<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NO. 2-78580
---------------------------
PNB FINANCIAL GROUP
------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
CALIFORNIA 95-3847640
- ------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR REORGANIZATION)
4665 MACARTHUR COURT
NEWPORT BEACH, CALIFORNIA 92660
-------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(714) 851-1033
--------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
------ ------
THE NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK OUTSTANDING AT AUGUST 4,
1996 WAS 2,164,783.
THIS REPORT INCLUDES A TOTAL OF 19 PAGES
================================================================================
<PAGE>
PNB FINANCIAL GROUP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1996
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
ITEM 1. Financial Statement
Condensed Consolidated Balance Sheets (unaudited) - 3
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Income 4
(unaudited) - Six Months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Income 5
(unaudited) - Three Months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows (unaudited) - Six 6
Months ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 8-17
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 18
ITEM 3. Defaults upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Securities Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-KSB 18
Signatures of Registrants 19
</TABLE>
2
<PAGE>
PNB FINANCIAL GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Assets June 30, 1996 December 31, 1995
- ------- ----------------- ------------------
<S> <C> <C>
Cash and due from banks $ 16,014,000 $ 13,814,000
Investment securities 8,577,000 10,626,000
Federal funds sold 13,000,000 2,500,000
Mortgage loans held for sale 52,754,000 41,968,000
Loans 99,588,000 103,737,000
Less allowance for possible loan losses (2,175,000) (2,659,000)
------------ ------------
Net loans 97,413,000 101,078,000
Premises and equipment, net 1,214,000 1,340,000
Other real estate owned 2,372,000 1,337,000
Other assets 3,024,000 2,129,000
------------ ------------
Total assets $194,368,000 $174,792,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $173,883,000 $157,303,000
Other liabilities 3,748,000 2,261,000
------------ ------------
Total liabilities 177,631,000 159,564,000
Shareholders' equity:
Common stock, no par value, 20,000,000
shares authorized; 2,164,783 and 2,187,933
shares issued and outstanding at
June 30, 1996 and December 31, 1995 15,990,000 16,134,000
Retained earnings (deficit) 928,000 (822,000)
Net unrealized loss on investment securities available for sale (181,000) (84,000)
------------ ------------
Total shareholders' equity 16,737,000 15,228,000
------------ ------------
Total liabilities and shareholders' equity $194,368,000 $174,792,000
============ ============
</TABLE>
See accompanying notes
3
<PAGE>
PNB FINANCIAL GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Interest income:
Loans, including fees $6,392,000 $5,703,000
Investment securities 222,000 437,000
Federal funds sold 116,000 59,000
---------- ----------
Total interest income 6,730,000 6,199,000
Interest expense 1,915,000 1,568,000
---------- ----------
Net interest income 4,815,000 4,631,000
Provision for possible loan losses 600,000 463,000
---------- ----------
Net interest income after provision for possible loan losses 4,215,000 4,168,000
Other income:
Commissions and other revenue from mortgage banking operations 5,397,000 1,939,000
Service charges, fees and other 726,000 424,000
---------- ----------
Total other income 6,123,000 2,363,000
Other expenses:
Mortgage banking operations 3,998,000 1,581,000
Salaries & employee benefits 1,980,000 1,825,000
Occupancy 802,000 836,000
Other 1,581,000 1,638,000
---------- ----------
Total other expense 8,361,000 5,880,000
Income before income taxes 1,977,000 651,000
Provision (benefit) for income taxes 227,000 (99,000)
---------- ----------
Net income $1,750,000 $ 750,000
========== ==========
Net income per share $ .76 $ .34
========== ==========
Weighted average number of shares 2,318,404 2,207,783
</TABLE>
See accompanying notes
4
<PAGE>
PNB FINANCIAL GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest income:
Loans, including fees $3,338,000 $2,967,000
Investment securities 113,000 189,000
Federal funds sold 38,000 19,000
---------- ----------
Total interest income 3,489,000 3,175,000
Interest expense 992,000 864,000
---------- ----------
Net interest income 2,497,000 2,311,000
Provision for possible loan losses 300,000 235,000
---------- ----------
Net interest income after provision for possible loan losses 2,197,000 2,076,000
Other income:
Commissions and other revenue from mortgage banking operations 3,067,000 1,248,000
Service charges, fees and other 475,000 242,000
---------- ----------
Total other income 3,542,000 1,490,000
