiners will view a shortfall relative to this amount as
indicating a need to more closely review Management's analysis to determine
whether it is reasonable and supported by the weight of available evidence,
and that all relevant factors have been appropriately considered."
Supervision and Regulation
--------------------------
PNB Financial Group
-------------------
The Company, as a bank holding company, is subject to regulation under the
Act. The Company is required to file quarterly and annual reports with the
FRB and to provide such additional information as the FRB may require. The
FRB also conducts examinations of the Company and any nonbank subsidiaries, if
any. The FRB has authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under the Act and regulations adopted by the FRB,
a bank holding company and its subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services. The FRB also regulates the
ability of the bank holding company to establish branches in foreign
countries.
The Company is required to obtain the prior approval of the FRB for the
acquisition of more than 5% of the voting shares or substantially all of the
assets of any bank or bank holding company. In addition, the Company is
prohibited by the Act, except in certain statutorily prescribed instances,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company and
from engaging, directly or indirectly, in activities other than those of
banking, managing or controlling banks or furnishing services to its
subsidiaries. However, the Company may, subject to the approval of the FRB,
engage in, or acquire shares of companies engaged in any activities which are
deemed by the FRB to be so closely related to banking, or managing or
controlling banks, as to be a proper incident thereto. The FRB is empowered
to differentiate between activities commenced de novo and activities commenced
-------
by acquisition, in whole or in part, of a going concern and is prohibited from
approving an application by a bank holding company to acquire voting shares of
any commercial bank in another state unless such acquisition is specifically
authorized by the laws of such other state. The Company has agreed with the
FRB not to pay dividends without the prior approval of the FRB and also to
advise the FRB if the Company repurchases any stock.
9
<PAGE>
Pacific National Bank
---------------------
The Bank, as a national banking association, is subject to primary
supervision, examination and regulation by the Comptroller. The Bank also is
a member of the Federal Reserve System and is subject to applicable provisions
of the Federal Reserve Act and regulations issued thereunder. The deposits of
the Bank are insured by the FDIC to the maximum extent provided by law.
On December 14, 1992, as a result of the regularly scheduled examination of
the Bank, a memorandum of understanding, (MOU) was executed with the
Comptroller. An MOU is an informal enforcement action initiated by the
Comptroller and entered into between a bank's board of directors and the
Comptroller. The MOU was intended to help remedy the Comptroller's criticisms
of the Bank and restore the Bank to a stronger condition. At the conclusion
of the Comptroller's February 1995 exam, the Comptroller determined that the
Bank was in full compliance with all articles of the MOU and the MOU was
formally removed. The Bank now operates free to any extraordinary
requirements imposed by the Comptroller.
Capital Adequacy
----------------
The Comptroller, the FDIC and the FRB impose risk-based capital requirements
on all banking organizations. The risk-based capital guidelines were designed
to make regulatory capital requirements more sensitive to the differences in
the risk profiles of individual banking organizations.
In general, the risk-based capital guidelines provide detailed definitions of
which obligations will be treated as capital, and assign different weights to
various assets and off-balance sheet items, depending upon the perceived
degree of credit risk to which they expose such entities. Each bank is
required to maintain a minimum ratio of core capital (Tier 1) and total
capital (Tier 2) to risk-weighted assets of 4% and 8%, respectively.
A bank's risk-based capital ratio is calculated by dividing its qualifying
total capital (the numerator of the ratio) by its risk-weighted assets (the
denominator). A bank's qualifying total capital consists of the sum of two
types of capital elements: core capital elements (Tier 1 capital) and
supplementary capital elements (Tier 2 capital), minus certain specified
deductions (collectively, the deductions), if any. Tier 1 capital consists of
the sum of: (i) common stockholders' equity capital; (ii) qualifying perpetual
preferred stock and related surplus; and (iii) minority interests in the
equity accounts of consolidated subsidiaries, less certain other intangible
assets. At least 50% of a bank's qualifying total capital must consist of
Tier 1 capital. Tier 2 capital consists of the sum of: (a) the allowance for
loan and lease losses (limited to 1.25% of total risk-weighted assets); (b)
certain additional perpetual preferred stock not included in Tier 1 capital,
and related surplus; (c) hybrid capital instruments, including mandatory
convertible debt securities; and (d) term subordinated debt and intermediate
term preferred stock and related surplus (limited to 50% of Tier 1 capital).
The deductions from Tier 1 capital and Tier 2 capital consist of: (i)
investments in banking and finance subsidiaries that are not consolidated for
regulatory capital purposes; (ii) intentional reciprocal cross-holdings of
capital securities issued by banks; and (iii) other deductions determined by
supervisory authority.
After determination of a bank's qualifying total capital, total risk-weighted
assets are ascertained. Under these guidelines, a bank's balance sheet assets
and credit equivalent amounts of off-balance sheet items, such as letters of
credit and outstanding loan commitments, are assigned to one of four broad
risk categories, which range from 0% for risk-free assets, such as cash and
certain U.S. Government securities, to 100% for relatively high-risk assets
such as loans and investments in fixed assets, premises and other real estate
owned. The aggregate dollar amount of each category is then multiplied by the
risk weight associated with that category. The resulting weighted values from
each of the categories are then added together to determine the total risk-
weighted assets that comprise the denominator of the risk-based capital ratio.
10
<PAGE>
The risk-based capital ratio focuses principally on broad categories of credit
risk; however, the ratio does not take into account other factors that can
affect a bank or bank holding company's financial condition. Those factors
include overall interest rate risk exposure; liquidity, funding and market
risks; the quality and level of earnings; investment or loan portfolio
concentrations; the quality of loans and investments; the effectiveness of
loan and investment policies; and Management's overall ability to monitor and
control financial and operating risks. In addition to evaluating capital
ratios, an overall assessment of capital adequacy will take into account each
of those other factors, including, in particular, the level and severity of
problem and adversely classified assets. For this reason, the final
supervisory judgement on a bank's capital adequacy may differ significantly
from the conclusions that might be drawn solely from the entity's risk-based
capital ratio. In light of the foregoing, banks are generally expected to
operate above the minimum risk-based capital ratio.
The FRB and the Comptroller impose a leverage capital ratio to compliment the
risk-based capital guidelines. The leverage capital ratio serves as a
backstop to the risk-based capital guidelines, and require every bank holding
company, as well as every bank, to maintain a minimum level of equity capital
to protect against unforeseen and extraordinary events.
In determining compliance with the leverage capital rule, the leverage capital
ratio is calculated by dividing Tier 1 capital (as defined earlier) by total
adjusted assets. Total adjusted assets are calculated by adding the allowance
for possible loan losses to total assets. The minimum leverage ratio for
BOPEC 1 bank holding companies and CAMEL 1 banks is 3%. Other bank holding
companies and banks will be required to have a minimum leverage ratio of 4% to
5%. The leverage capital rule also provides a general subjective catch-all
requirement that financial institutions should hold capital commensurate with
the level and nature of all the risks, including the volume and severity of
problem loans.
The regulators' position is that the leverage ratio is necessary because the
risk-based capital ratios do not incorporate a comprehensive measure of
interest risk. The regulators indicate that the leverage ratio, in
conjunction with the risk-based capital guidelines, establishes a more precise
measure of capital adequacy than the current standard and ensures that ample
safeguards remain in place. The leverage ratio imposes a limit on the extent
to which a financial institution could leverage its equity capital base. In
addition, the leverage ratio would be a check on other risks such as funding
and market risks, investment and loan portfolio concentrations, asset quality,
and adequacy of internal policies, systems and controls.
At December 31, 1995, the Company's and the Bank's capital ratios were in
excess of all minimum capital requirements. The actual capitalization of the
Company and the Bank are set forth as follows:
<TABLE>
<CAPTION>
Pacific PNB
Regulatory National Financial
Requirements Bank Group
------------- --------- ----------
<S> <C> <C> <C>
Leverage Capital Ratio 4.0% 7.7% 9.1%
Risk Based Capital:
Tier I Capital 4.0% 10.4% 12.3%
Tier 2 Capital 8.0% 11.7% 13.4%
</TABLE>
Other Regulations
-----------------
Various requirements and restrictions under the laws of the United States
affect the operations of the Bank. Federal statutes and regulations relate to
many aspects of the Bank's operations, including reserves against deposits,
loans, investments, mergers and acquisitions, borrowings, dividends and
locations of branch offices.
11
<PAGE>
The Bank also is subject to applicable provisions of California law, insofar
as they do not conflict with, or are not preempted by, federal banking law.
There has been no further effect upon the Bank's capital expenditures,
earnings, or competitive position as a result of compliance with federal,
state or local provisions regarding the discharge of materials into the
environment or the removal of hazardous waste or toxic substances. The Bank
is aware of one loan secured by property on which methane gas has been found,
but believes that remediation will be accomplished without further cost to the
Bank.
Distribution of Assets, Liabilities and Shareholders' Equity
------------------------------------------------------------
The following table sets forth the Company's condensed consolidated average
balances of each principal category of assets, liabilities and shareholders'
equity for each of the past two years. Average balances are based on daily
averages for the Bank and monthly averages for the Company, since the Company
does not maintain daily average information. In addition, the Company does
not calculate the net unrealized loss on investment securities available for
sale on a daily basis and, therefore, its average balance is calculated using
month end data. Management believes that the difference between monthly and
daily average data (where monthly data has been used) is not significant. All
dollar amounts are in thousands.
<TABLE>
<CAPTION>
PNB Financial Group
Average Balance Report
Year Ended December 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Assets
------
Cash and due from banks $ 9,620 $ 13,100
Interest bearing deposits in other banks -0- 949
Federal funds sold 2,286 8,079
--------- ---------
Total cash and cash equivalents 11,906 22,128
Securities available for sale 14,911 25,405
Mortgage loans held for sale 21,660 13,429
Loans 107,713 102,964
Allowance for loan losses (2,674) (3,168)
--------- ---------
Net loans 105,039 99,796
Premises and equipment, net 1,485 1,955
Other real estate owned 2,240 3,094
Other assets 2,208 3,804
--------- ---------
Total assets $159,449 $169,609
========= =========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PNB Financial Group
Average Balance Report
Year Ended December 31,
-----------------------
1995 1994
--------- ----------
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 51,140 $ 64,693
Interest bearing 91,976 90,735
-------- --------
Total deposits 143,116 155,428
Short-term borrowings 1,044 145
Other liabilities 1,415 917
-------- --------
Total liabilities 145,575 156,490
Stockholders' equity:
Capital stock 16,130 16,134
Accumulated deficit (1,913) (2,397)
Unrealized loss on securities
available for sale (343) (618)
-------- --------
Total stockholders' equity 13,874 13,119
-------- --------
Total liabilities and stockholders' equity $159,449 $169,609
======== ========
</TABLE>
Interest Rates and Differentials
--------------------------------
The Company's consolidated earnings are affected by the difference between the
income the Bank receives from its loan portfolio, investment in mortgage loans
held for sale, and securities available for sale and the Bank's cost of funds,
principally interest paid on deposits. Interest rates charged on the Bank's
loans are affected principally by the demand for such loans, the supply of
money available for lending purposes, and competition. In turn, these are
influenced by general economic conditions and other factors beyond the
Company's control, such as federal economic and tax policies, the general
supply of money in the economy, governmental budgetary action, and the actions
of the FRB.
Information concerning consolidated average interest earning assets along with
the average interest rates earned is set forth in the following table.
Averages were computed based upon daily balances for the Bank and monthly
balances for the Company, and all dollar amounts shown are in thousands.
13
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Average Interest Average Average Interest Average
Balance Income Rate Balance Income Rate
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
- --------------
Total loans (1) (2) $107,713 $10,335 9.6% $102,964 $ 8,755 8.5%
Mortgage loans held for sale 21,660 1,681 7.8% 13,429 1,070 8.0%
Securities available for sale 14,911 762 5.1% 25,405 1,230 4.8%
Federal funds sold 2,286 128 5.6% 8,079 301 3.7%
Interest-bearing deposits with banks - - - 949 40 4.2%
-------- ------- --- -------- ------- ---
Total interest-earning assets $146,570 $12,906 8.8% $150,826 $11,396 7.6%
-------- ------- --- -------- ------- ---
</TABLE>
(1) Net loan fees, which are deferred and amortized over the life of the loan,
are included in interest earned on loans. Total loan fees included in
interest income was $189,000 and $196,000 for the years ending December
31, 1995 and 1994, respectively.
(2) Average loan balances includes average loans on nonaccrual status of
$7,593,000 and $5,425,000 in 1995 and 1994, respectively, and are recorded
net of average unearned income of $287,000 and $216,000 as of December 31,
1995 and 1994, respectively. Without nonaccrual loans, the average rate
on loans would be 10.3% and 9.0% for the years ended December 31, 1995 and
1994, respectively.
Information concerning consolidated average interest bearing liabilities,
along with the average interest rates paid, is set forth in the following
table. Averages were computed based upon daily balances for the Bank and
monthly balances for the Company, and all dollar amounts are in thousands.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Average Interest Average Average Interest Average
Balance Income Rate Balance Income Rate
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Deposits and Borrowed Money
- ---------------------------
Interest bearing demand deposits $49,241 $1,266 2.6% $50,974 $1,195 2.3%
Time deposits 37,023 1,935 5.2% 33,556 1,286 3.8%
Savings deposits 5,711 154 2.7% 6,205 168 2.7%
Short-term borrowings 1,044 49 4.7% 143 3 2.1%
Total interest-bearing liabilities $93,019 $3,404 3.7% $90,880 $2,652 2.9%
======= ====== === ======= ====== ===
</TABLE>
14
<PAGE>
Net interest earnings (in thousands) and net yield on average earning assets
are shown in the table below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Total interest income (1) $ 12,906 $ 11,396
Total interest expense 3,404 2,652
-------- --------
Net interest earnings $ 9,502 $ 8,744
======== ========
Average earning assets (2) $146,570 $150,826
Net yield on average earning assets (3) 6.5% 5.8%
</TABLE>
(1) Net loan fees, which are deferred and amortized over the life of the loan,
are included in interest earned on loans.
(2) Average earning assets include average loans on nonaccrual status of
$7,593,000 and $5,425,000 in 1995 and 1994 respectively, and are recorded
net of average unearned income of $287,000 and $216,000 as of December 31,
1995, and 1994, respectively.
