<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 September 30, 1997
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 October 20,
1997 was 2,266,280.
THIS REPORT INCLUDES A TOTAL OF 21 PAGES
================================================================================
<PAGE>
PNB FINANCIAL GROUP
Index To Form 10-QSB
For the quarter ended September 30, 1997
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
NUMBER
------
<C> <S> <C>
ITEM 1. Financial Statement
Condensed Consolidated Balance Sheets (unaudited) - 3
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income 4
(unaudited) - Nine Months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Income 5
(unaudited) - Three Months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows (unaudited) - Nine 6
Months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 8-19
Condition and Results of Operations
<CAPTION>
PART II OTHER INFORMATION
<C> <S> <C>
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities 20
ITEM 3. Defaults upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Securities Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-KSB 20
Signatures of Registrants 21
</TABLE>
2
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Balance Sheets
September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Assets
- ------
Cash and due from banks $ 19,369,000 $ 12,700,000
Investment securities 7,000,000 7,381,000
Federal funds sold - 6,000,000
Mortgage loans held for sale 86,697,000 62,620,000
Loans 113,561,000 104,226,000
Less allowance for possible loan losses (2,405,000) (1,812,000)
------------ ------------
Net loans 111,156,000 102,414,000
Premises and equipment, net 1,007,000 1,150,000
Other real estate owned 563,000 3,483,000
Other assets 3,728,000 2,450,000
------------ ------------
Total assets $229,520,000 $198,198,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $197,882,000 $170,039,000
Short term borrowings 6,000,000 7,000,000
Other liabilities 3,095,000 2,476,000
------------ ------------
Total liabilities 206,977,000 179,515,000
Shareholders' equity:
Common stock, no par value, 20,000,000
shares authorized; 2,266,280 and 2,170,783
shares issued and outstanding at
September 30, 1997 and December 31, 1996 16,488,000 16,012,000
Retained earnings 6,063,000 2,734,000
Net unrealized loss on investment securities available for sale (8,000) (63,000)
------------ ------------
Total shareholders' equity 22,543,000 18,683,000
------------ ------------
Total liabilities and shareholders' equity $229,520,000 $198,198,000
============ ============
</TABLE>
See accompanying notes
3
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income
Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Interest income:
Loans, including fees $11,304,000 $ 9,623,000
Investment securities 316,000 331,000
Federal funds sold 204,000 342,000
Deposits with banks - 3,000
----------- -----------
Total interest income 11,824,000 10,299,000
Interest expense 2,915,000 2,920,000
----------- -----------
Net interest income 8,909,000 7,379,000
Provision for possible loan losses 765,000 750,000
----------- -----------
Net interest income after provision for possible loan losses 8,144,000 6,629,000
Other income:
Income from mortgage banking operations 10,437,000 8,363,000
Service charges, fees and other 1,378,000 1,177,000
----------- -----------
Total other income 11,815,000 9,540,000
Other expenses:
Mortgage banking operations 7,461,000 6,292,000
Salaries & employee benefits 3,246,000 2,983,000
Occupancy 1,043,000 1,178,000
Other 2,539,000 2,688,000
----------- -----------
Total other expense 14,289,000 13,141,000
Income before income taxes 5,670,000 3,028,000
Provision for income taxes 2,341,000 475,000
----------- -----------
Net income $ 3,329,000 $ 2,553,000
=========== ===========
Earnings per common and common equivalent share
Primary $ 1.42 $ 1.11
=========== ===========
Fully diluted $ 1.41 $ 1.11
=========== ===========
Weighted average number of shares for computing per share
computation
Primary 2,342,753 2,324,199
Fully diluted 2,359,593 2,324,199
</TABLE>
See accompanying notes
4
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Interest income:
Loans, including fees $4,116,000 $3,231,000
Investment securities 107,000 109,000
Federal funds sold 53,000 226,000
Deposits with banks - 3,000
---------- ----------
Total interest income 4,276,000 3,569,000
Interest expense 1,082,000 1,005,000
---------- ----------
Net interest income 3,194,000 2,564,000