Other expenses:
Mortgage banking operations 2,274,000 933,000
Salaries & employee benefits 1,026,000 890,000
Occupancy 393,000 407,000
Other 767,000 804,000
---------- ----------
Total other expense 4,460,000 3,034,000
Income before income taxes 1,279,000 532,000
Provision for income taxes 272,000 -
---------- ----------
Net income $1,052,000 $ 532,000
========== ==========
Net income per share $ .46 $ .24
========== ==========
Weighted average number of shares 2,311,006 2,217,199
</TABLE>
See accompanying notes
5
<PAGE>
PNB FINANCIAL GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net cash used in operating activities $(8,387,000) $(13,986,000)
----------- ------------
Cash flows from investing activities:
Net change in loans 1,439,000 (6,686,000)
Net change in investment securities 1,952,000 4,894,000
Other 464,000 2,694,000
----------- ------------
Net cash provided by investing activities 3,855,000 902,000
----------- ------------
Cash flows from financing activities:
Net change in deposits 16,581,000 8,813,000
Net change in short term borrowings 795,000 -
Payments for repurchase of common stock (144,000) -
----------- ------------
Net cash provided by financing activities 17,232,000 8,813,000
----------- ------------
Net increase (decrease) in cash and cash equivalents 12,700,000 (4,271,000)
Cash and cash equivalents at beginning of period 16,313,000 12,836,000
----------- ------------
Cash and cash equivalents at end of period $29,013,000 $ 8,565,000
=========== ============
</TABLE>
See accompanying notes
6
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
PNB Financial Group (the "Bank Holding Company") and its wholly-owned
subsidiary, Pacific National Bank (the "Bank"), (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated. The
condensed consolidated financial statements contain all adjustments (consisting
only of normal, recurring accruals) which are, in the opinion of Management,
necessary to present fairly the consolidated financial position of the Company
at June 30, 1996, and the consolidated results of operations and statements of
cash flows for the six and three month periods ended June 30, 1996 and June 30,
1995. Results for the six and three months ended June 30, 1996 are not
necessarily indicative of results which may be expected for any other interim
period, or for the year as a whole. These condensed consolidated financial
statements do not include all disclosures associated with the Company's annual
financial statements and, accordingly, should be read in conjunction with such
statements.
2. Consolidated Statement of Cash Flows
------------------------------------
For purposes of reporting cash flows, the Company defines cash and cash
equivalents as cash on hand, cash due from banks, interest-bearing deposits in
other banks and federal funds sold.
3. Preferred Stock
---------------
The Company has authorized 10,000,000 shares, no par value, preferred stock.
No shares of preferred stock have been issued.
7
<PAGE>
PNB FINANCIAL GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1996
ITEM 2.
- -------
Summary
- -------
The Company reported net income of $1,750,000 for the six months ended June
30, 1996 compared to a net income of $750,000 for the same period in 1995. The
increase in earnings was primarily a result of an increase in the profits in the
Bank's residential mortgage division which was a result of increased lending
activity. During the first six months of 1996, the Bank funded 3,111 mortgage
loans totalling $389.7 million compared to the first six months of 1995 during
which the Bank funded 982 mortgage loans totalling $117.6 million.
As of June 30, 1996, the Company had total assets of $194.4 million, total
loans of $99.6 million, and total deposits of $173.9 million, as compared to
total assets of $174.8 million, total loans of $103.7 million, and total
deposits of $157.3 million as of December 31, 1995. Average deposits for the
first six months of 1996 were $153.9 million as compared to an average deposit
level of $137.7 million during the first six months of 1995. The increase in
deposits is due to the improved state of the local economy along with the
continual marketing effort for expanding the deposit base of the Bank. This
marketing effort was aided by the local business market's renewed confidence in
the Bank's stability.
The following section sets forth the Company's condensed consolidated average
balances of each principal category of assets, liabilities, and shareholders'
equity for the six month period ended June 30, 1996 as compared to the same
period in 1995. Average balances are based on daily averages for the Bank, and
monthly averages for the Bank Holding Company, since the Bank Holding Company
does not maintain daily average information. Management believes that the
difference between monthly and daily average data (where monthly data has been
used) is not significant.