(3) Without average nonaccrual loans, net yield on average earning assets
would be 6.8% and 6.0% for the years ended December 31, 1995 and 1994,
respectively.
The Bank purchases external services on behalf of certain banking customers in
consideration of their noninterest bearing accounts. These external services
are limited to what a larger bank with the ability to provide in-house
services, such as bookkeeping, payroll and courier, could provide. In these
larger banks, these costs could be reflected as increased payroll, rent and
other administrative costs. At PNB, these costs are reflected as other
deposit expense. The effects of these arrangements in relationship to the
approximate average deposit balances are presented below. All dollar amounts
are in thousands.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1995 1994
----------------------------- -----------------------------
Average Deposit Average Average Deposit Average
Balance Expense Rate Balance Expense Rate
-------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Approximate noninterest
bearing accounts for which
external services are provided $20,000 $ 944 4.7% $35,000 $1,064 3.0%
======= ===== === ======= ====== ===
</TABLE>
The effects of these arrangements together with the average interest-bearing
liabilities and average interest rates paid from page 14 of this report are
presented below. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1995 1994
----------------------------- -----------------------------
Average Deposit Average Average Deposit Average
Balance Expense Rate Balance Expense Rate
-------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Total interest bearing liabilities
and noninterest bearing
accounts for which external
services are provided $113,019 $4,348 3.8% $125,880 $3,716 3.0%
======== ====== === ======== ====== ===
</TABLE>
15
<PAGE>
The effects of these arrangements on net interest earnings and net yield on
average earning assets are shown in the table below. All dollar amounts are in
thousands.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Net interest earnings $ 9,502 $ 8,744
Other deposit expense 944 1,064
-------- --------
Net interest earnings after other deposit expense $ 8,558 $ 7,680
======== ========
Average earning assets $146,570 $150,826
Net yield on average earning assets after
other deposit expense 5.8% 5.1%
</TABLE>
The Company's rate and volume analysis for the interest bearing assets and
interest bearing liabilities for 1995 as compared to 1994, as well as 1994
compared to 1993, is summarized in the tables set forth below. The total
change is separated into the change attributable to variations in volume and
the change attributable to variations in interest rates. For purposes of this
table, changes which are not due solely to volume or interest rate changes
have been allocated evenly among changes attributable to variations in volume
and rate. Nonaccrual loans are included in average loans. Other deposit
expense is not included in this analysis.
<TABLE>
<CAPTION>
Change in Net Interest
Income in 1995 from 1994
-----------------------------
<S> <C> <C> <C>
(In Thousands)
Volume Rate Total
------- ------ ------
Interest income:
Loans $ 421 $1,165 $1,586
Mortgage loans held for sale 647 (36) 611
Securities available for sale (522) 54 (468)
Deposits in other banks (20) (20) (40)
Federal funds sold (270) 97 (173)
------- ------ ------
Total 256 1,260 1,516
Change in loan fees (7) - (7)
------- ------ ------
Total change in interest
and loan fee income $ 249 $1,260 $1,509
======= ====== ======
Interest expense:
Interest bearing demand deposits $ (43) $ 114 $ 71
Time deposits 157 493 650
Savings deposits (13) (2) (15)
Short-term borrowings 30 16 46
------- ------ ------
Total change in interest expense $ 131 $ 621 $ 752
======= ====== ======
Change in net interest and loan fee income $ 118 $ 639 $ 757
======= ====== ======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Change in Net Interest
Income in 1995 from 1994
-----------------------------
(In Thousands)
Volume Rate Total
------- ------ ------
<S> <C> <C> <C>
Interest income:
Loans $ (769) $ 357 $ (412)
Mortgage loans held for sale (921) 162 (759)
Securities available for sale 775 80 855
Deposits in other banks (9) 5 (4)
Federal funds sold (163) 104 (59)
------- ------ ------
Total (1,087) 708 (379)
Change in loan fees 41 - 41
------- ------ ------
Total change in interest and loan fee income $(1,046) $ 708 $ (338)
======= ====== ======
<CAPTION>
Volume Rate Total
------- ------ ------
<S> <C> <C> <C>
Interest expense:
Interest bearing demand deposits $ 99 $ (100) $ (1)
Time deposits (298) (78) (376)
Savings deposits 7 5 12
Short-term borrowings - 3 3
------- ------ ------
Total change in interest expense $ (192) $ (170) $ (362)
======= ====== ======
Change in net interest and loan fee income $ (854) $ 878 $ 24
======= ====== ======
</TABLE>
Securities Available for Sale
-----------------------------
The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" effective January 1, 1994. SFAS No. 115 requires that
investments in equity securities that have readily determinable fair values
and all investments in debt securities be carried at fair value unless they
meet the criteria to be classified as held to maturity. Securities classified
as available for sale are those debt securities that the Company intends to
hold for an indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses for
securities available for sale would be excluded from earnings and reported as
a net amount in a separate component of stockholders' equity. Realized gains
or losses, determined on the basis of the cost of the specific securities
sold, are included in earnings. The Company has classified all of its
securities as available for sale and on December 31, 1995 and 1994, has
recorded $84,000 and $1,009,000, respectively as unrealized losses as a
separate component of stockholders' equity. The Company has no securities
classified as held to maturity or trading.
17
<PAGE>
The maturity distribution for securities available for sale as well as the
weighted average yield for each range of maturity at December 31, 1995 is as
follows. Actual maturities may differ from contractual maturities in mortgage
backed securities because mortgages underlying the securities may be called or
repaid without any penalties. Therefore, these securities are not included in
the maturity categories in the following maturity summary. All dollar amounts
are in thousands.
<TABLE>
<CAPTION>
Weighted
Average
Fair Value Yield
---------- ---------
<S> <C> <C>
U.S. Government Securities
--------------------------
Maturities one year or less $3,514 4.99%
Maturities over one year through five years 1,220 4.82%
U.S. Government Agency Securities
---------------------------------
Maturities over one year through five years 2,221 4.61%
Mortgage backed securities 3,331 5.75%
Federal Reserve Board stock 340 6.00%
</TABLE>
Mortgage Banking and Mortgage Loans Held for Sale
-------------------------------------------------
Although all risks associated with mortgage banking cannot be easily
summarized, the following are some of the risks involved. One risk associated
with mortgage banking is the liability associated with representations and
warranties made to purchasers and insurers of the mortgage loans. Under
certain circumstances, the Bank may become liable for the unpaid principal and
interest if there has been a breach of representation or warranties. In
addition, primarily all mortgage loans are sold with a recourse provision.
The Bank has different recourse provisions with each separate investor.
Generally, loans sold under the recourse provision are required to be
repurchased by the Bank if the loan becomes delinquent within a range of one
to six months of funding, depending upon the investor. The Bank has the
choice to not purchase the loan, but to indemnify the investor for any and all
costs and losses associated with the investor's collection of the loan. The
Bank may become liable for the unpaid and uninsured portion of the principal
and delinquent interest on mortgage loans either repurchased or indemnified.
The Bank limits these risks by using Certified Direct Endorsement
Underwriters, thereby assuring itself of having qualified personnel with the
necessary underwriting skills. The Bank also uses tighter than mandated
underwriting criteria, and performs prefunding audits of randomly and
specifically selected loans by the Bank's quality control department. The
quality control department also performs post funding audits of randomly and
specifically selected loans to ensure that its credit quality is being adhered
to. The risks associated with the recourse provisions are further reduced as
a majority of the loans originated by the Bank have FHA insurance or VA
guarantees which reduce the potential losses, if any. The risks associated
with nongovernmental loans are reduced due to stricter underwriting guidelines
and generally lower loan to value requirements. Although the Bank has taken
steps to limit its risk, during 1994, the Bank did incur a large number of
mortgage loans that became delinquent and were subject to the recourse
provisions. The delinquencies and eventual foreclosures on these loans were a
direct result of the poor economic conditions in the Southern California
marketplace. The situation was further exaggerated by the rapid decline of
real estate values in Southern California. Management is continually
assessing its risks associated with the recourse provisions and has created a
reserve for the estimated future losses. Management believes that the risk
associated with mortgage loans sold has been adequately reserved in the
Company's financial statements as of December 31, 1995. The following table
indicates the obligations which have been incurred in connection with the
recourse provision for the years ending December 31. All dollar amounts,
except for the number of loans, are in thousands.
18
<PAGE>
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Number of loans repurchased/indemnified 26 55
Dollar volume of loans repurchased/indemnified $ 3,163 $ 6,651
Total loans sold $336,695 $218,035
Historical % of repurchased/indemnified loans 1.47% 1.42%
Loans charged off $ 200 $ 291
Reserve at December 31 $ 232 $ 246
Expenses associated with repurchases/indemnified loans $ 177 $ 218
</TABLE>
Mortgage loans held for sale are reported at the lower of cost or market. A
portion of mortgage loans held for sale are not funded until the Bank obtains
a purchase commitment from a third party. The risk specifically associated
with this portion of mortgage loans held for sale is that the Bank will fail
to deliver the loans to the purchaser by the commitment date. Policies and
procedures are in place to insure that all mortgage loans held for sale are
shipped to the purchaser within the required time frames. The total amount of
loans which had purchase commitments at December 31, 1995 was $23,898,000.
The portion of mortgage loans held for sale that are not allocated to an
existing purchase commitment, and unfunded rate-locked loans, create interest
rate exposure. The Bank monitors this exposure daily and limits the potential
exposure by the purchase of mandatory forward commitments to sell whole loans.
Management estimates the amount of unfunded rate-locked loans that will
actually fund and purchases mandatory forward commitments based upon this
estimate and based upon the general interest rate environment. Management
does not speculate on interest rate movement and uses mandatory forward
commitments purely as a hedge against interest rate swings which could effect
the value of its unfunded pipeline of rate-locked loans and unallocated loans
held for sale. The estimates which management uses can differ from actual
loan fundings and, therefore, interest rate risk does exist. Management
believes that it is minimizing this risk by employing experienced personnel
who are following conservative secondary marketing policies. The Bank also
reduces interest rate exposure by limiting customer rate commitments to
varying periods of less than sixty days.
Loans in process for which interest rates were committed to the mortgage
broker/borrower totaled $17,266,000 as of December 31, 1995. At December 31,
1995, the Bank had $34,000,000 of mandatory forward commitments to sell whole
loans relating to their unfunded pipeline of rate-locked loans and unallocated
loans held for sale. Gains and losses on mandatory forward commitments are
realized in the period settlement occurs. Unrealized gains and losses on
forward commitments are included in the analysis of lower of cost or market
valuation for mortgage loans held for sale. At December 31, 1995, the
unrealized loss on the Bank mandatory forward commitments was $200,000.
Loan Portfolio
--------------
Although all risks relating to lending cannot be easily summarized, certain
loan risks are inherent in certain types of loans. Risks associated with
commercial loans include the competency of the Management of the borrower, the
industry in which the borrower is operating, the economy and the strength of
the product or service rendered. Risks associated with installment loans
include the strength of the revenue stream of the borrower and the value of
the collateral. Real estate construction loan risks include building
activity, marketing abilities, financing conditions, the economy, and the
supply and demand of the product in the specific area being developed.
To minimize the risks associated with lending, the Board has established
certain maximum loan-to-value ratios on real estate dependent loans and
certain maximum accounts receivable or inventory advance rates on commercial
business loans. The Bank's loan policy includes certain owner occupied and
non owner occupied commercial construction loans. The maximum loan-to-value
ratio on owner occupied and non owner occupied
19
<PAGE>
commercial construction loans is 75% and 70% respectively, and on affordable
single family residential construction loans is 70%. The loan-to-value
requirements on all construction loans are periodically reviewed to assure
conservative ratios based upon current economic conditions.
Commercial loans based upon accounts receivable or inventory are generally
limited to borrowings of a maximum of 80% of the asset base. In many
situations, the Bank further limits its risks on commercial loans by securing
real estate and other assets as additional collateral. The Bank monitors the
cash flow and financial condition of a commercial borrower by obtaining and
reviewing the financial statements of the borrower on a monthly, quarterly or
annual basis.
Construction loans are reviewed by Management as to the status of the loan, as
well as the construction project which serves as its collateral, on at least a
monthly basis. This frequent review allows Management to monitor for
unforeseen circumstances or events. By undertaking this supervision, the
risks inherent in construction loans remain under constant review by
Management.
The loan portfolio is analyzed and reviewed regularly by the Audit Committee
of the Bank. The quantitative review includes analysis of delinquent loans,
nonaccrual loans, classified loans, loans held for sale, concentrations,
trends in portfolio volume, off balance sheet items, historical loan loss
experiences, and the economy. All loans are internally graded and all
classified loans are carefully reviewed on a loan-by-loan basis. The Audit
Committee also relies on a regular monthly loan review by an outside third
party. This loan review audits certain loans based upon guidelines set by the
Audit Committee, and reports its findings directly to Audit Committee.
A portion of the Bank's real estate loan portfolio consists of non-owner
occupied real estate mortgage loans. The Bank monitors the properties cash
flow and the financial condition of the borrower as extensively as the
documentation of each loan allows and are visited as frequently as necessary.
A significant portion of these real estate mortgage loans continue to perform
as agreed and appear to maintain sufficient cash flow from the property to
adequately service the repayment schedule. However, several of these loans do
not appear to maintain sufficient cash flow from the property to pay their
property taxes. In these cases, the borrowers are not paying their property
taxes and, along with penalties and interest, the delinquent property taxes
are reducing the value of the Bank's collateral. In addition, due to the
decrease in real estate values in Southern California, the loans may be, in
some situations, collateral deficient. All of these loans have been
classified and have been analyzed and reserved for on a loan-by-loan basis.
During 1995, one of these loans was foreclosed on and resold. Some of these
loans are paying interest on a floating interest rate and if interest rates
increase dramatically while real estate values remain depressed, the potential
for default on such loans will increase and the Bank could end up owning the
property.