Provision for possible loan losses 570,000 150,000
---------- ----------
Net interest income after provision for possible loan losses 2,624,000 2,414,000
Other income:
Income from mortgage banking operations 3,779,000 2,966,000
Service charges, fees and other 531,000 451,000
---------- ----------
Total other income 4,310,000 3,417,000
Other expenses:
Mortgage banking operations 2,678,000 2,294,000
Salaries & employee benefits 1,006,000 1,003,000
Occupancy 327,000 376,000
Other 830,000 1,107,000
---------- ----------
Total other expense 4,841,000 4,780,000
Income before income taxes 2,093,000 1,051,000
Provision for income taxes 858,000 248,000
---------- ----------
Net income $1,235,000 $ 803,000
========== ==========
Earnings per common and common equivalent share
Primary $.52 $.35
========== ==========
Fully diluted $.51 $.35
========== ==========
Weighted average number of shares for computing per share computation
Primary 2,396,777 2,319,484
Fully diluted 2,407,773 2,319,484
</TABLE>
See accompanying notes
5
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Net cash provided by (used in) operating activities $(19,786,000) $ 3,344,000
Cash flows from investing activities:
Net change in loans (11,474,000) 301,000
Net change in investment securities 389,000 3,105,000
Other 4,861,000 335,000
------------ -----------
Net cash provided by (used in) investing activities (6,224,000) 3,741,000
------------ -----------
Cash flows from financing activities:
Net change in deposits 27,843,000 7,648,000
Net change in short term borrowings (1,351,000) 353,000
Net change in common stock 186,000 (133,000)
------------ -----------
Net cash provided by financing activities 26,678,000 7,868,000
------------ -----------
Net increase in cash and cash equivalents 668,000 14,953,000
Cash and cash equivalents at beginning of period 18,701,000 16,313,000
------------ -----------
Cash and cash equivalents at end of period $ 19,369,000 $31,266,000
============ ===========
</TABLE>
See accompanying notes
6
<PAGE>
PNB FINANCIAL GROUP
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(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 September 30, 1997, and the consolidated results of operations and statements
of cash flows for the nine and three month periods ended September 30, 1997 and
September 30, 1996. Results for the nine and three months ended September 30,
1997 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.
4. Impact of Recently Issued Accounting Standards
----------------------------------------------
The FASB has issued a statement No. 128 "Earnings Per Share" ("EPS") which
becomes effective for periods ending after December 15, 1997. This statement
requires restatement of all prior period EPS data presented. This statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15 and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with the presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully diluted
EPS pursuant to APB Opinion 15. The Company's proforma basic and diluted EPS for
the nine and three month periods ending September 30, 1997 is $1.52 and $1.41
and $.56 and $.51, respectively.
In addition to the above newly issued accounting standards, the FASB
issued in the first six months of 1997, SFAS statement No. 129, "Disclosure of
Information about Capital Structure", SFAS statement No. 130, "Reporting
Comprehensive Income", and SFAS statement No. 131, "Disclosures About Segments
of an Enterprise and Related Information". These statements will be effective
for the Company for its year beginning January 1, 1998. Management has not yet
completed its analysis to determine the impact implementation of SFAS No. 129,
130, and 131 will have on the Company's financial statements.
7
<PAGE>
PNB FINANCIAL GROUP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1997
Item 2.
- -------
Summary
- -------
The Company reported net income of $3,329,000 or $1.41 per fully diluted
share, for the nine months ended September 30, 1997 compared to a net income of
$2,553,000 or $1.11 per fully diluted share, for the same period in 1996. The
increase in earnings was a result of several items including a significant
decrease in nonperforming assets which, together with an 11% increase in the
average assets resulted in a 21% increase in the Company's net interest margin.
In addition, the Bank's residential mortgage division reported improved earnings
due to an increase in the volume of residential mortgage loans funded and sold.