(Continued on next page)
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
Unaudited
<TABLE>
<CAPTION>
Assets 1996 1995
- ------ ------------- -------------
<S> <C> <C>
Cash and due from banks $ 11,239,000 $ 9,261,000
Investment securities 8,392,000 17,278,000
Federal funds sold 4,569,000 2,099,000
Mortgage loans held for sale 44,121,000 13,084,000
Loans 101,109,000 107,496,000
Less allowance for loan losses (2,480,000) (2,765,000)
------------- -------------
Net loans 98,629,000 104,731,000
Premises and equipment, net 1,279,000 1,608,000
Other assets 4,812,000 4,801,000
------------- -------------
Total assets $173,041,000 $152,862,000
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 55,814,000 $ 48,607,000
Interest-bearing 98,111,000 89,187,000
Short-term borrowings 974,000 975,000
Other liabilities 2,127,000 1,011,000
------------- -------------
Total liabilities 157,026,000 139,780,000
------------- -------------
Shareholders' equity:
Capital stock 16,013,000 16,129,000
Retained earnings (deficit) 133,000 (2,534,000)
Net unrealized loss on investment securities available for sale (131,000) (513,000)
------------- -------------
Total shareholders' equity 16,015,000 13,082,000
------------- -------------
Total liabilities and shareholders' equity $173,041,000 $152,862,000
============= =============
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
Capital Resources
- -----------------
The federally-mandated minimum capital requirements and the actual
capitalization of the Company and the Bank as of June 30, 1996 are set forth
below.
CAPITAL REQUIREMENTS AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Pacific PNB
Regulatory National Financial
Requirements Bank Group
------------- --------- ----------
<S> <C> <C> <C>
Leverage Capital Ratio 4.0% 7.50% 9.4%
Risk Based Capital:
Tier 1 Capital 4.0% 11.1% 13.5%
Tier 2 Capital 8.0% 12.4% 14.8%
</TABLE>
Liquidity
- ---------
Liquidity, as it relates to the Bank Holding Company, represents the ability
to obtain funds to support its investment activities and operating needs. The
Bank Holding Company's principal sources of funds are its cash balances and
short-term loan portfolio as well as its ability to raise capital by selling
additional shares of common stock. In May, 1996, the Bank Holding Company
purchased at a substantial discount two troubled real estate dependent loans for
$1.1 million. Of this amount, $800,000 was financed with the seller.
Management anticipates foreclosing on these two loans and recognizing a gain on
the ultimate sale of the real estate collateral. Management expects these sales
to occur before December 31, 1996. The Bank Holding Company is carrying these
loans on a nonaccrual basis. As of June 30, 1996, the Bank Holding Company has
cash balances of approximately $321,000. These liquid assets, along with cash
generated from its loan portfolio, will support its 1996 operating requirements.
Liquidity, as it relates to banking, represents the ability to obtain funds
to meet loan commitments and to satisfy demand for deposit withdrawals. The
principal sources of funds that provide liquidity to the Bank are its cash
balances, federal funds sold, investment securities and a portion of its
mortgage loans held for sale. During the second quarter of 1996, the Bank's
average liquid assets as a percentage of average assets equaled 28.1% compared
to 18.3% during the second quarter of 1995. The Bank's average loan to deposit
ratio during the second quarter of 1996 was 61.7% compared to an average loan to
deposit ratio of 77.5% during the second quarter of 1995. The change in these
liquidity ratios is the result of an increase in the average deposit level and
decrease of the average loan balance of the Bank. A large portion of the Bank's
deposits consist of deposits maintained by escrow and title insurance companies.
During the second quarter of 1996, the average deposits from escrow and title
companies were $21.9 million or approximately 13.6% of total average deposits.
This is compared to total escrow and title deposits of $14.7 million in the
second quarter of 1995 or 10.6% of total average deposits. Currently, no escrow
or title customer accounts for over 3% of the Bank's total deposits.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
To cushion against unanticipated fluctuations in its liquidity position, the
Bank has secured secondary lines of credit with its correspondent bank and the
Federal Home Loan Bank ("FHLB") of approximately $10.8 million as of June 30,
1996. The FHLB line of credit is collateralized by a portion of the Bank's loan
portfolio. The Bank also can borrow money against a portion of its investment
portfolio. Additionally, the majority 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.