In December, 1994, due to a major loss in its investment portfolio, Orange
County declared bankruptcy. Many municipalities, utilities, school districts
and other county governmental functions had money invested with the County's
investment portfolio and, therefore, lost a portion of their investments. The
total loss incurred by the County's investment portfolio is estimated to be
$1.64 billion. A majority of the Bank's service area is located in Orange
County. The economic impact to the County should not be minimized, however,
Management believes that the economic environment in the County is strong and
that the business and private sectors will be able to overcome the
government's financial problems without any significant negative
ramifications. Management has not seen, nor does it expect to see, the
bankruptcy having a material impact on the Company's operations or loan
portfolio.
The Company's loans are summarized in the following table according to loan
types as of December 31, 1995 and 1994, respectively. Loans have been
recorded net of loan purchase discounts of $729,000 and $995,000 and
20
<PAGE>
unearned income of $251,000 and $297,000 as of December 31, 1995 and 1994,
respectively. Such purchase discounts will be amortized to income over the
life of the loans, which range from one to twenty-four years as of December
31, 1995. The Company has no foreign loans. All dollar amounts are in
thousands.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Commercial loans $ 55,291 $ 57,741
Real estate loans 26,984 26,050
Construction loans 12,001 10,345
Consumer loans 9,461 10,790
-------- --------
Total loans 103,737 104,926
-------- --------
Allowance for possible loan losses (2,659) (2,727)
-------- --------
Net loans $101,078 $102,199
======== ========
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
------------------------------------------------------------------
A significant portion of the commercial loan portfolio normally does not
actually payoff when the loans mature. There are several factors which cause
actual repayments to differ from scheduled maturities. On a commercial loan,
the Bank typically will establish an annual maturity date. This enables the
Bank to monitor the borrower's financial condition and past performance along
with their compliance with any loan conditions. If the Bank determines that
the loan still meets its underwriting criteria, the loan may be renewed.
Often times the loan will not be renewed but will be restructured so that the
loan is still within the Bank's underwriting guidelines. Under either of
these circumstances, the commercial loan is renewed, not repaid. Before
renewing a loan, the Bank has the opportunity to adjust or change the interest
rate charged on the loan. Therefore, in regards to the sensitivity of loans
to interest rates, the maturities are important.
Delays in the construction or marketing period might cause a construction loan
not to be paid off upon maturity. The borrower may need additional time to
complete the project and an extension is approved provided no other defaults
have occurred. As with commercial loans, if a construction loan is renewed or
extended, the Bank may change the interest rate charged and/or charge
additional loan fees.
Scheduled maturities of all loans outstanding at December 31, 1995 are
summarized in the table set forth below. As discussed above, the Company does
not expect a majority of the commercial loans to be repaid upon maturity. As
of December 31, 1995, all of the Bank's construction loan portfolio is
scheduled to mature in one year or less. The Company does not keep records as
to the actual amount repaid upon maturity. Information regarding the loan
maturities within the individual loan classifications presented above is not
available. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
Total
loans
--------
<S> <C>
In one year or less $ 84,519
After one year but less than five years 16,676
Over five years 2,542
--------
Total loans $103,737
========
</TABLE>
On a floating interest rate loan, the Bank may impose a minimum floor and/or
maximum ceiling interest rate which the floating rate cannot be either reduced
below or above. In doing this, the Bank limits its exposure to
21
<PAGE>
large decreases in interest rates but also risks not receiving as much
interest as possible if interest rates were to increase significantly in a
short time period. Loans which have these floors or ceilings are reported as
floating interest rate loans below. The total amount of loans as of December
31, 1995 due after one year, categorized as to those loans which have
predetermined interest rates and those which have floating interest rates are
summarized in the table set forth below. Information regarding the fixed
interest rate versus variable interest rate by loan classifications presented
above is not available. All dollar amounts are in thousands.
Loan balances due after one year which have:
<TABLE>
<CAPTION>
Total
loans
-------
<S> <C>
Fixed interest rates $12,123
Floating interest rates 7,095
-------
Total loans $19,218
=======
</TABLE>
Interest Rate Sensitivity Analysis
----------------------------------
The Company's interest rate sensitivity is measured by dividing the Company's
rate sensitive assets by its rate sensitive liabilities. The interest rate
sensitivity ratio ("GAP") indicates what effect a change in interest rate
would have on the net interest margin of a financial institution. Generally,
in a positive GAP environment an increase in interest rates would increase the
net interest margin while a decrease in interest rates would have a negative
impact on the net interest margin. The following table sets forth the
Company's interest rate sensitivity analysis as of December 31, 1995. All
dollar amounts are in thousands.
<TABLE>
<CAPTION>
Greater
Less than 3-12 1-5 than
3 Months Months Years 5 Years Total
--------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans (1) $ 65,956 $12,718 $15,396 $ - $ 94,070
Mortgage loans held for sale 41,968 - - - 41,968
Investment securities (2) 2,913 1,246 6,551 - 10,710
Federal funds sold 2,500 - - - 2,500
-------- ------- ------- -------- --------
Total Rate Sensitive Assets 113,337 13,964 21,947 - 149,248
Rate Sensitive Liabilities:
Time deposits 17,917 21,804 2,711 - 42,432
Interest bearing demand deposits 47,983 - - - 47,983
Savings deposits 5,131 - - - 5,131
Other demand deposits (3) 19,526 - - - 19,526
-------- ------- ------- -------- --------
Total Rate Sensitive Liabilities 90,557 21,804 2,711 - 115,072
Cumulative GAP $ 22,780 $14,940 $34,176 $34,176
======== ======= ======= ========
Cumulative GAP Ratio 1.25 1.13 1.30
======== ======= =======
</TABLE>
(1) Loans do not include nonaccrual loans of $9,667,000 as of December 31,
1995.
(2) Securities are recorded at their amortized cost and mortgage back
securities are included at their estimated repayment dates.
22
<PAGE>
(3) Although these demand deposits are not interest-bearing accounts, these
deposits are considered to be rate sensitive because the Bank provides
them with an earnings allowance which fluctuates with an interest rate
index.
As the gap analysis demonstrates, the Company is in a positive one year gap
position. The Company's one year gap ratio at December 31, 1995, was 1.13%
and is slightly over the acceptable range of 1.10% as determined by the
Company's asset/liability policy. Due to the increase in mortgage loans held
for sale over the last year and the large noninterest bearing deposit base
which the company enjoys, in February 1996, the Asset Liability Committee
reevaluated its gap policy and changed its acceptable range of its gap ratio
to a high of 1.25%. The committee believes that due to the relative short
term nature of both the Company's assets and liabilities that the change in
this policy has not materially increased the Company's risk to large interest
rate movements.
While the gap analysis is a useful asset/liability management tool, it does
not fully assess interest rate risk. Gap analysis does not address the
effects of customer options (such as early withdrawal of time deposits and
options to prepay loans) and Bank strategies, (such as delaying increases in
interest rates paid on interest-bearing deposit accounts) on the Bank's net
interest income. Therefore, a gap analysis is only one tool with which to
analyze interest rate risk and must be reviewed in conjunction with other
asset/liability management reports.
Nonperforming Loans
-------------------
The Company's current policy is generally to cease accruing interest and to
charge-off all accrued and unpaid interest on loans which are past due as to
principal and/or interest for 90 days, or at an earlier time as Management
determines timely collection of interest to be in doubt. On certain
nonaccrual loans deemed by Management to be fully collectible, accrued
interest is not charged-off. Additionally, loans which are 90 days or more
past due may continue accruing interest if they are, in the opinion of
Management and the Bank's Audit Committee, both well secured and in the
process of collection. As of December 31, 1995, $328,000 of loans classified
past due 90 days or more consists of FHA insured or VA guaranteed mortgage
loans which have been repurchased and, in the opinion of Management, have no
principal or interest loss exposure.
Certain loans which are performing to their contractual obligation may be
recorded as a nonaccrual loan. In some of these cases, the full amount of the
payment received is used to reduce the principal balance of the loan and no
interest income is recorded. These loans are recorded as such because in the
opinion of Management and the Bank's audit committee or the opinion of the
Comptroller, there are serious doubts as to the ability of the borrower to
continue to comply with the present loan repayment terms. The interest income
not recognized and applied to principal is only recognized when the loan is
fully repaid. At December 31, 1995, the Bank had two loans totalling
$2,144,000 which are being accounted for in this manner. Additionally, some
loans which are performing to their contractual obligations may be carried as
a nonaccrual loan, but interest income is being recognized on a cash received
basis. In these cases, the loan is not accruing interest, but when a payment
is received, the payment is being applied to principle and interest income as
if the loan was on accrual status. At December 31, 1995, the Bank had two
loans totalling $1,540,000 which is being accounted for in this manner. The
Bank recognized approximately $120,000 of interest income on these loans
during 1995.
The following table sets forth the total amount of nonperforming loans and the
percentage of nonperforming loans to total loans for December 31, 1995, and
1994, respectively. All dollar amounts are in thousands.
23
<PAGE>
<TABLE>
<CAPTION>
1995 1994
---------------------- --------------------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Performing loans accounted for on a nonaccrual basis $ 3,684 3.6% $ 1,502 1.4%
Nonperforming loans accounted for on a nonaccrual basis 5,983 5.7% 1,634 1.6%
Accruing loans contractually past due 90 days or more 382 .4% 826 .8%
------- ----------- ----------------- -----------
Total $10,049 9.7% $3,962 3.8%
======= =========== ================= ===========
</TABLE>
As of the dates shown, the Company had no loans in a current status where
there were serious doubts as to the ability of the borrower to comply with the
present loan repayment terms. However, on December 31, 1995, the Company had
two loans totalling $3.4 million on which there is doubt as to the ability or
willingness of the borrower to comply with the present loan repayment terms
along with the payment of past and current property taxes. Additionally, due
to the risks inherent in the Company's loan portfolio, as well as general
economic conditions, Management recognizes that loans now current may become
doubtful as to repayment. As of December 31, 1995, the Company had three
loans totalling $3.6 million that are referred to as "troubled debt
restructuring" in accordance with SFAS 15. All of these loans are performing
loans which are accounted for on a nonaccrual basis. (See the table above).
As of December 31, 1994, the Company had no loans that are referred to as
troubled debt restructurings. As a result of placing loans on nonaccrual
status, the Company did not accrue interest of approximately $650,000 and
$556,000 during 1995 and 1994, respectively, which would have been earned had
such loans been performing throughout the year.
Other Real Estate Owned
-----------------------
The Company's policy is to acquire real estate in settlement of loans when all
other repayment alternatives have been exhausted and when the Company can
reasonably estimate that it can recover all or a portion of its original loan.
The Company's policy is to evaluate the potential recovery based upon the fair
market value of the property less estimated selling costs and any senior
encumbrances which might be attached to the property. The Company's other
real estate owned ("OREO") is carried at its fair market value less estimated
selling costs. The following table sets forth the total amount of OREO by the
original type of loan for December 31, 1995 and 1994, respectively. All
amounts are in thousands.
<TABLE>
<CAPTION>
Original Type of Loan 1995 1994
--------------------- ------- -------
<S> <C> <C>
Real estate $1,337 $4,351
Mortgage division loans - 171
------ ------
Total $1,337 $4,522
====== ======
</TABLE>
The following table sets forth the type of property which is included in other
real estate owned as of December 31, 1995 and 1994. All amounts are in
thousands.
<TABLE>
<CAPTION>
Type of Real Estate 1995 1994
------------------- ------ ------
<S> <C> <C>
Land $ 405 $1,456
Apartment Building 395 1,441
Commercial and Industrial 283 1,017
Condominium 254 437
Single family residence - 171
------ ------
Total $1,337 $4,522
====== ======
</TABLE>
24
<PAGE>
Summary of Loan Loss Experience
-------------------------------
The Company maintains an allowance for loan losses, which is reduced by loan
charge-offs and increased by loan recoveries and the provision for loan losses
which are charged to operating expense. The level of the allowance for loan
losses is continually evaluated and is based upon the Company's loan loss
experience (using a migration analysis), performance of loans in the Company's
portfolio, evaluation of collateral for such loans, cash flows or net worth of
the respective borrowers or guarantors, prevailing economic conditions, and
such other factors as, in Management's judgment, deserve current recognition
in the estimation of loan losses.
The Bank maintains a program which ensures that the Bank maintains an adequate
allowance. The Bank's program is consistent with Banking Circular #201
(revised) dated February 20, 1992. In general, this methodology is referred
to as a migration analysis. A migration analysis uses historical loan loss
experience within pools of similar loans to determine the allowance necessary
for each loan pool. The Bank began using this methodology for the year ended
December 31, 1992 and has continued to use it on a quarterly basis since such
date. In the opinion of Management, this methodology along with the
methodology used prior to the adoption of this program has ensured that the
allowance is adequate to absorb the known and inherent risks in the Bank's
loan portfolio.
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by creditors
for impairment of a loan", as amended by SFAS No. 118. Under Statement 114,
impaired loans subject to the statement are required to be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The company had $9,466,000 of impaired loans as of December 31,
1995, of which the majority were collateral dependent. The Company has always
measured its collateral dependent loans on the fair value of the collateral
and, therefore, the adoption of these statements has not made a material
impact on the Company's allowance. The total allowance for loan losses
relating to impaired loans of $9,021,000 was $1,511,000 on December 31, 1995.
Impaired loans for which there is no specific allowance for loan losses at
December 31, 1995, is $445,000.
The following table summarizes loan balances and changes in the allowance for
loan losses arising from loan charge-offs and recoveries as of the dates and
for the periods indicated. All dollar amounts are in thousands.
25
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Balance of allowance for loan losses at beginning of period $2,727 $3,473
Loans changed off:
Commercial 616 800
Consumer 32 39
Real Estate 1,097 1,350
-------- --------
Total loans charged-off 1,745 2,189
Recoveries of loans previously charged-off:
Commercial 62 347
Consumer 10 38
Real Estate 102 146
-------- --------
Total loan recoveries 174 531
-------- --------
Net loans charged off 1,571 1,658
Provision charged to operating expense 1,503 912
-------- --------
Balance of allowance for loan losses at end of period $ 2,659 $ 2,727
======== ========
Amount of loans outstanding at end of period $103,737 $104,926
Average amount of loans outstanding $107,713 $102,964
Ratio of net charge-offs during the period to average loans
outstanding during the period 1.46% 1.61%
======== ========
</TABLE>
Allocation of Allowance for Loan Losses
---------------------------------------
In determining the level and adequacy of the allowance for loan losses, the
Bank utilizes a migration analysis as recommended by the Comptroller. Due to
the small size of its portfolio, the Bank Holding Company determines its
allowance on a loan by loan basis. The following table sets forth the loan
pools the Company utilizes and its respective allowance established. All
dollar amounts are in thousands.