As a result of these items, the Company reported a $2,642,000 (87%) increase in
income before income taxes. This improvement was substantially offset with an
increase in the provision for income taxes. The increase in the provision for
income taxes was the result of the utilization of a net deferred tax asset
during the nine months ended September 30, 1996. This utilization reduced the
Company's provision for income taxes to 15.7% of pretax income during the nine
months ended September 30, 1996, compared to 41% during the same period in 1997.
As of September 30, 1997, the Company had total assets of $229.5 million,
total loans of $113.6 million, and total deposits of $197.9 million, as compared
to total assets of $198.2 million, total loans of $104.2 million, and total
deposits of $170.0 million as of December 31, 1996. Average deposits for the
first nine months of 1997 were $171.1 million as compared to an average deposit
level of $157.5 million during the first nine months of 1996. The increase in
deposits was due in part to an increase in the deposits of the Bank's escrow and
title customers and the utilization of brokered deposits. As of September 30,
1997, the Bank had $7.0 million of brokered deposits which it is utilizing in
place of more expensive borrowings to partially fund its mortgage loans held for
sale.
The following section sets forth the Company's condensed consolidated
average balances of each principal category of assets, liabilities, and
shareholders' equity for the nine month period ended September 30, 1997 as
compared to the same period in 1996. 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.
8
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Assets
- ------
Cash and due from banks $ 12,923,000 $ 11,060,000
Investment securities 7,240,000 8,206,000
Federal funds sold 5,227,000 8,988,000
Mortgage loans held for sale 60,535,000 44,866,000
Loans 105,746,000 99,704,000
Less allowance for loan losses (1,816,000) (2,348,000)
------------ ------------
Net loans 103,930,000 97,356,000
Premises and equipment, net 1,062,000 1,244,000
Other real estate owned 3,422,000 3,063,000
Other assets 2,371,000 2,324,000
------------ ------------
Total assets $196,710,000 $177,107,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 72,240,000 $ 56,341,000
Interest-bearing 98,814,000 101,135,000
Short-term borrowings 2,413,000 382,000
Other liabilities 2,524,000 2,745,000
------------ ------------
Total liabilities 175,991,000 160,603,000
------------ ------------
Shareholders' equity:
Capital stock 16,182,000 16,007,000
Retained earnings 4,579,000 647,000
Net unrealized loss on investment securities available for sale ( 42,000) (150,000)
------------ ------------
Total shareholders' equity 20,719,000 16,504,000
------------ ------------
Total liabilities and shareholders' equity $196,710,000 $177,107,000
============ ============
</TABLE>
9
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
Capital Resources
- -----------------
The federally-mandated minimum capital requirements and the actual
capitalization of the Company and the Bank as of September 30, 1997 are set
forth below.
CAPITAL REQUIREMENTS AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Pacific PNB
Regulatory National Financial
Requirements Bank Group
------------ -------- ---------
<S> <C> <C> <C>
Leverage Capital Ratio 4.0% 9.4% 10.7%
Risk Based Capital:
Tier 1 Capital 4.0% 13.2% 14.9%
Total Capital 8.0% 14.5% 16.2%
</TABLE>
As of September 30, 1997, the Company and the Bank are categorized as well
capitalized under the regulatory framework for prompt corrective action, as well
as under the FDIC's deposit insurance assessment risk ratings. Accordingly, the
Company's Board of Directors believes the Company has excess capital which could
be better utilized to increase earnings and shareholder value.
The Board has investigated numerous strategic opportunities to deploy this
excess capital and, on July 31, 1997, the Board authorized the Company to invest
a maximum of $2.5 million, up to a maximum 5% of the outstanding voting shares,
in a newly formed company ("Newco"). The Board believes that this investment
will increase the Company's earnings and shareholder value and that the benefits
of the investment outweighs the inherent risks associated with a start-up
business.