Results of Operations for the Six Months
Ended June 30, 1996 and June 30, 1995
-------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $531,000 (8.6%) between the
periods presented primarily due to the increase in volume of mortgage loans
which was partially offset by the decrease in volume of investment securities
and loans. In addition, the reduction of interest rates on loans offset some of
the volume increases in interest income. The increase in the volume of mortgage
loans is due to the increased activity in the Bank's mortgage loan business.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the six months ended June 30, 1996 as compared to
the six months ended June 30, 1995.
Change in interest income due to:
<TABLE>
<CAPTION>
Volume Rate Total
----------- ----------- -----------
<S> <C> <C> <C>
Loans $ (296,000) $(224,000) $ (520,000)
Mortgage loans held for sale 1,222,000 (60,000) 1,162,000
Investment securities (230,000) 15,000 (215,000)
Federal funds sold 66,000 (9,000) 57,000
---------- --------- ----------
Total $ 762,000 $(278,000) $ 484,000
========== =========
Change in loan fees 47,000
----------
Total change in interest and loan fee income $ 531,000
==========
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
Total interest expense
- ----------------------
Total interest expense increased $347,000 (22.1%) between the periods
presented due to an increase in the volume and rate of time deposits. The
average volume of time deposits increased from $33.8 million for the six months
ended June 30,1995 to $42.4 million for the six months ended June 30, 1996, and
the average interest rate paid on these deposit increased from 2.4% to 2.8%
during the same time frame. The following table sets forth the Company's rate
and volume analysis for interest-bearing liabilities for the six months ended
June 30, 1996 as compared to the corresponding period ended June 30, 1995.
<TABLE>
<CAPTION>
Change in interest expense due to:
Volume Rate Total
------------ ---------- ----------
<S> <C> <C> <C>
Short-term borrowing $ - $ (4,000) $ (4,000)
Savings deposits (14,000) (7,000) (21,000)
Time deposits 224,000 142,000 366,000
Interest-bearing demand deposits 6,000 - 6,000
----------- -------- ---------
Total $ 216,000 $131,000 $347,000
=========== ======== =========
Allowance for loan losses
- --------------------------
An analysis of the allowance for loan losses is summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
Balance at beginning of period $ 2,658,000 $ 2,727,000
---------------- ---------------
Charge-offs (1,119,000) (539,000)
Recoveries 36,000 42,000
---------------- ---------------
Net charge-offs (1,083,000) (497,000)
---------------- ---------------
Contribution to allowance for loan losses 600,000 463,000
---------------- ---------------
Balance at end of period $ 2,175,000 $ 2,693,000
================ ===============
Allowance as a percentage of total loans 2.2% 2.4%
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
The following table sets forth the total amount of nonaccrual loans, accruing
loans past due 90 days or more, troubled debt restructurings, classified loans
and other real estate owned as of June 30, 1996 and 1995 as well as December 31,
1995.
<TABLE>
<CAPTION>
June 30, 1996 Dec. 31, 1995 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $10,423,000 $ 9,666,000 $ 6,226,000
Accruing loans contractually past due 90 days or more 226,000 382,000 871,000
Total classified loans 14,848,000 20,534,000 14,990,000
Other real estate owned 2,372,000 1,337,000 1,806,000
Troubled debt restructurings (Included in non-accrual 3,238,000 3,589,000 2,275,000
and classified loans)
</TABLE>
The Company's contribution to the provision for loan losses was $600,000 for
the first six months of 1996 compared to $463,000 during the same period in
1995. This contribution resulted in an allowance of 2.2% of total outstanding
loans at June 30, 1996, compared to 2.4% at June 30, 1995. 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 volumes and Management's
analysis of current market conditions. Management believes that the allowance
at June 30, 1996 is adequate to absorb the inherent risks in the Company's loan
portfolio.
The decline in the allowance for loan losses is due to the write off of a
portion of several large real estate loans during the six months of 1996. These
write-offs were triggered by the pending foreclosure of the loans' collateral
and equal the amount of collateral deficiency in the loan. These write-offs had
no major impact on additional contributions to the reserve for loan losses
because they were specifically reserved for and were part of the past year's
allowance for loan losses.