26
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1995
--------------------------------------- ----------------------------------
Allowance Allowance
Loan for Loan for
Volume loan losses % Volume loan losses %
----------------- ----------- ----- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Classified loans
----------------
Construction loans $ 4,345 $ 608 14.00% $ 2,413 $ 407 16.86%
First trust deed loans 7,414 887 11.96% 9,310 876 9.41%
Real estate commercial borrowers 2,887 538 18.63% 2,166 234 10.80%
Guaranteed mortgage loans - - -% 1,217 46 3.78%
All other loans 1,491 139 9.32% 3,867 442 11.43%
-------- ------ ----- ------- ------ -----
Total classified loans $ 16,137 $2,172 13.46% $18,973 $2,005 10.57%
-------- ------ ----- ------- ------ -----
Remaining loan portfolio
------------------------
Construction loans $ 9,073 $ - - $11,814 $ 100 .85%
First trust deed loans 16,607 91 .55% 16,838 35 .01%
Guaranteed mortgage loans (1) 561 - - - 200 -
All other loans 61,359 396 .65% 57,301 336 .59%
-------- ------ ----- ------- ------ -----
Total $103,737 $2,659 2.56% $104,926 $2,727 2.60%
======== ====== ===== ======== ====== ======
</TABLE>
(1) Loans sold under recourse provision - see mortgage banking section page
18.
Deposits
--------
The average amounts of deposits and the average rates paid thereon for the
periods indicated are summarized below. The Bank does not have any
significant foreign deposits. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- -------------------
Average Average Average Average
Balance Rate Balance Rate
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 51,140 0% $ 64,693 0%
Interest-bearing demand deposits 49,241 2.6% 50,974 2.3%
Savings deposits 5,711 2.7% 6,205 2.7%
Time certificates of deposit of $100,000 or more 18,269 5.5% 15,337 4.1%
Other time deposits 18,754 5.0% 18,219 3.6%
-------- --------
Total $143,115 $155,428
======== ========
</TABLE>
The following table shows the maturity schedule of time certificate of
deposits of $100,000 or more at December 31, 1995.
<TABLE>
<CAPTION>
<S> <C>
Three months or less $10,605
Over 3 through 12 months 9,441
Over 12 months 407
-------
Total $20,453
=======
</TABLE>
27
<PAGE>
Return on Equity and Assets
---------------------------
The following table sets forth certain consolidated financial ratios relative
to the Company's consolidated financial performance for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994
----- ------
<S> <C> <C>
Net interest spread on average assets 6.0% 5.2%
Return on average assets 1.3% (.77%)
Return on average equity 14.7% (9.9%)
Dividend payout rate None None
Average equity to average assets 8.70% 7.73%
</TABLE>
Short-Term Borrowings
---------------------
The Company had no category of short-term borrowings of which the average
balance for the year was greater than 30% of consolidated shareholders' equity
at December 31, 1995 or 1994.
Item 2. PROPERTIES
-------------------
As of December 31, 1995 the Company leases seven properties. The properties
are used as administrative offices, branch offices, and mortgage banking
offices. In February 1995, the Company terminated the remaining three years
of its lease of its Santa Ana location. The net cost to the Company for this
early termination was approximately $50,000. Neither the Company, nor any of
its subsidiaries other than the Bank, lease or own any real property. All of
the leased premises are suitable for their intended use. In the opinion of
Management, all of the leased properties are adequately insured. The
following table sets forth certain information with respect to leases of the
Company.
<TABLE>
<CAPTION>
Lease 1995
Square Expiration 1995 Rental Effective
Location Feet Date Expense Lease Rate (5)
-------- ------ ---------- ----------- --------------
Branch Offices
--------------
<S> <C> <C> <C> <C>
4665 MacArthur Court, Newport Beach (1) 17,130 12/31/00 $380,000 $1.85
15615 Alton Parkway, Suite 100, Irvine (2) 4,757 10/31/98 106,000 1.85
8501 Wilshire Boulevard, Beverly Hills 6,698 10/31/96 184,000 2.29
1045 West Katella Boulevard, Orange (3) 7,465 2/28/99 130,000 1.45
Mortgage Banking and Administrative Offices
-------------------------------------------
41 Corporate Park, Irvine 14,664 3/31/99 158,000 1.20
Mortgage Loan Production Offices
--------------------------------
5225 Canyon Crest Drive, Riverside (4) 1,036 7/31/98 14,000 1.10
4041 North Central Avenue, Phoenix AZ 850 Monthly 6,000 1.18
</TABLE>
(1) The Bank has subleased approximately 5,000 square feet of these premises
and received rental income from the sublease of $61,000 during 1995. This
sublease expired on December 31, 1995. The Bank subleased approximately
2,500 square feet of this space to a new tenant on a month to month basis
effective February 1, 1996. Senior Management and loan administration
occupies approximately 2,500 square feet of the Newport Beach location.
28
<PAGE>
(2) The Bank's financial service department utilizes approximately 2,000
square feet of the Irvine Spectrum location.
(3) Approximately 2,000 square feet of this location is utilized for the
Bank's data processing center.
(4) The Bank has the option to cancel this lease with 60 days written notice.
(5) Calculated as monthly charge per actual square foot over the life of the
lease.
Item 3. LEGAL PROCEEDINGS
- ---------------------------
There are no pending legal proceedings to which the Company or the Bank is a
party or to which any of their respective properties are subject, other than
ordinary routine litigation incidental to the Bank's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
During the Company's Annual Meeting of Shareholders, the shareholders amended
the by-laws to reduce the number of Directors to not less than five (5) nor
more than eleven (11), elected all of the nominees of the Board of Directors,
approved the 1995 Incentive Stock Option Plan and approved the appointment of
the independent public auditors for 1995.
29
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Company's common stock is not presently trading in an "established public
trading market". The Company is aware of four security dealers who seek to
handle trades in its stock: Mitchell Securities Corporation of Portland,
Oregon, Burford Capital of Glendale, California, Cruttenden & Company of
Newport Beach, California, and Hoefer & Arnett of San Francisco, California.
The approximate number of shareholders as of January 1, 1995 was 300. The
following table shows the range of bid quotations for each quarter within the
last two fiscal years. Such over-the-counter quotations are to the best
knowledge of Management and reflect interdealer prices, without retail mark
up, mark down or commissions and may not necessarily represent actual
transactions. To date, the Company has not paid dividends on any of its
shares.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fourth Quarter, 1995 $5.25 $4.50
Third Quarter, 1995 4.50 4.25
Second Quarter, 1995 4.25 3.50
First Quarter, 1995 4.00 3.50
Fourth Quarter, 1994 4.00 3.00
Third Quarter, 1994 4.00 3.00
Second Quarter, 1994 4.00 3.00
First Quarter, 1994 5.00 3.00
----------------------- ----- -----
</TABLE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
SUMMARY
-------
The Company reported a net profit of $2,041,000 in 1995 compared to a net loss
of $1,301,000 in 1994. The 1995 net income is the highest earnings the
Company has reported since its inception in 1982. The dramatic reversal in
earnings was a result of an increase in volume of the Bank's residential
mortgage division along with a increase in the Bank's net interest margin and
a reduction of noninterest expenses. The Bank's residential mortgage division
contributed $1,123,000 to profit during 1995 compared to a loss of $800,000
during 1994. The loss by this division in 1994 was due to the increasing
interest rate environment and the corresponding reduction of the loan
refinancing business. In 1995, with a reduced staffing level, the mortgage
division recaptured a significant share of the purchase money mortgage
marketplace. The increase in net interest income in 1995 compared to 1994 was
a result of a higher volume of loans along with an increase in interest rates
charged on loans. The decrease of noninterest expenses was a result of
various cost containment policies which were installed during 1994 and fully
reflected in 1995. Despite the record earnings, the high level of
nonperforming assets present in 1994 has carried into 1995. The high level of
nonperforming and classified assets required an increase in the contribution
to the allowance for loan losses (allowance) in 1995 compared to 1994.
During the year ended December 31, 1995, the Company had total average assets
of $159.4 million, total average loans of $107.7 million and total average
deposits of $143.1 million compared to total average assets of $169.6 million,
total average loans of $102.9 million and total average deposits of $155.4
million during the year ended December 31, 1994. The decrease in average
assets and average deposits in 1995 compared to 1994 is primarily
30
<PAGE>
due to a reduced level of deposits from the Bank's escrow customers. This
reduction was due to one large escrow customer leaving the bank along with a
general decrease in escrow deposits due to the reduction of real estate
transactions in Southern California. The Bank continued the trend set in 1994
of moderate commercial loan growth with an increase in average loans of 4.7%
in 1995. The 1995 increase in loans is a result of the Bank's increased
marketing effort and by a modestly improving Southern California economy.
A majority of the Bank's marketplace is located in Orange County, California.
In December 1994, due to a major loss in its investment fund, Orange County
declared bankruptcy. The Company had no investments with the County and
management has not seen, nor does it expect to see, the bankruptcy to have a
significant impact on the Company's operations or loan portfolio.
RESULTS OF OPERATIONS
---------------------
Return (loss) on average assets was 1.28% in 1995, compared to (.77%) in 1994.
Return (loss) on stockholder's equity was 16.7% in 1995 compared to (9.0%) in
1994. The Bank comprises substantially all of the assets of the Company and
contributes most of the earnings or losses for the Company. The Bank earned
$2,082,000 in 1995 compared to a loss of $1,144,000 in 1994. The Bank Holding
Company (BHC) lost $41,000 in 1995 compared to a loss of $157,000 in 1994.
The reduction in the BHC losses is a result of a sharp reduction in the
expenses of the BHC.
Although fee generating activity such as the Bank's mortgage division and the
Bank's SBA division are an integral part of the Company, the Company's primary
source of revenue will continue to be its net interest margin. The Company's
net interest margin as a percent of total average earning assets was 6.5% in
1995 compared to 5.8% in 1994. The increase in the net interest margin was
due to an increase in higher yielding assets such as loans and mortgage loans
held for sale along with the increase of the prime lending rate in 1995
compared to 1994. Due to the actions of the Federal Reserve Bank (FRB), in
1995 the prime lending rate increased from 8.5% to 9.0% and then back down to
8.5%. The average 1995 prime lending rate was higher than the average prime
lending rate in 1994. A significant portion of the Bank's loans are based on
a variable interest rate tied to prime.
NET INTEREST INCOME
-------------------
Net interest income before the provision for loan losses totalled $9,502,000
in 1995 compared to $8,744,000 in 1994. The increase of net interest income
of $758,000 in 1995 compared to 1994 was due to an increase in interest income
which was partially offset by an increase in interest expense. The increase
of interest income was due to the increase in interest rates on loans and
other interest earning assets along with an increase in the average loan and
mortgage loan outstanding. These increases were partially offset by a
decrease in the average balance of investment securities and federal funds
sold. The increase of interest expense was primarily due to an increase of
interest rates on interest-bearing deposits, and partially due to an increase
in the volume of the deposits.
The average yield on total interest bearing assets was 8.8% in 1995 compared
to 7.6% in 1994, an increase of 120 basis points. The primary reasons for the
increase in average yield was an increase in the average interest rates earned
on loans, fed funds sold and securities available for sale, and an increase in
the volume of mortgage loans held for sale and on loans held. Average
mortgage loans held for sale in 1995 were $21.7 compared to an average of
$13.4 million during 1994. The average cost of interest bearing liabilities
was 3.7% in 1995 compared to 2.9% in 1994, an increase of 80 basis points.
The increase was primarily attributed to the increase in interest rates paid
on interest bearing demand deposits and time deposits along with an increase
in the volume of time deposits.
31
<PAGE>
PROVISIONS FOR LOAN LOSSES
--------------------------
The Company's provision for loan losses was $1,503,000 in 1995 compared to
$912,000 in 1994. This resulted in an allowance of $2,659,000 at December 31,
1995 compared to $2,727,000 at December 31, 1994. The increase in the
provision for 1995 was a result of, among other factors, an increase in the
classified and nonaccrual loans in 1995 compared to 1994.
Nonaccrual loans were $9.7 million on December 31, 1995 compared to $3.1
million December 31, 1994. As of December 31, 1995, approximately $3.7
million of the nonaccrual loans were current on loan payments, and during
1995, the Bank recognized approximately $120,000 of interest income on
nonaccrual loans of approximately $1.5 million. Although current on loan
payments, these loans still exhibit certain weaknesses such as delinquent
property taxes, collateral deficiencies and insufficient cash funds. During
the third quarter of 1995, the Company experienced a reversal of a two year
trend which saw the Company reduce classified and nonaccrual loans. This
reversal is primarily due to two borrowers whose loans total approximately
$3.0 million. Although placed on nonaccrual, Management does not anticipate a
principle loss on these loans. During January 1996, one of these loans,
totalling $1.4 million was paid in full. Management is working on reducing
the nonperforming assets and anticipates a reduction in this level during the
next year. A moderate turnaround in the economy should help Management reduce
the levels of nonperforming assets.
The allowance is a result of Management's analysis of the estimated inherent
losses in the Bank's loan portfolio. This analysis takes into consideration
the level and trend of loan losses, loan delinquencies, classified loan levels
and Management analysis of current economic conditions. As an integral part
of its examination process, the Comptroller reviews the Bank's allowance. The
Comptroller may require the Bank to recognize additions to the allowance based
upon judgements different from those of Management. Management believes that
the allowance at December 31, 1995 is adequate to absorb the inherent risks in
the Company's loan portfolio. Nevertheless, due to the high level of
nonperforming loans, there still exists substantial inherent risk in the
current loan portfolio and the moderate improvement in the local economy could
be short term. The table below provides more specific data relative to the
Company's allowance and nonperforming assets. All dollar amounts are in
thousands.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
Allowance for possible loan losses $ 2,659 $ 2,727
Loans past due 90 days or more and accruing 382 826
Nonaccrual loans 9,666 3,136
Classified loans 20,534 18,973
Troubled debt restructuring (Included in nonaccrual 3,589 -
and classified loans)
Other real estate owned 1,336 4,522
Allowance for possible loan losses as a percent of:
Total loans 2.6% 2.6%
Loans past due 90 days or more and accruing 696% 330%
Nonaccruing loans 28% 87%
Classified loans 12.9% 14.4%
Nonperforming loans and real estate owned
as a percent of total assets: 6.3% 4.9%
</TABLE>
32
<PAGE>
OTHER INCOME
------------
Loan fees, mortgage loan processing fees, premiums earned on the sale of
mortgage loans and SBA loans, and service charges and other fees charged to
Bank customers continue to be the primary components of other income in 1995
and 1994. Mortgage division gross income was $5,708,000 in 1995, an increase
of 73% from the 1994 gross income of $3,302,000. The increase in the mortgage
division's gross revenue was a direct result of an increase in the volume of
mortgage loans originated and sold. The increased volume is a result of a
reduction in the Southern California marketplace of mortgage lenders along
with the division's reputation for quality service and 48 hour loan approval.