Newco will be a corporation which will elect to be subject to income tax
as a real estate investment trust ("REIT"). A REIT is allowed to pass through
its earnings to its shareholders without those earnings being subject to
corporate income taxes. This REIT will specialize in the purchase and management
of mortgage loans and mortgage-backed securities on single family and
multifamily real estate properties throughout the United States. Newco will be
structured to generate earnings from net interest margin, the spread between the
interest rate it receives on its assets, and the interest rate it pays on its
liabilities. Newco wishes to raise between forty and fifty million dollars of
equity capital before year end 1997. The capital will be used along with
borrowings (primarily under reverse repurchase agreements) to purchase
adjustable rate mortgage assets. To minimize its interest rate risk, Newco will
utilize various hedging techniques to match the interest rate structure of its
liabilities to that of its assets.
The Company and two other individuals have been involved in Newco's
formation. These two individuals have significant experience and expertise in
the purchase and management of mortgage loans and will become executive officers
of Newco. Due to his expertise, Mr. Barbieri, the CEO and President of the
Company and the Bank, will be an officer and board member of Newco. In addition,
two members of the Board of Directors of the Company will also be on the Board
of Directors of Newco. The Company believes that this affiliation is necessary
to oversee its investment in the new company. In addition, it is anticipated
10
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
that the Bank will initially perform and be compensated for certain services,
such as accounting and data processing for Newco.
The Bank and Newco will also work together to design new mortgage products
with terms and pricing that meet the needs of Newco's portfolio, and can be
offered by the Bank through its extensive network of mortgage brokers as
"portfolio products". The Bank does not currently offer any portfolio products
and management believes that this could greatly enhance the mortgage division's
product line.
The Company's investment in Newco will be partially funded with a dividend
of approximately $1.5 million from the Bank to the Bank Holding Company. The
Bank's proforma capital ratios as of September 30, 1997, after this proposed
dividend would be as follows:
<TABLE>
<CAPTION>
Pro-Forma
September 30, 1997 Capital Ratios
---------------------------------
<S> <C>
Leverage Capital 8.7%
Risk Based Capital:
Tier 1 Capital 12.2%
Total Capital 13.5%
</TABLE>
With the proforma capital ratios as of September 30, 1997, the Bank would
still be considered well capitalized under the regulatory framework for prompt
corrective action as well as the FDIC's deposit insurance assessment ratings.
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, short-term loan portfolio, cash dividends from its subsidiary bank, as
well as its ability to raise capital by selling additional shares of common
stock. As of September 30, 1997, the Bank Holding Company has cash balances of
approximately $534,000. These liquid assets, along with cash generated from its
loan portfolio, as well as any additional cash dividend from the Bank, will
support its 1997 operating requirements. In April 1997, the Board of Directors
("Board") authorized management to purchase back up to $1.0 million of the
Company's common stock at a maximum price established by the Board. The Board
believes that the Company's stock is a good investment that should benefit all
shareholders. As of September 30, 1997, the Company has purchased and retired
13,003 shares at an average price of $15.46 per share. Due to the limited supply
of the Company's stock, management does not anticipate the full utilization of
the $1.0 million.
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, securities available for sale and a
portion of mortgage loans held
11
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
for sale. The Bank's portfolio loan-to-deposit ratio (excluding residential
mortgage loans held for sale) at September 30, 1997 was 56.2% as compared to
57.9% at September 30, 1996 and 60.0% as of December 31, 1996. The Bank's
residential mortgage division utilizes the Bank's funding sources to fund its
mortgage loans held for sale. Management can slow down or speed up the shipping
and sale of these loans, and manages the balance of the mortgage loans held for
sale to match its funds available. In this way, management maximizes the yield
on its liquid assets. Due to the fluctuations in funding and sale of mortgage
loans, along with changes in the deposit balances of the Bank, the matching of
liquid assets and mortgage loans held for sale is not always achieved. At
certain times during the year, the Bank utilizes its borrowing relationships to
help fund the mortgage loans held for sale. These borrowing sources include an
unsecured line of credit with one of its correspondent banks, a line of credit
secured by a portion of its real estate loans with the Federal Home Loan Bank,
borrowings against the Bank's securities, and the use of brokered deposits.