Classified loans are those that have some identified weaknesses as determined
by Management that may jeopardize the orderly collection of the debt in the
future. Classified loan decreased $5.7 million from December 31, 1995 to June
30, 1996. This decrease is due to the collection of several loans along with
the transfer of two loans to other real estate owned. Due to the pending
foreclosure on several large real estate loans, classified loans and nonaccrual
loans are expected to decline in the next two quarters. The allowance for loan
losses should not be effected by these foreclosures.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
Other Income
- ------------
Other income increased $3,760,000 (159%) between the periods presented. The
increase was primarily due to higher revenue generated from the Bank's
residential mortgage operation. During the first six months of 1996, gross
revenue from the mortgage operation was $5,397,000 compared to $1,939,000 in the
corresponding period in 1995. The increase in the mortgage divisions gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $1,393,000 during the first six months of 1996, compared to
$369,000 during the same period in 1995. The increase in other income was
partially due to a real estate owned sale which resulted in a $102,000 gain. In
addition, an increase in other income was partially due to an increase in the
income recognized on the sale of SBA loans. During the first six months of
1996, the SBA Department recognized sales premiums of $244,000 compared to
recognized sales premiums of $167,000 in 1995. In July, 1996, the Bank's SBA
department was awarded a "Preferred Lender" status with the SBA. This should
decrease the Bank's response time to customers and, therefore, should have a
positive impact on loan volume.
Other Expenses
- --------------
Other expenses increased $2,481,000 (42.2%) between the periods presented.
The Company's other expenses increased only $64,000 (1.5%), while the Bank's
residential mortgage division's expenses increased $2,417,000 (153%). The
increase in the mortgage division's expenses was due to the increased level of
activity and was substantially associated with the increase in salaries and
benefits and commissions. The $64,000 increase in the Company's other expenses
was due to increased salary and benefits which was partially offset by a
decrease in FDIC insurance premiums.
Provision for Income Taxes
- --------------------------
As of December 31, 1995, the Company had net deferred tax assets totalling
$890,000 which the Company had not recognized. These deferred tax assets
include Federal and State net operating loss carryforwards of $901,000 and
$34,000, respectively. A portion of these unrecorded deferred tax assets were
utilized during the first six months of 1996 to offset the Company's profits.
As of June 30, 1996, the Company had recognized deferred tax assets of $689.000.
Although Management anticipates future earnings, the future tax benefit of any
remaining deferred tax assets are not assured of realization and, therefore,
have not been recorded by the Company.
Cash and Cash Equivalents
- -------------------------
As of June 30, 1996, cash and cash equivalents increased $12.7 million from
December 31, 1995 balances primarily due to a increase of deposits of $16.6
million and a decrease in investment securities of $2.0 million and loans of
$1.4 million.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
Results of Operations for the Three Months
Ended June 30, 1996 and June 30, 1995
-------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $314,000 (9.9%) between the
periods presented primarily due to the increase in volume of mortgage loans
which was partially offset by the decrease in volume of investment securities
and loans. The table below sets forth the Company's rate and volume analysis
for interest-earning assets for the three months ended June 30, 1996 as compared
to the three months ended June 30, 1995.
<TABLE>
<CAPTION>
Change in interest income due to:
Volume Rate Total
-------------- ----------- ------------
<S> <C> <C> <C>
Loans $ (165,000) $ (177,000) $(342,000)
Mortgage loans held for sale 690,000 (6,000) 684,000
Investment securities (111,000) 33,000 (78,000)
Federal funds sold 24,000 (4,000) 20,000
-------------- ----------- ------------
Total $ 438,000 $ (154,000) $ 284,000
============== =========== ============
Change in loan fees 30,000
------------
Total change in interest and loan fee income $ 314,000
============
</TABLE>
Total interest expense
- ----------------------
Total interest expense increased $128,000 (14.8%) between the periods
presented due to an increase in the volume and interest rates of time deposits.
The following table sets forth the Company's rate and volume analysis for
interest-bearing liabilities for the three months ended June 30, 1996 as
compared to the corresponding period ended June 30, 1995.