During 1995, the division funded $366 million of loans compared to $199
million in 1994. Unlike 1993's volume, which was heavily weighted in
refinancing and which fell dramatically in 1994 due to the sharp increase in
interest rates, 1995's volume was primarily purchase money loans which are
less volatile in increasing interest rate environments. During the fourth
quarter of 1995, the mortgage division funded a record $122 million of loans.
If the interest rate environment remains stable, and as long as the Southern
California economy is not thrown back into a recession, Management anticipates
the increased volume of mortgage loans to continue.
During 1995, the Bank's SBA department had gross fee income of $240,000
compared to $274,000 in 1994. Including loan servicing income and interest
income on loans, the SBA department contributed $232,000 to net profit
compared to a contribution of $165,000 in 1994. The elimination of SBA loan
refinancing and other legislative changes to the SBA program was a major
factor in the reduced volume of SBA loans processed and sales premiums earned
in 1995 compared to 1994. During 1995, the Bank received a Certified Lending
status with the SBA and anticipates applying for and receiving the SBA's
Preferred Lender status during 1996.
OTHER EXPENSES
--------------
Total other expenses were $12,595,000 in 1995, a decrease of 5% from the 1994
other expenses of $13,213,000. The decrease of $618,000 between 1995 and 1994
is due to a decrease in the Company's overall operating expenses of $770,000
(8%) which was partially offset by the increase of $152,000 in the Bank's
residential mortgage division expenses. The increase in the mortgage division
expenses was due to increased commission expenses, which is a direct result of
an increase in the loan activity of the department. Without commission
expense, the mortgage department expenses decreased $45,000 despite the 73%
increase in gross revenues.
The decrease in the Company's other operating expenses were primarily due to
decreases in insurance expenses, occupancy costs, other real estate owned
expenses, and other deposit expenses. The decrease in insurance expense was
primarily due to the reduction of FDIC insurance rates along with the
reduction of business insurance costs. Although the Company enjoyed a
decrease in FDIC insurance in 1995, the Company expects to incur a
nonrecurring increase during 1996. A portion of the Bank's deposits are
insured under the Savings Association Insurance Fund ("SAIF"). Proposed
legislation, which is anticipated to become effective in 1996, would charge
the Bank a one time SAIF recapitalization fee of approximately $350,000 to
$450,000.
The decrease in occupancy cost is primarily the result of the elimination of
the Santa Ana location in 1994. Expenses on other real estate owned (OREO)
totaled $246,000 during 1995 a decrease of $128,000 (34%) from 1994's expenses
of $374,000. These expenses are associated with operating expenses of the
OREO such as property taxes, and repairs and maintenance, along with
reductions in estimated fair market values and losses on disposition of the
real estate. The decrease in this expense was a result of the decreased level
of OREO along with the stabilization of real estate values. The decrease in
other deposit expense is a result of the decrease of noninterest bearing
demand deposits for which the Bank provides an earnings allowance and
purchases external services on behalf of these customers. The decrease in
these deposits was partially offset by the increase of the earnings allowance
on these deposit accounts.
33
<PAGE>
PROVISION FOR INCOME TAXES
--------------------------
The Company recognized an income tax benefit of $98,000 during 1995 compared
to no benefit in 1994. The income tax benefit recorded in 1995 was due to the
Company recognizing a tax refund on a carryback of its past net operating
losses. The Company did not record any income tax benefit based upon the
future tax benefits of its net operating loss carryforward. As of December
31, 1995, the Company has Federal and State net operating loss carryforwards
of $901,000 and $34,000, respectively, which can be used to offset future
Federal and State taxable income. Effective January 1, 1996, the Company
expects to begin accruing income tax expense on pre-tax income above
approximately $2.2 million.
LIQUIDITY
---------
Liquidity as its relates to the BHC represents the ability to obtain funds to
support investment activities and operating needs. The BHC's principal
sources of funds are its cash balances and loan portfolio, as well as its
ability to raise capital by selling additional shares of common stock. Another
common source of liquidity to a bank holding company is cash dividends from
its subsidiary bank. Currently, the Bank is restricted from paying dividends
to the BHC without prior regulatory approval. As of December 31, 1995, the
BHC has cash balances of $772,000. In January 1996, the Board of Directors
approved a stock buy back program which would allow the BHC to purchase up to
$1.0 million of stock without reducing the BHC working capital to below
$250,000. The BHC's cash balances, along with the interest income generated
from its loan portfolio, will easily support its 1996 operating requirements.
Liquidity as it relates to banking, represents the ability to obtain funds to
meet loan requirements and to satisfy demand for deposit withdrawal. The
principal source of funds that provide liquidity to the Bank are cash
balances, federal funds sold, securities available for sale and a portion of
mortgage loans held for sale. At December 31, 1995, the Bank's liquid assets
totalled 28.2% of total assets compared to 20.8% at December 31, 1994. The
Bank's loan-to-deposit ratio at December 31, 1995 was 65.0% as compared to
72.5% at December 31, 1994. The increases in these liquidity ratios are the
result of the increase in the Bank's deposits of $15.4 million (10.8%) from
December 31, 1994 to December 31, 1995. A large portion of the Bank's
deposits consist of deposits maintained by escrow companies and, to a lesser
degree, title insurance companies. At December 31, 1995, escrow and title
insurance companies' deposits totalled approximately $23.0 million or 14.5% of
total deposits. This compared to escrow and title insurance deposits of
approximately $25 million or 17.2% of total deposits at December 31, 1994.
The Bank's policy is to maintain these deposits at a level not to exceed 25%
of total deposits. The Bank monitors the deposit levels of this group
closely. During the years ended December 31, 1995, and 1994, 37.7% and
49.7%, respectively of these deposits were generated by the largest three
customers.
To cushion against unanticipated fluctuations in its liquidity position, the
Bank has the ability to borrow against its securities available for sale and
has secured a secondary line of credit with the FRB of approximately $900,000
as of December 31, 1995. Additionally, a portion of the Bank's mortgage loans
held for sale, while not considered a primary source of liquidity, can
significantly aid in the Bank's ability to meet its liquidity requirements.
At any time during the year, a substantial portion of the investment in
mortgage loans held for sale are sold and scheduled to be purchased within ten
business days. The bank monitors the level of its investment in mortgage
loans held for sale very closely and can adjust a portion of this level
according to its liquidity needs.
CAPITAL RESOURCES
-----------------
The capital adequacy of a financial institution is generally measured by
relating the amount of capital to total assets. Risk-based capital guidelines
require that each bank and bank holding company maintain a minimum ratio of
core capital and total capital to risk-weighted assets of 4% and 8%,
respectively. Leverage capital guidelines
34
<PAGE>
serve as a backstop to the risk-based capital rules, and require every bank
holding company, as well as every bank, to maintain a minimum level of equity
to adjusted assets of 4%. At December 31, 1995 and 1994, the Company's and
the Bank's capital ratios were in excess of all the minimum required levels.
The federally mandated minimum capital requirements and the actual
capitalization of the Company and the Bank are set forth below.
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
Pacific PNB Pacific PNB
National Financial National Financial
Regulatory Requirement Bank Group Bank Group
----------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Leverage Capital Ratio 4.0% 7.7% 9.1% 6.9% 7.9%
Risk Based Capital
Tier I Capital 4.0% 10.4% 12.3% 9.5% 10.9%
Tier II Capital 8.0% 11.7% 13.4% 10.7% 12.2%
</TABLE>
Management has demonstrated its ability and commitment to maintaining capital
at a sufficient level to assure shareholders, customers and regulators that
the Company and the Bank are financially sound.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
See index to consolidated financial statements at page 39 of this report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
During 1994, the Company changed its independent accountants to McGladrey &
Pullen, LLP. For further information, refer to Form 8-KSB/A which was filed
June 20, 1994.
35
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ---------------------------------------------------------------------
As of December 31, 1995, the Board of Directors of the Company consists of
four (4) members, all of whose terms expire at the next annual meeting of
shareholders. In September, 1995, Mr. David Stein resigned from the Board of
Directors. On March 6, 1996, the Board appointed G. Mitchell Morris as
director to fill the vacancy created by Mr. Stein's resignation. Executive
officers of the Company serve at the pleasure of the Board of Directors. The
following table sets forth certain information concerning the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Shares of Common
Stock Owned Directly Percentage of Total
Position in PNB Served or Beneficially Shares Outstanding
Financial Group Since Age as of Dec 31, 1995 as of Dec 31, 1995
----------------------- ------ --- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
Allen C. Barbieri Director/President/CEO 1994 37 50,149 2.29%
Martin T. Hart Director 1990 60 90,960 4.16%
Doug L. Heller Chief Financial Officer 1990 38 6,767 .31%
G. Mitchell Morris Director 1996 75 40,000 1.83%
Jon A. Salquist Director 1995 51 56,516 2.58%
Bernard E. Schneider Director/Chairman 1991 50 400 .02%
</TABLE>
A brief summary of the background and business experience of each of the above
persons during the past five years is set forth below.
Allen C. Barbieri has been the President and Chief Executive Officer of the
-----------------
Bank since 1994, and is currently the President and Chief Executive Officer of
the Company. Mr. Barbieri has worked in the banking industry since 1986. He
received a Masters Degree in Business/Finance from the Massachusetts Institute
of Technology (MIT) in 1987.
Martin T. Hart is an active private investor. He serves on numerous Boards of
--------------
Directors of private and publicly held companies.
Doug L. Heller has been the Executive Vice President and Chief Financial
--------------
Officer of the Bank, and Chief Financial Officer of the Company since 1990.
Mr. Heller graduated from the University of Colorado Business School in 1979
and earned his certified public accountant license in 1983.
G. Mitchell Morris is retired and a private investor.
------------------
Jon A. Salquist is an active private investor. He holds a Masters Degree from
---------------
Stanford University.
Bernard E. Schneider is a partner and an attorney with the international law
--------------------
firm of McDermott, Will and Emery. During 1995 Mr. Schneider served as
Chairman of the Board of the Company and the Bank.
36
<PAGE>
Item 10. EXECUTIVE COMPENSATION
- --------------------------------
The total compensation paid or accrued by the Company and the Company's
subsidiaries for the years ended December 31, 1995, 1994 and 1993, to the
Company's Chief Executive Officer ("CEO") and the four most highly compensated
executive officers ("Named Executive Officers") for the years ended December
31, 1995 are presented below in the summary compensation table. The Company has
no stock appreciation rights ("SARS"), restricted stock awards or LTIP payouts.
<TABLE>
<CAPTION>
Other
Annual
Name (1) Year Salary Bonus Comp.(2) Options
- -------- --- ------ -------- ------- -------
<S> <C> <C> <C> <C> <C>
Bernard E. Schneider 1995 $ 60,000 $ 0 $ 0 0
1994 90,000 0 0 40,000
1993 67,000 0 0 0
Allen C. Barbieri 1995 131,000 35,000 1,493 0
1994 131,000 0 298 50,000
Doug L. Heller 1995 120,000 20,000 808 0
1994 120,000 0 3,676 13,750
1993 116,500 4,000 9,000 0
Allan Gibson 1995 120,000 10,000 1,831 0
1994 120,000 0 3,161 10,000
1993 120,000 2,266 0 0
Herb Reynolds 1995 125,812 5,000 1,391 0
1994 129,058 0 6,147 0
1993 119,374 0 0 0
<CAPTION>
<C> <S>
(1) Bernie E. Schneider Chairman of the Board of Pacific National Bank and the Company
Allen C. Barbieri President and Chief Executive Officer of Pacific National Bank and the Company
Doug L. Heller Executive Vice President and Chief Financial Officer of Pacific National Bank,
Chief Financial Officer of the Company
Allan Gibson Executive Vice President and Chief Operating Officer of Pacific National Bank
Herb Reynolds Executive Vice President of Pacific National Bank
</TABLE>
(2) Automobile allowance and other fringe benefits.
During 1995, the Company did not grant any stock options, SARS nor did it
award any compensation under any long-term incentive plan to the named
executive officers. During 1995, the named executive officers did not
exercise any stock options. The following table sets forth the number of
unexercised stock options, along with the value of unexercised in-the-money
options as of December 31, 1995 for the named executive officers. For the
purpose of calculating the value of unexercised in-the-money options, the
fair market value of the Company's stock was estimated at $4.87 per share
based upon the average price paid for the Company's stock as reported by
Mitchell Securities.
37
<PAGE>
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised
Acquired Options in-the-money options
on at FY-End(#) at FY-End($)
Exercise Value Exercisable/ Exercisable/
Name (#) Realized Unexerciseable Unexerciseable
- ----------------------- --------- -------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Bernard E. Schneider N/A N/A 40,000/0 $55,000/0
Allen C. Barbieri N/A N/A 50,000/0 68,750/0
Doug L. Heller N/A N/A 20,000/0 27,500/0
Allan Gibson N/A N/A 10,000/0 13,750/0
Herb Reynolds N/A N/A 1,250/0 1,719/0
</TABLE>
On April 1, 1994, the Bank entered into an employment agreement with Allen
Barbieri which set forth the terms and conditions under which Mr. Barbieri
would be employed by the Bank. Other than a termination agreement, this
agreement is consistent with all normal employment policies of the Bank. The
agreement sets forth that Mr. Barbieri's initial term of employment shall be
for two years and shall be extended by the Board for additional successive
terms of one year. The Board may terminate Mr. Barbieri's employment for
cause without any additional compensation at any time during the term of the
agreement. If Mr. Barbieri's employment is terminated by the Bank without
cause, or if the Bank gives written notice to Mr. Barbieri of its intention
not to renew for a successive term, then the Bank will pay Mr. Barbieri his
full salary which would have been paid to him for the remainder of the initial
term or successive terms, as applicable, but not less than 12 months in any
case.