A large portion of the Bank's deposits consist of deposits maintained by
escrow companies and, to a lesser degree, title insurance companies. At
September 30, 1997 and December 31, 1996, escrow and title insurance companies'
deposits totaled approximately $40.0 million or 20.2% of total deposits and
$28.2 million or 16.6% of total deposits, respectively. This compared to escrow
and title insurance deposits of approximately $23.7 million or 14.3% of total
deposits at September 30, 1996. The increase in these types of deposits are
primarily a result of an increase in real estate activity in Southern
California. Management expects these deposits, along with others, to continue to
increase in the fourth quarter of 1997. 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 past two years, no single
escrow or title insurance customer accounted for over 4% of the Bank's total
deposits.
Results of Operations for the Nine Months
Ended September 30, 1997 and September 30, 1996
-----------------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $1,525,000 (14.8%) between
the periods presented primarily due to the significant increase in the average
balance of mortgage loans held for sale and, to a lesser degree, the increase in
the average balance of its portfolio loans. The increase in the average balance
of mortgage loans held for sale is due to the increased activity in the Bank's
residential mortgage loan department and to management's efforts to increase
profitability by increasing the holding period of these loans. During the first
nine months of 1997, the Bank funded $792 million of mortgage loans, compared to
the first nine months of 1996, during which the Bank funded mortgage loans
totaling $592 million. The increase in total interest income was also due in
part to the significant decrease in nonaccrual loans. This is reflected in the
loan rate component of the table below. During the first nine months ended
September 30, 1997, nonaccrual loans averaged $2.3 million compared to average
nonaccrual loans of $9.2 million during the same period in 1996. Although not as
significant, the increase in interest income was also the result of a quarter of
a point increase in the prime lending rate which occurred in March of 1997.
12
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996.
Change in interest income due to:
<TABLE>
<CAPTION>
Volume Rate Total
---------- --------- ----------
<S> <C> <C> <C>
Loans $ 421,000 $297,000 $ 718,000
Mortgage loans held for sale 916,000 (17,000) 899,000
Investment securities (41,000) 25,000 (16,000)
Federal funds sold (144,000) 5,000 (135,000)
---------- -------- ----------
Total $1,152,000 $310,000 $1,462,000
========== ======== ----------
Change in loan fees 63,000
----------
Total change in interest and loan fee income $1,525,000
==========
</TABLE>
Total interest expense
- ----------------------
Total interest expense decreased $5,000 (.2%) between the periods
presented primarily due to a decrease in the rate of time deposits which was
mostly offset with an increase in the volume of short term borrowings. The Bank
has reduced its interest rates paid on time deposits and has used its short-term
borrowings to fund its mortgage loans held for sale more often during the first
nine months of 1997 than the first nine months of 1996. In order to attract new
depositors and overall business relationships, during the second and third
quarters of 1997, the Bank offered a high rate personal money market account
which attracted approximately $8.0 million in new interest bearing demand
deposits. This promotion increased the Bank's overall rate paid for its interest
bearing demand deposits. Now that this promotion has ended, management expects
that a portion of these deposits will leave the Bank and that both the rate and
volume of interest bearing demand deposits will decrease during the fourth
quarter of 1997. The following table sets forth the Company's rate and volume
analysis for interest-bearing liabilities for the nine months ended September
30, 1997 as compared to the corresponding period ended September 30, 1996.
Change in interest expense due to:
<TABLE>
<CAPTION>
Volume Rate Total
----------- ------------ ---------
<S> <C> <C> <C>
Interest-bearing demand deposit $ (39,000) $ 49,000 $ 10,000
Time deposits (24,000) (69,000) (93,000)
Savings deposits 4,000 1,000 5,000
Short-term borrowings 89,000 (16,000) 73,000
---------- ----------- --------
Total $ 30,000 $ (35,000) $ (5,000)
========== =========== ========
</TABLE>
13
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
Allowance for loan losses
- -------------------------
An analysis of the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1996
---------- -----------
<S> <C> <C>
Balance at beginning of period $1,812,000 $ 2,659,000
---------- -----------
Charge-offs (480,000) (1,567,000)
Recoveries 308,000 223,000
---------- -----------
Net charge-offs (172,000) (1,344,000)
---------- -----------
Contribution to allowance for loan losses 765,000 750,000
---------- -----------
Balance at end of period $2,405,000 $ 2,065,000
========== ===========
Allowance as a percentage of total loans 2.1% 2.1%
</TABLE>
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 September 30,1997 and
1996 as well as December 31, 1996.
