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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, 1997
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[_] 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
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Commission file number 2-78580
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PNB FINANCIAL GROUP
(Name of small business issuer in its charter)
California 95-3847640
(State or other jurisdiction of (I.R.S. Employer
incorporation 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.
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB X
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Issuer's revenue for its most recent fiscal year ended December 31, 1997 is
$33,239,000. 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 30, 1998 was approximately $10.7
million. The approximate average bid and ask price of the Company's stock during
March, 1998 which was used to compute the aggregate market value was $25.00 per
share.
The number of shares of common stock outstanding as of March 30, 1998, was
2,280,680.
Transmittal Small Business Disclosure Format (check one): Yes x No
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TABLE OF CONTENTS
Page(s)
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PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 30-31
Item 3. LEGAL PROCEEDINGS 31
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 33
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 33-38
Item 7. FINANCIAL STATEMENTS 38
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES 38
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS 39
Item 10. EXECUTIVE COMPENSATION 39-41
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 42-43
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 43
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 44-45
SIGNATURES 46
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PART I
Item 1. BUSINESS
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PNB Financial Group
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PNB Financial Group (the "Bank Holding Company", or, together with Pacific
National Bank, 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, PNB Financial Group's principal business is to serve as a holding
company for the Bank.
Pacific National Bank
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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. These loans can be separated into three
distinct types: (1) commercial, real estate and consumer loans which the Bank
holds for investment, (2) residential mortgage loans which are sold to
institutional investors, and (3) Small Business Administration Loans ("SBA")
in which the guaranteed portion is generally sold in the secondary market.
During 1997, the Bank opened a new mortgage loan production office in
Sacramento and closed its commercial loan and depository regional office in
the Irvine Spectrum, CA. With these changes, PNB operates three commercial
loan and depository regional offices, two full service residential mortgage
loan offices and four mortgage loan production offices. With the exception of
the four residential mortgage loan production offices, all of the offices are
in the Southern California marketplace with deposit taking offices in Newport
Beach, Beverly Hills, and Orange, and mortgage division offices in Irvine, and
San Diego. The four mortgage loan production offices are located in Phoenix,
Flagstaff, and Tucson, Arizona and Sacramento, California. These mortgage loan
production offices were responsible for less than 10% of the Bank's 1997
mortgage loan volume. On December 31, 1997 the Bank employed 229 full time
equivalent people including 34 commissioned mortgage brokers. The Bank's
residential mortgage division accounted for 157 of the employees of the Bank.
Several of the Bank's employees also provide services for the Company.
PNB's portfolio lending activities are conducted primarily in the Southern
California marketplace. As of December 31, 1997, PNB's portfolio loans totaled
approximately $117 million of which approximately 39% consisted of commercial
loans, 54% in real estate loans and the remainder in consumer 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 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 and short term certificates of deposit. The Bank's revenues are
derived principally from interest and fees earned on its loan portfolio and
other investments, income derived from the origination and sale of residential
mortgage loans and the guaranteed portion of SBA loans. Interest on deposits,
salaries and commissions, occupancy, and general and administrative costs are
the Bank's major expense items.
The Bank's marketing efforts for portfolio loans are conducted through the
extensive use of personal solicitations by the Bank's officers, directors, and
commission sales representatives. All officers and sales representatives are
responsible for making regular calls on potential customers to solicit
business as well as on existing customers to
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obtain referrals. Certain officers and commissioned sales representatives use
outside brokers who generally earn a commission for services rendered. 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, 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 the Bank's expedited review evaluation.
In 1992, in order to increase its lending activities to the small business
market and increase its fee income, the Bank established an 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 premium from the sales. The Bank retains the unguaranteed
portion of the loan in its portfolio and continues to service the total loan.
As of December 31, 1997, the Bank was servicing approximately $19.9 million of
SBA loans for others. The Bank has a preferred lending status with the SBA's
Santa Ana, Los Angeles and San Diego District Offices. The preferred lending
status gives the Bank designated underwriting from the SBA and has enabled the
Bank to offer quicker response time to customer needs.
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, 1997, approximately 48% of the Bank's deposits were noninterest
bearing demand deposits and 26% of the total deposits were interest bearing
demand deposits. A portion of the noninterest bearing demand accounts consist
of demand accounts maintained by title insurance, escrow and property
management 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, 1997, the Bank maintained approximately $46
million (or 45% of the total noninterest bearing accounts) of noninterest
bearing accounts for its title insurance, escrow and property management
customers. In order to fund certain short-term cash needs arising from
increased activity in the mortgage banking operation, the Bank has utilized a
limited amount of short-term brokered deposits. These brokered deposits are
utilized as a low cost alternative to traditional financing methods.
Management monitors the brokered deposits closely and the board of directors
has established limits on the maximum amount of these deposits. The Bank is
also in compliance with the comptroller of the currency's regulations
regarding the utilization of brokered deposits. As of December 31, 1997, the
Bank=s brokered deposits totaled $13.4 million and during 1997, brokered
deposits averaged $6.8 million.