The Company compensates its outside Directors for their participation in Board
of Directors meetings along with other committee meetings. The amount for
each committee is based upon several factors including an estimation of the
time devoted to the preparation of each meeting and the length of time at each
meeting. Due to the extra time devoted, the chairman of each committee is
compensated double the normal committee fee. The schedule below sets forth
the compensation which each outside Director was paid during 1995 for his
participation in each committee meeting along with the frequency of each
committee meeting.
<TABLE>
<CAPTION>
Committee Company Fee Frequency
- --------- ------- ---- ---------
<S> <C> <C> <C>
Board of Directors BHC $ 0 Quarterly
Board of Directors Bank 350 Monthly
Audit Committee Bank 250 Monthly
Loan Committee Bank 150 Weekly
Asset Liability Committee Bank 100 Monthly
Community Reinvestment Act Committee Bank 150 As needed
Compensation Committee Bank 125 As needed
</TABLE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information concerning common stock ownership of each of the Company's
directors and executive officers is discussed in Item 9, Directors, Executive
Officers, Promoters and Control Persons, which is incorporated herein by
reference. As of December 31, 1995, all directors of the Company and its
subsidiary as a group beneficially own 421,237 shares or 19.3% of the total
shares outstanding. Mr. Terry M. Giles, 1272 Peacock Hill, Santa Ana,
California 92705, owns 1,043,009 shares or 47.7% of common stock of the
Company. Mr. Giles stock is subject to an option agreement which is more
fully described below. Mr. David Stein of Mallorca, Spain owns 121,700 shares
or 5.56% of the common stock of the Company. Other than the persons listed in
Item 9, Mr.
38
<PAGE>
Giles and Mr. Stein were the only persons who are known to the Company to be
the beneficial owner of more than five percent of the Company's common stock
as of December 31, 1995.
In February, 1995, Mr. Giles sold 225,000 common shares and granted an option
to purchase an additional 1,192,006 common shares to a group of six
individuals. This was an arms length transaction at prices negotiated and
determined to be fair market value. The group of six, which includes the
following directors of the Company and the Bank: Mr. Barbieri, Mr. Heller,
Mr. Hart, and Mr. Salquist, would control over 65% of the outstanding shares
of the Company if the option is exercised. On October 17, 1995, the Federal
Reserve approved the Company's change of control application which was applied
for as a result of this option. During the option term, the voting of the
option shares is governed by an agreement which states that if the optionor
and optionee do not agree, the vote will be decided by a third party. The
option is exercisable until October 17, 1997 or, in the event that the Company
or the Bank has entered into a definitive letter of intent or agreement
involving a sale of assets or stock, merger or other business combination
requiring regulatory approval, for such additional period equal to the
regulatory review period plus three business days.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Certain Directors of the Company directly, and through the companies with
which they are associated, are customers of, and have banking transactions
with, the Bank in the ordinary course of its business. These Director related
loans, made in the ordinary course of business, were made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unaffiliated persons. Such loans did
not involve more than the normal risk of collectibility or present other
unfavorable features to the Bank. As of December 31, 1995 the loans
outstanding to officers, directors and affiliates were 39.3% of the Company's
total stockholders' equity and 5.8% of the Company's total loan portfolio.
The Bank leased its Santa Ana facility from a general partnership of which
Terry M. Giles, the Company's majority shareholder, is the majority partner.
The remaining three years of this lease, including the obligation to pay rents
of approximately $530,000 was terminated in February 1995 at a net cost to the
Company of $50,000.
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
Index to Consolidated Financial Statements
------------------------------------------
The table below indicates the pages in this report where the consolidated
financial statements of PNB Financial Group and the 1995 and 1994 report of
McGladrey & Pullen, LLP independent auditors, are located.
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Auditors for 1995 and 1994 41
Consolidated Balance Sheets 42-43
Consolidated Statements of Operations 44-45
Consolidated Statements of Stockholders' Equity 46
Consolidated Statements of Cash Flows 47
Notes to Consolidated Financial Statements 48-64
</TABLE>
39
<PAGE>
Exhibits:
--------
See index to exhibits at page 66 of this Form 10-KSB.
Reports on Form 8-K
-------------------
During the last quarter of 1995, the Company filed a report on form 8-KSB in
response to Item 1, change in control of registrant. This report was filed on
October 18, 1995 and discussed the Federal Reserve's response to the change in
control application.
40
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN, LLP]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PNB Financial Group
Newport Beach, California
We have audited the accompanying consolidated balance sheets of PNB Financial
Group and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. 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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 1995 and 1994 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PNB
Financial Group and subsidiary as of December 31, 1995 and 1994 and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Anaheim, California
January 19, 1996
41
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------- -------------
<S> <C> <C>
Cash and due from banks (Note 12) $ 13,814,000 $ 9,836,000
Federal funds sold 2,500,000 3,000,000
------------ ------------
Total cash and cash equivalents 16,314,000 12,836,000
Securities available for sale (Note 2) 10,626,000 19,129,000
Mortgage loans held for sale (Notes 3 and 8) 41,968,000 12,448,000
Loans (Note 3):
Commercial 55,291,000 57,741,000
Real estate and construction 38,985,000 36,395,000
Consumer 9,461,000 10,790,000
------------ ------------
103,737,000 104,926,000
Allowance for loan losses (2,659,000) (2,727,000)
------------ ------------
Loans, net 101,078,000 102,199,000
Premises and equipment, net (Note 4) 1,340,000 1,735,000
Other real estate owned 1,337,000 4,522,000
Other assets 2,129,000 2,716,000
------------ ------------
Total assets $174,792,000 $155,585,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1995 and 1994
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------- -------------
<S> <C> <C>
Deposits:
Noninterest bearing demand $ 61,757,000 $ 58,719,000
Interest bearing:
Demand 47,983,000 45,080,000
Savings 5,131,000 6,582,000
Time certificates of deposit of $100,000
or more 20,453,000 16,336,000
Other time deposits 21,979,000 15,742,000
------------ ------------
Total deposits 157,303,000 142,459,000
Other liabilities 2,261,000 869,000
------------ ------------
Total liabilities 159,564,000 143,328,000
------------ ------------
Commitments and contingency (Notes 3, 5 and 12)
Stockholders' equity (Notes 6 and 12):
Common stock, no par value; 20,000,000 shares
authorized; 2,187,933 and 2,186,933 shares
issued and outstanding at December 31, 1995
and 1994, respectively 16,134,000 16,129,000
Accumulated deficit (822,000) (2,863,000)
Unrealized loss on securities available for
sale (Note 2) (84,000) (1,009,000)
------------ ------------
Total stockholders' equity 15,228,000 12,257,000
------------ ------------
Total liabilities and stockholders' equity $174,792,000 $155,585,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $12,016,000 $ 9,825,000
Interest on investment securities 762,000 1,230,000
Interest on federal funds sold 128,000 301,000
Interest on deposits in other banks - 40,000
----------- -----------
Total interest income 12,906,000 11,396,000
----------- -----------
INTEREST EXPENSE
Demand 1,315,000 1,198,000
Savings 154,000 168,000
Time certificates of deposit of $100,000
or more 1,003,000 630,000
Other time deposits 932,000 656,000
----------- -----------
Total interest expense 3,404,000 2,652,000
----------- -----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 9,502,000 8,744,000
PROVISION FOR LOAN LOSSES
(Note 3) 1,503,000 912,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,999,000 7,832,000
----------- -----------
OTHER INCOME
Commissions and other revenue from mortgage
banking operations (Note 8) 5,708,000 3,302,000
Service charges, fees and other 642,000 529,000
Gain (loss) on sales of investment
securities (Note 2) (51,000) (25,000)
Premium earned on sales of SBA loans 240,000 274,000
----------- -----------
Total other income 6,539,000 4,080,000
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
OTHER EXPENSES
Mortgage banking operations (Note 8) $ 4,175,000 $ 4,023,000
Salaries and employee benefits 3,635,000 3,622,000
Occupancy (Note 5) 1,675,000 1,824,000
Other deposit expense 944,000 1,064,000
Insurance 541,000 767,000
Professional services 452,000 552,000
Legal 292,000 341,000
Other real estate owned expense 246,000 374,000
Supplies 171,000 222,000
Business development expense 126,000 183,000
Auto 68,000 90,000
Miscellaneous 270,000 151,000
----------- -----------
Total other expenses 12,595,000 13,213,000
----------- -----------
INCOME (LOSS) BEFORE BENEFIT FROM
INCOME TAXES 1,943,000 (1,301,000)
BENEFIT FROM INCOME TAXES (Note 7) (98,000) -
----------- -----------
NET INCOME (LOSS) $ 2,041,000 $(1,301,000)
=========== ===========
NET INCOME (LOSS) PER SHARE $.91 $(.59)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Retained Securities Total
---------------------------- Earnings Available Stockholders'
Shares Amount (Deficit) for Sale Equity
------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 2,189,483 $16,139,000 $(1,562,000) $ - $14,577,000
Retirement of common stock (2,550) (10,000) - - (10,000)
Change in accounting for securities
available for sale - - - (76,000) (76,000)
Increase in unrealized loss on
securities available for sale - - - (933,000) (933,000)
Net loss - - (1,301,000) - (1,301,000)
------------ ----------- ----------- ------------- -----------
Balance, December 31, 1994 2,186,933 16,129,000 (2,863,000) (1,009,000) 12,257,000
Exercise of stock option 1,000 5,000 - - 5,000
Decrease in unrealized loss on
securities available for sale - - - 925,000 925,000
Net income - - 2,041,000 - 2,041,000
------------ ----------- ----------- ------------- -----------
Balance December 31, 1995 2,187,933 $16,134,000 $ (822,000) $ (84,000) $15,228,000
============ =========== =========== ============= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,041,000 $ (1,301,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 568,000 623,000
Provision for loan losses 1,503,000 912,000
Change in other assets and liabilities, net 1,389,000 (470,000)
Proceeds from sale of mortgage loans
held for sale 336,694,000 218,035,000
Origination of mortgage loans held for sale (366,214,000) (198,726,000)
------------- -------------
Net cash provided by (used in)
operating activities (24,019,000) 19,073,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available for sale securities 7,628,000 16,127,000
Proceeds from maturities of available for
sale securities 1,749,000 5,958,000
Purchase of available for sale securities - (29,575,000)
Net change in loans 1,829,000 172,000
Proceeds from sale of other real estate owned 1,590,000 1,266,000
Acquisitions of premises and equipment (148,000) (236,000)
------------- -------------
Net cash provided by (used in)
investing activities 12,648,000 (6,288,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 14,844,000 (23,569,000)
Net change in common stock 5,000 (10,000)
------------- -------------
Net cash provided by (used in)
financing activities 14,849,000 (23,579,000)
------------- -------------
Net increase (decrease) in
cash and cash equivalents 3,478,000 (10,794,000)
CASH AND CASH EQUIVALENTS
Beginning of year 12,836,000 23,630,000
------------- -------------
End of year $ 16,314,000 $ 12,836,000
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995 and 1994
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
PNB Financial Group is a bank holding company whose wholly-owned subsidiary,
Pacific National Bank, provides bank related services including the granting of
commercial, real estate, installment, construction, and Small Business
Administration (SBA) loans, mortgage brokerage and mortgage banking services to
customers.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES ARE AS FOLLOWS:
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent asset and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of consolidation:
The consolidated financial statements include the accounts of PNB Financial
Group (the Company) and its wholly-owned subsidiary, Pacific National Bank (the
Bank). All significant intercompany balances have been eliminated in
consolidation.
Cash and cash equivalents:
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less and federal
funds sold to be cash equivalents. The Company has deposits at other banks in
excess of insured limits and federal funds sold are all to one institution.
Securities available for sale:
Securities classified as available for sale are those debt securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations and other similar factors.
Securities available for sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in stockholders' equity, net of
any related deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in earnings.
48
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Mortgage loans held for sale:
Mortgage loans held for sale are reported at the lower of cost or fair value
which is computed by the aggregate method. Gains and losses on the sale of
mortgage loans are adjusted by gains and losses generated from corresponding
hedging transactions entered into to protect the mortgage loan inventory value
from fluctuations in interest rates. Hedge positions are maintained to protect
the pipeline of loan applications in process from changes in interest rates.
Gains and losses which occur during the commitment and warehousing period
related to the pipeline and mortgage loans held for sale are recognized in the
period loans are sold. Unrealized hedging losses are recognized currently if
deferring such losses would result in mortgage loans held for sale and the
pipeline being valued in excess of their estimated fair value. Interest income
on these loans is accrued daily. Loan origination fees are deferred and
recognized as income when the loan is sold to a permanent investor.
Loans:
Loans are stated at amounts advanced less payments received, unearned fees and
loan discounts. Impaired loans are measured on the present value of expected
future cash flows discounted at the loan's effective interest rate, or as an
expedient at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
Interest income on loans is accrued daily except where reasonable doubt exists
as to the collectibility of the interest, in which case the accrual of interest
income is discontinued. The Company's current policy is generally to cease
accruing interest and to charge off all accrued and unpaid interest on loans
which are past due as to principal and/or interest for 90 days, or at an earlier
time, if management determines timely collection of interest is in doubt. Loan
origination fees and certain incremental direct costs relating to loan
originations are deferred and amortized over the life of the loan. Discounts on
loans purchased are credited to income over the life of the loan using the
interest method.
The adequacy of the allowance for loan losses is determined by management based
on a number of factors, including historical loan loss experience (migration
analysis), changes in the nature and volume of the loan portfolio, review of
problem loans, quality of the overall portfolio and current economic conditions.
While management uses the best information available to provide for possible
losses, future adjustments to the allowance may be necessary due to economic,
operating, regulatory or other conditions that may be beyond the Company's
control. Loans considered uncollectible are charged to the allowance for loan
losses and subsequent recoveries are added to the allowance.