<TABLE>
<CAPTION>
Sept. 30, 1997 Dec. 31, 1996 Sept. 30, 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $1,836,000 $3,220,000 $4,686,000
Accruing loans contractually past due 90 days or more 90,000 277,000 399,000
Total classified loans 6,094,000 6,087,000 8,750,000
Other real estate owned 563,000 3,483,000 5,798,000
Troubled debt restructurings 4,041,000 4,108,000 1,749,000
</TABLE>
14
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
The Company's problem assets have decreased significantly during the past
year. Classified loans decreased $2.7 million (30%) from September 30, 1996 to
September 30, 1997, while non accrual loans and REO have decreased $2.9 million
(61%) and $5.2 million (90%), respectively, over the same period. In addition,
the Company's net charge off for the period was only $172,000, or an 87%
reduction from the net charge off during the same period in 1996. Despite these
significant improvements, during the third quarter, the Company did classify one
large loan as doubtful and has made an additional contribution to reserve for a
possible loss on this loan. Primarily as a result of this one loan, the
Company's contribution to the provision for loan losses was $765,000 for the
first nine months of 1997 compared to $750,000 during the same period in 1996.
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.
Other Income
- ------------
Other income increased $2,275,000 (23.8%) between the periods presented.
The increase was primarily due to higher revenue generated from the Bank's
residential mortgage operation. During the first nine months of 1997, gross
revenue from the mortgage operation increased $2,074,000 (24.8%) compared to the
corresponding period in 1996. The increase in the mortgage division's gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $2,961,000 during the first nine months of 1997, compared to
$2,062,000 during the same period in 1996. The increase in net income of this
department is primarily due to the higher volume of loans funded and sold along
with a lower provision for indemnification reserve.
The increase in service charges, fees and other, is due to an increase in
rental income from REO properties along with an increase in both servicing
income and sales premiums earned in the Bank's SBA department. These increases
were partially offset with a decrease in the gain on REO sales. During the nine
months ended September 30, 1996, the Company reported $360,000 gain on the sales
of REO compared to $268,000 during the same period in 1997. Due to the
significant decrease in REO, management does not anticipate this level of gains
in the future. The increase in the REO rental income is offset with the
corresponding increase in REO expenses.
Other Expenses
- --------------
Other expenses increased $1,148,000 (8.7%) between the periods presented.
The Company's other expenses increased only $21,000 (.3%) while the Bank's
residential mortgage division's expenses increased $1,169,000 (18.6%). 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,
employee benefits and commissions, which were partially offset with a reduction
in the department's loan indemnification expense. The increase in the Company's
other expenses of $21,000 was primarily due to an increase in salaries, employee
benefits and REO expenses. These increases were offset with decreases in
insurance, occupancy and legal expenses. In 1996, the Company incurred a special
one time assessment by the Savings Association Insurance Fund ("SAIF") of
$300,000 to recapitalize the SAIF Fund. As a result of this one time charge, the
SAIF deposit insurance rates were reduced. During 1997, the Bank has seen a
savings of approximately $88,000 due to
15
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
a reduction of the SAIF premium. With the closure of the Irvine Spectrum branch
on November 30, 1997, management expects occupancy and salaries to be reduced
further without any effect to the Company's loans or deposit totals. In
addition, with the significant reduction of REO properties, management
anticipates a reduction in the REO expenses.