<TABLE>
<CAPTION>
Change in interest expense due to:
Volume Rate Total
------------- ------------- ------------
<S> <C> <C> <C>
Short-term borrowings $ (8,000) $ 1,000 $ (7,000)
Savings deposits (6,000) (4,000) (10,000)
Time deposits 96,000 17,000 113,000
Interest-bearing demand deposits 34,000 (2,000) 32,000
------------- ------------- ------------
Total $ 116,000 $ 12,000 $ 128,000
============= ============= ============
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
Allowance for possible loan losses
- ----------------------------------
An analysis of the allowance for possible loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30
------------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Balance at beginning of period $2,176,000 $2,740,000
-------------- --------------
Charge-offs (305,000) (315,000)
Recoveries 4,000 33,000
-------------- --------------
Net charge-offs (301,000) (282,000)
-------------- --------------
Contribution to allowance for possible loan losses 300,000 235,000
-------------- --------------
Balance at end of period $2,175,000 $2,693,000
============== ==============
Allowance as a percentage of total loans 2.2% 2.4%
</TABLE>
Other Income
- ------------
Other income increased $2,052,000 (137%) between the periods presented. The
increase was due to higher revenue generated from the Bank's residential
mortgage division. During the second quarter of 1996, gross revenue from the
mortgage division was $3,067,000 compared to $1,248,000 in the corresponding
period in 1995. The increase in the mortgage division's gross revenue resulted
in the division posting a pretax income, before administration allocation, of
$790,000 during the second quarter of 1996, compared to pretax income of
$299,000 during the same period in 1995. The increase in other income was also
due to an increase in the income recognized on the sale of SBA loans. During
the second quarter of 1996, the SBA Department recognized sales premiums of
$190,000 compared to $92,000 during the same period in 1995.
Other Expenses
- --------------
Other expenses increased $1,426,000 (47%) between the periods presented. The
Bank's residential mortgage division's expenses increased $1,341,000 (144%),
while expenses relating to other areas of the Company increased $85,000 (4.0%).
The increase in the mortgage division's expenses was due to increased level of
activity and was primarily associated with increases in salaries and benefits
and commissions. The $85,000 increase in the Company's other expense was due to
increased salaries and benefits which was partially offset by a reduction in
occupancy costs and FDIC insurance premiums.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
JUNE 30, 1996
Provision for Income Taxes
- ---------------------------
At the end of each interim period the company makes its best estimate of the
effective tax rate expected to be applicable for the full year. The rate
determined is then used on a current year to date basis. During the second
quarter, the Company revised its earnings estimate for the year and, therefore,
the second quarter's provision as a percent of income was higher than the first
quarter's provision as a percent of income.
17
<PAGE>
PART II - OTHER INFORMATION
---------------------------
JUNE 30, 1996
Item 1. 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 subsidiaries are subject, other than
ordinary routine litigation incidental to the Bank's business.
Item 2. Changes in Securities.
- ------- ----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- ------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
Not applicable.
Item 5. Other Information.
- ------- ------------------
Item 6. Exhibits and Reports on Form 8-KSB.
- ------- ----------------------------------
(a) Exhibits Filed - none required.
--------------
(b) Reports on Form 8-KSB. During the second quarter of 1996, the Company
---------------------
filed a report on Form 8-KSB in response to Item 1, Change in Control of
Registrant. This report was filed on June 4, 1996, and discussed an
amendment to the original option agreement which the company's majority
shareholder has with a group of six individuals.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
PNB Financial Group
<TABLE>
<S> <C>
Date: August 7, 1996 By: /s/ ALLEN C. BARBIERI
-------------------- ----------------------------------
Allen C. Barbieri
Chief Operating Officer
Date: August 7, 1996 By: /s/ DOUG L. HELLER
-------------------- ---------------------------------
Doug L. Heller
Chief Financial Officer
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,014
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,577
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 99,588
<ALLOWANCE> 2,175
<TOTAL-ASSETS> 194,368
<DEPOSITS> 173,883
<SHORT-TERM> 795
<LIABILITIES-OTHER> 2,953
<LONG-TERM> 0
0
0
<COMMON> 15,990
<OTHER-SE> 747
<TOTAL-LIABILITIES-AND-EQUITY> 194,368
<INTEREST-LOAN> 6,392
<INTEREST-INVEST> 222
<INTEREST-OTHER> 116
<INTEREST-TOTAL> 6,730
<INTEREST-DEPOSIT> 1,890
<INTEREST-EXPENSE> 1,915
<INTEREST-INCOME-NET> 4,815
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,361
<INCOME-PRETAX> 1,977
<INCOME-PRE-EXTRAORDINARY> 1,977
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,750
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
<YIELD-ACTUAL> .061
<LOANS-NON> 10,423
<LOANS-PAST> 226
<LOANS-TROUBLED> 3,238
<LOANS-PROBLEM> 14,848
<ALLOWANCE-OPEN> 2,658
<CHARGE-OFFS> 1,119
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 2,175
<ALLOWANCE-DOMESTIC> 2,175
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