Premises and equipment:
Premises and equipment are stated at cost, less accumulated depreciation and
amortization which is charged to expense on a straight-line basis over the
estimated useful lives of the assets. The useful life of equipment is estimated
to be from three years to five years. Improvements to leased property are
amortized over the lesser of the term of the lease or life of the improvements.
49
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Other real estate owned:
Other real estate owned, which represents real estate acquired in settlement of
loans, is held for sale and is recorded at the lower of cost or fair value less
estimated cost of disposal. Any writedown to fair value at the time of transfer
to other real estate owned is charged to the allowance for loan losses. Any
subsequent operating expenses or income, reduction in estimated fair values, or
gains or losses on disposition of such properties are charged or credited to
current operations. Other real estate owned is evaluated regularly by
management and reductions of the carrying amounts are recorded as necessary.
Noninterest bearing demand deposits:
As of December 31, 1995 and 1994, approximately $23,000,000 and $27,000,000,
respectively, of the noninterest bearing demand deposits consist of demand
accounts currently maintained by title insurance companies, escrow companies and
property management companies. The Bank provides an earnings allowance for
these customers and purchases external services on behalf of these customers
based on the amount of the earnings allowance less any internal charges
incurred. These external services, which are commonly offered in the banking
industry, include bookkeeping, payroll and courier. The expense of these
external services is classified as other deposit expense in the accompanying
consolidated statements of operations.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Net income (loss) per share:
Net income (loss) per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the year (2,269,591
in 1995 and 2,188,296 in 1994). Common stock equivalents are dilutive in 1995
and were antidilutive in 1994.
Reclassification:
Certain reclassifications have been made to the prior years' financial
statements, with no effect on net (loss) or stockholders' equity, to conform to
the 1995 financial statement presentation.
50
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Recent accounting development:
Effective January 1, 1996, the Bank adopted Financial Accounting Standards Board
(FASB) Statement No. 123, "Accounting for Stock Based Compensation". Statement
No. 123 established financial accounting and reporting standards for stock-based
employee compensation plans, such as a stock purchase plan. The Statement
generally suggests, but does not require, stock-based compensation transactions
be accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable. Companies that do not elect to change their accounting for stock-
based compensation are required to disclose the effect on net income and
earnings per share as if the provisions of Statement No. 123 were followed. The
Company has decided not to adopt the accounting provisions of this Statement.
NOTE 2. INVESTMENT SECURITIES AVAILABLE FOR SALE.
Securities available for sale as of December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Values
----------- ---------- ----------- -----------
1995
----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities $ 4,753,000 $ 1,000 $ (20,000) $ 4,734,000
U.S. government agency
securities 2,247,000 - (26,000) 2,221,000
Mortgage backed
securities 3,370,000 12,000 (51,000) 3,331,000
Federal Reserve Bank
stock 340,000 - - 340,000
----------- ------- --------- -----------
$10,710,000 $13,000 $ (97,000) $10,626,000
=========== ======= ========= ===========
<CAPTION>
1994
----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities $13,333,000 $ - $ (449,000) $12,884,000
U.S. government agency
securities 2,376,000 - (195,000) 2,181,000
Mortgage backed
securities 4,089,000 - (365,000) 3,724,000
Federal Reserve Bank
stock 340,000 - - 340,000
----------- ------- ----------- -----------
$20,138,000 $ - $(1,009,000) $19,129,000
=========== ======= =========== ===========
</TABLE>
51
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
The amortized cost and fair value of securities available for sale as of
December 31, 1995 by contractual maturity are shown below. Maturities may
differ from contractual maturities in mortgage backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 3,519,000 $ 3,514,000
Due after one year through five years 3,481,000 3,441,000
Mortgage backed securities 3,370,000 3,331,000
Federal Reserve Bank stock 340,000 340,000
----------- -----------
$10,710,000 $10,626,000
=========== ===========
</TABLE>
Gross realized losses from the sale of securities available for sale were
$51,000 and $25,000 for the years ended December 31, 1995 and 1994,
respectively. There were no gross realized gains on the sale of securities
available for sale for the years ended December 31, 1995 and 1994. As of
December 31, 1995 and 1994, securities available for sale with a fair value of
$1,450,000 and $7,773,000, respectively, were pledged as collateral for various
purposes as required or permitted by law.
NOTE 3. LOANS
Loan portfolio composition:
A majority of the Bank's commercial and consumer loan portfolio is with
customers located in California throughout its primary market area of Orange and
Los Angeles Counties. The Bank grants commercial and consumer loans to
borrowers in a number of different industries.
The Bank's real estate and construction loan portfolio consists of loans on real
estate located throughout Southern California. These areas have recently
experienced adverse economic conditions, including declining real estate values.
These factors have adversely affected borrowers' ability to repay. Although
management believes the level of its allowance for loan losses and the carrying
value of its other real estate owned as of December 31, 1995 is appropriate,
continued depressed economic conditions in these areas may result in losses that
cannot be reasonably predicted at this time. In addition, various regulatory
agencies as an integral part of their examination process periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management.
52
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Allowance for loan losses:
The following is a summary of transactions affecting the allowance for loan
losses for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Beginning balance $ 2,727,000 $ 3,473,000
Provision for loan losses 1,503,000 912,000
Amounts charged off (1,745,000) (2,189,000)
Recoveries 174,000 531,000
----------- -----------
Ending balance $ 2,659,000 $ 2,727,000
=========== ===========
</TABLE>
Loans have been recorded net of purchase discounts of $729,000 and $995,000 and
net deferred origination fees of $69,000 and $140,000 as of December 31, 1995
and 1994, respectively. Such amounts will be amortized to income over the lives
of the loans. At December 31, 1995, the Bank has a line of credit with the
Federal Reserve Bank. Borrowings under this line would be collateralized by a
portion of the Bank's consumer loan portfolio and bear interest at the
prevailing discount rate.
SBA loans:
The Bank serviced approximately $10,487,000 and $6,600,000 of SBA loans for
others as of December 31, 1995 and 1994, respectively, which are not included in
the accompanying balance sheets. At December 31, 1995 and 1994, $182,000 and
$157,000, respectively, of net deferred gains relating to the sale of SBA loans
is included in loans.
Nonaccrual and impaired loans:
Loans on which the accrual of interest has been discontinued amounted to
$9,667,000 and $3,136,000 at December 31, 1995 and 1994, respectively. If
nonaccrual loans had been maintained in accordance with their terms, additional
interest income of approximately $650,000 ($.29 per common share) and $556,000
($.25 per common share) would have been recorded during the years ended December
31, 1995 and 1994, respectively.
Impaired loans having recorded investments of $9,021,000 at December 31, 1995
have been recognized in conformity with FASB Statement No. 114 as amended by
FASB Statement No. 118. The total allowance for loan losses related to these
loans was $1,511,000 on December 31, 1995. Impaired loans for which there is no
specific allowance for loan losses at December 31, 1995 is $445,000. The
average recorded investment for all impaired loans during 1995 was $7,592,000.
Interest income of $117,000 was recognized on impaired loans in 1995, all of
which was recognized using a cash-basis method of accounting during the time
within that period that the loans were impaired.
53
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Mortgage loans held for sale:
In the ordinary course of business, the Bank has liability under representations
and warranties made to purchasers and insurers of mortgage loans. Under certain
circumstances, the Bank may become liable for the unpaid principal and interest
on defaulted loans (whether recourse or nonrecourse) or other loans if there has
been a breach of representations or warranties. The Bank has had no material
losses from breaches of representations and warranties.
Substantially all mortgage loans are sold with a recourse provision. The Bank
has different recourse provisions with each investor. Generally, loans sold
under the recourse provision are required to be purchased back by the Bank if
the loan becomes delinquent within two to six months of funding. The Bank has
the choice to not purchase the loan, but to indemnify the investor for any and
all costs associated with the investors collection of the loan. The Bank's
repurchases and indemnifications have not resulted in any material losses. The
Bank estimates its loss exposure to loans sold under the recourse provision and
has recorded a loss estimate of $232,000 and $246,000 as of December 31, 1995
and 1994, respectively.
Related party loans:
Certain stockholders of the Company, officers and directors of the Company and
the Bank, including their families and companies of which they are principal
owners, are considered to be related parties. These related parties were loan
customers of, and had other transactions with, the Company and the Bank in the
ordinary course of business. In management's opinion, these loans and
transactions were on the same terms as those for comparable loans and
transactions with nonrelated parties. The activity in related party loans for
the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Balance, beginning $ 7,259,000 $ 8,214,000
Additional advances 4,994,000 9,985,000
Repayments (4,378,000) (10,864,000)
Loans no longer with related parties (1,889,000) (76,000)
----------- ------------
Balance, ending $ 5,986,000 $ 7,259,000
=========== ============
</TABLE>
At the end of the two years in the table above none of the loans were past due,
nonaccrual, or restructured to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower.
There were no loans to a related party that were considered classified loans at
December 31, 1995 and 1994.
54
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
NOTE 4. PREMISES AND EQUIPMENT
Components of premises and equipment are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Furniture, fixtures and equipment $ 3,659,000 $ 3,511,000
Leasehold improvements 1,470,000 1,576,000
----------- -----------
5,129,000 5,087,000
Accumulated depreciation and amortization (3,789,000) (3,352,000)
----------- -----------
$ 1,340,000 $ 1,735,000
=========== ===========
</TABLE>
NOTE 5. COMMITMENTS, CONTINGENCY AND RELATED PARTY TRANSACTIONS
Operating leases:
At December 31, 1995, all of the Company's operations are conducted in leased
facilities under noncancelable operating leases expiring at various dates
through 2000. Several of the leases contain options to extend the lease terms
which range from five to fifteen years. After deducting sublease rental income
of $ 61,000 and $106,000, the Company incurred net rental expense of $1,037,000
and $1,134,000, during the years ended December 31, 1995 and 1994, respectively.
The future minimum lease payments required under operating leases with remaining
terms in excess of one year total $3,772,000 and are due in the years ending:
1996 $1,040,000; 1997 $893,000; 1998 $796,000; 1999 $539,000 and 2000 $504,000.
In February of 1995, the Bank terminated its lease on its Santa Ana facility.
This facility is owned by a general partnership of which the Company's majority
stockholder is the majority partner. Rental expense related to leasing space in
this building amounted to $16,000 and $189,000 during the years ended December
31, 1995 and 1994, respectively.
Financial instruments with off-balance sheet risk:
In the normal course of business, the Bank is a party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include unfunded commitments to extend credit and
obligations under 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 consolidated balance sheets. The Bank's exposure to
credit loss in the event of nonperformance by the other party as a result of
commitments to extend credit and obligations under standby letters of credit is
represented by the contractual amount of those instruments. At December 31,
1995 and 1994 the Bank had unfunded commitments to extend credit of $ 19,231,000
and $18,921,000 and obligations under standby letters of credit of $492,000 and
$441,000, respectively.
55
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
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 down, the total commitment amounts do 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. All standby letters
of credit issued by the Bank are for a fixed period not to exceed one year.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for extending loan facilities to customers. The Bank
evaluates each customer's credit worthiness 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 of the counterparty.
Collateral held varies but may include cash, accounts receivable, inventories,
property, plant and equipment, and residential and commercial properties.
The Bank enters into financial arrangements to mitigate the exposure of
fluctuating interest rates in the normal course of business through origination
and selling of mortgage loans. These financial instruments include commitments
to fund mortgage loans, mandatory forward commitments and other hedging
instruments. These instruments involve, to varying degrees, elements of credit
and interest rate risk. Credit risk is managed by the Bank by entering into
agreements with Wall Street investment bankers and with permanent investors
meeting the credit standards of the Bank. At any time, the exposure to the
Bank, in the event of default by the counterparty under a mandatory commitment
is the difference between the contract price and current market value, which
amount would only be a fractional percentage of the outstanding commitments.
Until a rate commitment is extended by the Bank to a mortgage broker/borrower,
there is no market interest rate risk to the Bank. The Bank reduces interest
rate exposure by limiting these rate commitments to varying periods of less than
sixty days. Loans in process for which interest rates were committed to the
mortgage broker/borrower totaled $17,266,000 as of December 31, 1995. These
commitments are hedged by the Bank by entering into mandatory forward
commitments to sell whole loans.
At December 31, 1995, the Bank had $34,000,000 of mandatory forward commitments
to sell whole loans relating to their unfunded pipeline of rate-locked loans and
unallocated loans held for sale. Gains and losses on mandatory forward
commitments are realized in the period settlement occurs. Unrealized gains and
losses on forward commitments are included in the analysis of lower of cost or
market valuation for mortgage loans held for sale. At December 31, 1995, the
unrealized loss on the Bank mandatory forward commitments was $200,000. The
Bank has also committed to sell loans that have already been funded that are
pending purchases by an investor. The total amount of such committed loans at
December 31, 1995 was $23,898,000.
56
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Contingency:
Congress is currently considering legislation to require a special one-time
assessment on deposits insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. If the legislation is passed in its current form, the
Bank's assessment cost could range between $350,000 and $450,000. After payment
of the assessment, the SAIF portion of the FDIC insurance premium for the
following year is expected to drop from it current level of approximately
$150,000 to a minimal amount.
NOTE 6. STOCKHOLDERS' EQUITY
Stock option plans:
During 1995, the Company's 1985 Incentive Stock Option Plan and the 1985
Nonqualified Stock Option Plan expired. As of December 31, 1995, options for
47,250 and 248,500 shares, respectively, of the Company's common stock were
outstanding under these Plans. In 1995, the Company adopted a 1995 Incentive
Stock Option Plan which provides for a maximum of 50,000 options to be granted.
As of December 31, 1995, no options under the 1995 Plan have been granted.
Under terms of the incentive and nonqualified stock option plans, options of the
Company's common stock may be granted to officers, key employees and directors
of the Company and the Bank, and others. Under the plans, options are granted
with an exercise price not less than fair market value of the common stock at
the date the options are granted. All options expire ten years from the date of
grant, and are 100% vested at the date of grant.