Provision for Income Taxes
- --------------------------
During the first nine months of 1996, the Company recorded a provision for
income tax of 15.7% of pretax income. This amount was based upon the utilization
of a portion of its available net deferred tax assets which had not been
recognized in previous periods. These deferred tax assets included Federal and
State net operating loss carryforwards. As all of the available deferred tax
assets were recorded by the Company through December 31, 1996, the Company will
be recording tax expense of approximately 41% from December 31, 1996 forward.
Accordingly, during the first nine months of 1997, the Company recorded a
provision of approximately 41%.
Cash and Cash Equivalents
- -------------------------
As of September 30, 1997, cash and cash equivalents increased $.7 million
from December 31, 1996 balances primarily due to an increase in deposits, which
was partially offset by an increase in the cash used in operations along with an
increase in loans. The cash used in operations is primarily a function of the
increase in mortgage loans held for sale.
Results of Operations for the Three Months
Ended September 30, 1997 and September 30, 1996
-----------------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $707,000 (19.8%) between the
periods presented primarily due to the significant increase in the average
balance of mortgage loans held for sale and, to a lesser degree, its portfolio
loans. In addition, the increase in interest income was due in part to the
decrease in the average balance of nonaccrual loans between the periods. During
the three months ended September 30, 1997, nonaccrual loans averaged $1.9
million compared to an average balance of $7.8 million during the corresponding
period in 1996. The increase in the average balance of mortgage loans held for
sale is due to the increased activity in the Bank's residential mortgage loan
department and to management's efforts to increase profitability by increasing
the holding period of these loans.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996.
16
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
Change in interest income due to:
<TABLE>
<CAPTION>
Volume Rate Total
--------- -------- ---------
<S> <C> <C> <C>
Loans $ 291,000 $ 96,000 $ 387,000
Mortgage loans held for sale 526,000 (60,000) 466,000
Investment securities ( 11,000) 9,000 (2,000)
Federal funds sold (182,000) 7,000 (175,000)
--------- -------- ---------
Total $ 624,000 $ 52,000 $ 676,000
========= ======== =========
Change in loan fees 31,000
---------
Total change in interest and loan fee income $ 707,000
=========
</TABLE>
Total interest expense
- ----------------------
Total interest expense increased $77,000 (7.7%) between the periods
presented due to an increase in the rate of interest bearing demand deposits
along with an increase in the volume of short-term borrowings. The following
table sets forth the Company's rate and volume analysis for interest-bearing
liabilities for the three months ended September 30, 1997 as compared to the
corresponding period ended September 30, 1996.
Change in interest expense due to:
<TABLE>
<CAPTION>
Volume Rate Total
-------- -------- -------
<S> <C> <C> <C>
Interest-bearing demand deposits $(14,000) $ 58,000 $44,000
Time deposits 7,000 ( 6,000) 1,000
Savings deposits 1,000 - 1,000
Short-term borrowings 42,000 (11,000) 31,000
-------- -------- -------
Total $ 36,000 $ 41,000 $77,000
======== ======== =======
</TABLE>
17
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
Allowance for possible loan losses
- ----------------------------------
An analysis of the allowance for possible loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Balance at beginning of period $1,751,000 $2,175,000
---------- ----------
Charge-offs ( 13,000) (448,000)
Recoveries 97,000 188,000
---------- ----------
Net recovery (charge off) 84,000 (260,000)
---------- ----------
Contribution to allowance for possible loan losses 570,000 150,000
---------- ----------
Balance at end of period $2,405,000 $2,065,000
========== ==========
Allowance as a percentage of total loans 2.1% 2.1%
</TABLE>
The Company's contribution to the provision for loan losses was $570,000
for the quarter ending September 30, 1997 compared to $150,000 during the same
period in 1996. The increase in the contribution to the allowance for possible
loan losses between the periods presented was due to the classification of one
large loan as doubtful during the quarter ended September 30, 1997. Management
does not expect this loan to have a material effect on the Company's performance
during the fourth quarter of 1997.
Other Income
- ------------
Other income increased $893,000 (26.1%) between the periods presented. The
increase was primarily due to higher revenue generated from the Bank's
residential mortgage division. During the three months ended September 30,1997,
gross revenue from the mortgage division increased $813,000 (27.4%) compared to
the corresponding period in 1996. The increase in the mortgage division's gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $1,097,000 during the three months ended September 30, 1997,
compared to $669,000 during the same period in 1996. The increase in net income
of this department is primarily due to the higher volume of loans funded and
sold along with a lower provision for indemnification reserve.
Other Expenses
- --------------
Other expenses increased $61,000 (1.3%) between the periods presented.
The Company's other expenses decreased $323,000 (13%) while the Bank's
residential mortgage division's expenses increased
18
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
September 30, 1997
$384,000 (16.7%). 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, employee benefits and commissions. These increases were
partially offset with a decrease in the department's loan indemnification
expense. The decrease in the Company's other expenses of $323,000 was primarily
due to a decrease in the Bank's deposit insurance expense. During the third
quarter of 1996, the Bank incurred a special one time SAIF assessment of
$300,000.
Provision for Income Taxes
- --------------------------
During the three months ended September 30, 1996, the Company recorded a
provision for income tax of 23.6% of pretax income. This amount was based upon
the utilization of a portion of its available net deferred tax assets which had
not been recognized in previous periods. These deferred tax assets included
Federal and State net operating loss carryforwards. As all of the available
deferred tax assets were recorded by the Company through December 31, 1996, the
Company will be recording tax expense of approximately 41% from December 31,
1996 forward. Accordingly, during the three months ended September 30, 1997, the
Company recorded a provision of approximately 41%.
19
<PAGE>
Part II - Other Information
---------------------------
September 30, 1997
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.
- ------- ------------------
On November 30, 1997, the Bank's lease on its branch at 15615 Alton
Parkway, Suite 100, Irvine expires. This branch had total loans of $4.3 million
and total deposits of $7.7 million as of September 30, 1997. Management believes
these customers can be serviced through its two other branches in Orange County
and has elected not to renew its lease. The Company does not expect any material
cost resulting from the branch closure and expects to save approximately
$180,000 per annum in reduced occupancy and employee costs.
Item 6. Exhibits and Reports on Form 8-KSB.
- ------- ----------------------------------
(a) Exhibits Filed - none required.
--------------
(b) Reports on Form 8-KSB. During the third quarter of 1997, the Company
---------------------
did not file a report on Form 8-KSB.
20
<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
Date: November 4, 1997 By: /s/ ALLEN C. BARBIERI
---------------------------- -----------------------------
Allen C. Barbieri
President and C.E.O.
Date: November 4, 1997 By: /s/ DOUG L. HELLER
---------------------------- -----------------------------
Doug L. Heller
Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 19,369
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 113,561
<ALLOWANCE> 2,405
<TOTAL-ASSETS> 229,520
<DEPOSITS> 197,882
<SHORT-TERM> 6,000
<LIABILITIES-OTHER> 3,095
<LONG-TERM> 0
0
0
<COMMON> 16,488
<OTHER-SE> 6,055
<TOTAL-LIABILITIES-AND-EQUITY> 229,520
<INTEREST-LOAN> 4,116
<INTEREST-INVEST> 107
<INTEREST-OTHER> 53
<INTEREST-TOTAL> 4,276
<INTEREST-DEPOSIT> 1,042
<INTEREST-EXPENSE> 1,082
<INTEREST-INCOME-NET> 3,194
<LOAN-LOSSES> 570
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,841
<INCOME-PRETAX> 2,093
<INCOME-PRE-EXTRAORDINARY> 2,093
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,235
<EPS-PRIMARY> .52
<EPS-DILUTED> .51
<YIELD-ACTUAL> 6.61
<LOANS-NON> 1,836
<LOANS-PAST> 90
<LOANS-TROUBLED> 4,041
<LOANS-PROBLEM> 6,094
<ALLOWANCE-OPEN> 1,751
<CHARGE-OFFS> 13
<RECOVERIES> 97
<ALLOWANCE-CLOSE> 2,405
<ALLOWANCE-DOMESTIC> 2,405
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