A summary of stock option transactions for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Options outstanding, beginning of year $283,250 $ 463,500
Options expired (30,500) (201,000)
Options amended by 50% reduction - (131,250)
Options granted 44,000 152,000
Options exercised (1,000) -
-------- ---------
Options outstanding, end of year $295,750 $ 283,250
======== =========
</TABLE>
At December 31, 1995, 290,250 options were exercisable at $3.50 per share and
5,500 options were exercisable at $4.50 per share.
Preferred stock:
The Company has authorized 10,000,000 shares, no par value, preferred stock. No
shares of preferred stock have been issued.
57
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Dividend restrictions:
The Company and the Bank are restricted as to the amount of dividends which can
be paid. Dividends declared by national banks that exceed the net income (as
defined) for the current year plus retained net income for the preceding two
years must be approved by the Comptroller of the Currency. Under this formula,
no dividends may be paid without prior regulatory approval. Regardless of
formal regulatory restrictions, the Company and the Bank may not pay dividends
that would result in its capital levels being reduced below the minimum
regulatory requirements (See Note 12). Also, the Company and the Bank are
prohibited from paying dividends unless they have positive retained earnings.
NOTE 7. INCOME TAXES
The benefit from income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Current:
Federal $(98,000) $ -
State - -
Deferred - -
-------- ---------
Total benefit from income taxes $(98,000) $ -
======== =========
</TABLE>
The benefit from income taxes resulted in an effective tax rate different from
the federal income tax statutory rate. The reasons for this difference are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Federal income tax (benefit) computed
at a statutory rate of 35% $ 680,000 $(455,000)
State franchise tax, net of federal
income tax benefit 120,000 (91,000)
Change in valuation allowance (801,000) 651,000
Other items (97,000) (105,000)
--------- ---------
Total benefit from income taxes $ (98,000) $ -
========= =========
</TABLE>
58
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Loan loss reserves $ 416,000 $ 594,000
Nonaccrual interest income 270,000 256,000
Net operating loss carryforward 309,000 987,000
Fixed assets 64,000 41,000
Mortgage loans held for sale 42,000 -
Other 66,000 44,000
---------- ----------
Total deferred tax assets 1,167,000 1,922,000
Valuation allowance 890,000 1,691,000
---------- ----------
Net deferred tax asset 277,000 231,000
---------- ----------
Discount on loans (224,000) (167,000)
Other (53,000) (64,000)
---------- ----------
Total deferred tax liabilities (277,000) (231,000)
---------- ----------
Net deferred taxes $ - $ -
========== ==========
</TABLE>
Management believes that they will ultimately be able to recognize the net
deferred tax asset available to be recorded by the Company, but have recorded a
valuation allowance on the entire amount available at December 31, 1995 due to
the uncertainty of realization based on the Company's past history of operating
losses.
The Company has federal and state net operating loss (NOL) carryforwards of
$901,000 and $34,000, respectively. These NOL's can be used to offset future
federal and state taxable income. The federal NOL expires in 2009 and the state
NOL expires in 1999.
NOTE 8. SEGMENT DATA, MORTGAGE BANKING OPERATIONS
The Bank operates a residential mortgage division for the origination and sale
of mortgage loans. Substantially all of the mortgage loans it originates are
located in Los Angeles, Orange, San Bernardino and Riverside Counties and all
loans are sold to institutional investors. During the years ended December 31,
1995 and 1994, 63% and 71%, respectively, of loans sold were to one investor.
The Bank does not maintain the servicing on the loans which it sells. The
mortgage division operates both a wholesale and retail department. During 1995,
approximately 91% of the loan volume was originated from the wholesale
department, and approximately 70% of the mortgage loans originated were FHA-
insured or VA-guaranteed loans. All revenue earned by this division is from
unaffiliated third parties.
59
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
Income (loss) from operations of the mortgage division was $1,123,000 and
$(800,000) for the years ended December 31, 1995 and 1994, respectively. Income
from operations is calculated before income tax and allocation of corporate
expenses such as administration, data processing, legal and accounting. Income
from operations of the mortgage division does not include the interest income or
expense associated with the funding and holding of mortgage loans before they
are sold. Total assets related to the mortgage division, which include the
inventory of mortgage loans held for sale as well as certain furniture and
equipment were $44,430,000 and $16,173,000 as of December 31, 1995 and 1994,
respectively. As of December 31, 1995, the Bank employed 154 people, of whom 76
were engaged in the mortgage division.
NOTE 9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with FASB Statement No. 107, "Disclosures About Fair Value of
Financial Instruments," a summary of the estimated fair value of the Company's
consolidated financial instruments as of December 31, 1995 and 1994 is presented
below. The estimated fair value amounts have been determined by management
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Statement No. 107 excludes certain financial instruments and all nonfinancial
assets and liabilities from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ----------- -------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 13,814 $ 13,814 $ 9,836 $ 9,836
Federal funds sold 2,500 2,500 3,000 3,000
Securities available for sale 10,626 10,626 19,129 19,129
Mortgage loans held
for sale 41,968 42,271 12,448 12,448
Loans 101,078 101,067 102,199 102,114
Accrued interest receivable 859 859 963 963
Liabilities:
Savings and demand
deposits $114,871 $114,871 $110,381 $110,381
Time deposits 42,432 42,439 32,074 32,074
Gain or (loss) on off-balance
sheet liabilities:
Mandatory forward
commitments $ - $ (200) $ - $ (25)
Mortgage loan
commitments - 230 - (180)
</TABLE>
60
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
The fair value of cash and due from banks, interest bearing deposits in other
banks, and federal funds sold approximate their carrying amounts. The fair
value of securities available for sale and mortgage loans held for sale are
based on quoted market prices when such quotes are available. In the absence of
quoted market prices, securities are priced based on prices obtained from
certain brokers. These brokers estimate the fair value based upon quoted prices
for similar securities and or pricing maturities. There can be no assurance
that the prices estimated for such securities can be realized upon ultimate
sale.
For variable rate loans that reprice frequently, and that have experienced no
significant change in credit risk, fair values are based on carrying values. At
December 31, 1995 and 1994, variable rate loans comprised approximately 80% of
the loan portfolio. Fair values for all other loans are estimated based on
discounted cash flows, using interest rates currently being offered for loans
with similar terms to borrowers with similar credit quality. Prepayments prior
to the repricing date are not expected to be significant. Loans are expected to
be held to maturity and any unrealized gains or losses are not expected to be
realized.
Fair values disclosed for demand deposits equal their carrying amounts, which
represent the amount payable on demand. The carrying amounts for variable rate
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregate expected
monthly maturities on time deposits. Early withdrawals of fixed rate
certificates of deposit are not expected to be significant.
The fair value of loan commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements, present credit worthiness of the counterparties and the current
rates on mortgage loans. The fair value of mandatory forward commitments is
based on quoted market prices.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1995 and 1994. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date and, therefore,
current fair value estimates may differ significantly from amounts presented
herein.
61
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
NOTE 10. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
A condensed summary of financial information of PNB Financial Group (parent
company only) is as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 772,000 $ 191,000
Loans, net 1,015,000 1,478,000
Investment in subsidiary 13,407,000 10,400,000
Other assets 36,000 242,000
----------- -----------
Total assets $15,230,000 $12,311,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 2,000 $ 54,000
Stockholders' equity 15,228,000 12,257,000
----------- -----------
Total liabilities and stockholders' equity $15,230,000 $12,311,000
=========== ===========
CONDENSED STATEMENTS OF OPERATIONS
Revenues $ 132,000 $ 146,000
Expenses 173,000 303,000
----------- -----------
(Loss) before equity in net (loss) of subsidiary (41,000) (157,000)
Equity in net income (loss) of subsidiary 2,082,000 (1,144,000)
----------- -----------
Net income (loss) $ 2,041,000 $(1,301,000)
=========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
Net income (loss) $ 2,041,000 $(1,301,000)
Equity in net (income) loss of subsidiary (2,082,000) 1,144,000
Other 157,000 82,000
----------- -----------
Cash flows from operating activities 116,000 (75,000)
Cash flows from investing activities 460,000 100,000
Cash flows from financing activities 5,000 (10,000)
----------- -----------
Net increase in cash 581,000 15,000
Cash at beginning of year 191,000 176,000
----------- -----------
Cash at end of year $ 772,000 $ 191,000
=========== ===========
</TABLE>
There were no dividends paid from the Bank to the Company during the years ended
December 31, 1995 and 1994.
62
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995 and 1994
NOTE 11. DISCLOSURE OF CASH FLOW INFORMATION
Supplemental cash flow information and disclosure of noncash activity for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $3,353,000 $2,644,000
========== ==========
Income tax (refunds), net $ (13,000) $ (490,000)
========== ==========
Supplemental disclosure of noncash investing activities:
Real estate acquired in settlement of loans $2,763,000 $5,050,000
========== ==========
Loans to facilitate sale of other real estate owned $3,266,000 $2,119,000
========== ==========
</TABLE>
NOTE 12. REGULATORY MATTERS
Bank regulations require that all banks maintain a percentage of their deposits
as reserves at the Federal Reserve Bank. At December 31, 1995 and 1994, their
required reserves were $2,569,000 and $1,612,000, respectively. These amounts
are included in cash and due from banks.
The Company and the Bank are 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 and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt correction
action, the Company and the Bank must meet specific capital guidelines that
involve qualitative measures of the Company and the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's 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 I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1995, that the Company and the Bank meet all capital adequacy requirements
to which it is subject.
As of December 31, 1995, the Company and the Bank are categorized as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company and the Bank must maintain minimum
total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the
table. There are no conditions or events since that management believes have
changed the institution's category.
63
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1994, and 1993
The Company's and the Bank's actual capital amounts and ratios, along with the
minimum capital amounts and ratios for both capital adequacy purposes and to be
well capitalized under prompt corrective action provisions, are presented in the
following tables. All amounts are in thousands.
<TABLE>
<CAPTION>
The Bank:
To Be
Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
- ----------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) $14,280 11.7% $9,787 8.0% $12,233 10.0%
Tier I Capital (to Risk Weighted Assets) $12,751 10.4% $4,893 4.0% $ 7,340 6.0%
Tier I Capital (to Average Assets) $12,751 7.7% $6,628 4.0% $ 8,285 5.0%
As of December 31, 1994:
Total Capital (to Risk Weighted Assets) $12,379 10.7% $9,220 8.0% $11,525 10.0%
Tier I Capital (to Risk Weighted Assets) $10,938 9.5% $4,610 4.0% $ 6,915 6.0%
Tier I Capital (to Average Assets) $10,938 6.9% $6,362 4.0% $ 5,469 5.0%
<CAPTION>
The Company:
To Be
Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
- ----------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) $16,866 13.4% $9,946 8.0% $ 1,243 10.0%
Tier I Capital (to Risk Weighted Assets) $15,312 12.3% $4,973 4.0% $ 7,460 6.0%
Tier I Capital (to Average Assets) $15,312 9.1% $6,701 4.0% $ 8,376 5.0%
As of December 31, 1994:
Total Capital (to Risk Weighted Assets) $14,257 12.2% $9,386 8.0% $11,732 10.0%
Tier I Capital (to Risk Weighted Assets) $12,790 10.9% $4,693 4.0% $ 7,039 6.0%
Tier I Capital (to Average Assets) $12,790 7.9% $6,439 4.0% $ 8,049 5.0%
</TABLE>
64
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 30th day of March 1996.
PNB FINANCIAL GROUP
(Registrant)
BY: /s/ BERNARD E. SCHNEIDER
------------------------------------
BERNARD E. SCHNEIDER
Chairman of the Board
In accordance with the Security Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ ALLEN C. BARBIERI President and Director March 29, 1996
- ----------------------
ALLEN C. BARBIERI
/s/ DOUG L. HELLER Chief Financial Officer March 29, 1996
- ----------------------
DOUG L. HELLER
/s/ MARTIN T. HART Director March 29, 1996
- ----------------------
MARTIN T. HART
/s/ G. MITCHELL MORRIS Director March 29, 1996
- ----------------------
G. Mitchell Morris
/s/ JON A. SALQUIST Director March 29, 1996
- ----------------------
JON A. SALQUIST
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Page
- ------- -------------------------------------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation (1) *
3.2 Bylaws of the Company (2) *
3.3 Amended Articles of Incorporation (3) *
22 Subsidiaries of the Company 67
* Not Applicable
</TABLE>
(1) Filed as Exhibit 3.1 to registrant's 1989 Annual Report on Form 10-K,
which is incorporated herein by reference.
(2) Filed as Exhibit 6, to Registrant's Registration Statement on Form S-14
(File No. 2-78580), which exhibits are incorporated herein by reference.
(3) Filed as Exhibit 3.3 to Registrant's 1990 Annual Report on Form 10-K,
which is incorporated herein by reference.
66
<PAGE>
EXHIBIT NO. 22
SUBSIDIARIES OF THE COMPANY
<PAGE>
SUBSIDIARIES OF PNB FINANCIAL GROUP
-----------------------------------
At December 31, 1995, the only subsidiaries of PNB Financial Group was Pacific
National Bank.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 13,814
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,594
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 103,737
<ALLOWANCE> 2,659
<TOTAL-ASSETS> 174,792
<DEPOSITS> 157,303
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,261
<LONG-TERM> 0
0
0
<COMMON> 16,134
<OTHER-SE> (906)
<TOTAL-LIABILITIES-AND-EQUITY> 174,792
<INTEREST-LOAN> 12,016
<INTEREST-INVEST> 762
<INTEREST-OTHER> 128
<INTEREST-TOTAL> 12,906
<INTEREST-DEPOSIT> 3,355
<INTEREST-EXPENSE> 3,404
<INTEREST-INCOME-NET> 9,502
<LOAN-LOSSES> 1,503
<SECURITIES-GAINS> (51)
<EXPENSE-OTHER> 12,595
<INCOME-PRETAX> 1,943
<INCOME-PRE-EXTRAORDINARY> 1,943
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,041
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
<YIELD-ACTUAL> 6.48
<LOANS-NON> 9,667
<LOANS-PAST> 382
<LOANS-TROUBLED> 3,589
<LOANS-PROBLEM> 20,534
<ALLOWANCE-OPEN> 2,727
<CHARGE-OFFS> 1,745
<RECOVERIES> 174
<ALLOWANCE-CLOSE> 2,659
<ALLOWANCE-DOMESTIC> 2,659
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