The Bank opened its residential mortgage loan division in 1986. The Bank=s
residential mortgage loan activity is primarily conducted throughout Southern
California and Arizona. A small portion of its loan volume is from other areas
throughout the United States. The Bank's mortgage loan division operates both
wholesale and retail departments. The wholesale department accounts for the
majority of the loan volume. The wholesale business is brought to the Bank
through a professional commissioned sales staff which services an extensive
network of over 500 wholesale mortgage loan brokers. The Bank=s retail sales
staff generates mortgage loans through their own efforts in contacting the end
consumer. Virtually, all of the mortgage loans the Bank 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. Historically, most of the
loans generated by the Bank's residential mortgage division were FHA insured
or VA guaranteed loans. During 1996, the Bank expanded its product line to
more aggressively market nongovernment guaranteed loans. In 1997 and 1996, 53%
and 56% of the mortgage loans originated were FHA insured or VA guaranteed
loans. The majority of the mortgage loans which the Bank originates are
considered by the market to be "A" rated loans. The Bank also originates a
small number of subprime "A minus", "B" and "C" rated loans. For additional
information concerning this segment of the Company, please see footnote 10 of
the Company's consolidated financial statements on page F-24 of this report.
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The banking business in Southern California, generally, and in the Bank's
primary market area in Orange and Los Angeles 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 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, closed or sold to
other banking institutions. During 1995, 1996 and 1997, several other
transactions took place where banks, including some of the largest banks and
savings and loans in California, were merged or sold. The last four years have
seen the number of independent banks in Orange County decrease greatly. From
time to time in the ordinary course of business the Company solicits or
entertains offers for the sale or merger of the Bank. The Board of Directors
entertain such discussions with the goal of maximizing shareholder value. At
the present time no such discussions are in process.
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, title
insurance, and property management 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 also uses outside couriers to
service depositors not in the geographic area of the Bank's branches. The Bank
competes for its portfolio loans principally on the basis of the quality of
services it provides borrowers, the types of loans it originates, the
underwriting criteria and loan conditions applied and the interest rates and
loan fees charged. The Bank believes it attracts customers by offering a
higher level of service than that offered by its competition, along with
offering loans which can be tailor made for each specific request. 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.
The mortgage banking business in Southern California is also very competitive.
The Bank's mortgage banking competition includes large national mortgage
companies which have many offices over the Bank's primary market area, along
with local non-bank mortgage companies. These large national mortgage
companies also operate wholesale and retail departments along with a
correspondent department. The Bank competes with these companies on both a
retail and wholesale basis and also sells its loans to the correspondent
department of these companies. The loans which are sold to these companies are
subject to their underwriting guidelines and pricing which may be different
than the underwriting guidelines and pricing which are offered under their own
retail and wholesale departments. The large national mortgage companies
typically sell their mortgage loans directly to Wall Street investment firms
and retain the loan servicing. This, together with their large volume, gives
them a competitive advantage over PNB. The excellent service PNB has continued
to give, along with the knowledge of the Bank's underwriters and sales staff,
encourages the mortgage brokers to send their loans to PNB. This, together
with a local presence in the marketplace, gives the Bank an advantage over the
large national mortgage company. In addition, the largest advantage the Bank
has over most local non-bank mortgage companies, is the Bank's ability to fund
loans the same day that the signed loan documents are received. Most non-bank
mortgage companies have to use an outside warehousing line which can slow down
the funding function.
Effect of Governmental Policies and Certain Legislation
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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 Company is 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 Company 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 Company are also impacted by the fees and
commissions generated by the Bank's mortgage and SBA division. The market
place in which these divisions operate are also very sensitive to changes in
the prevailing market rates of interest.
The earnings and growth of the Company 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 Office of 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 residential mortgage loan
department. During 1996, the budget impasse was resolved, but another budget
impasse could occur in the future and may have a material impact on the Bank's
operations.
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
1995 and 1996, the SBA, in an effort to reduce the Federal Government's
subsidy of the program, changed a number of its rules several times. Also
during this period, 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 changes in the SBA, which could have a
material impact on revenue generated from the Bank's SBA department.
Potential legislation is also being discussed (or has been proposed) which
also could affect the business activities of the Company. 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 allow the banking industry to sell insurance and
other products to customers, to allow banks to pay interest on business demand
deposit accounts, 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 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
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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. Recently, several southern California banks
have been sold to out of state financial institutions. The extent to which
these transactions will affect the Company and 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").
The FDIC's system charges 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. The FDIC
has the authority to change the deposit insurance premium schedule which it
imposes on financial institutions. Due to the overall health of the banking
industry and the level of the deposit insurance fund over the last few years,
the deposit insurance premium schedule has been lowered to the current rate
schedule which ranges from a statutory annual minimum of $2,000 to 27 cents
per $100 of deposits depending on the Bank's risk classification. The Bank's
FDIC's risk classification is 1A which is considered the lowest risk
classification that the FDIC has. An increase in the deposit insurance premium
schedule, or a reduction of the Bank's risk classification, would have a
material impact on the deposit premiums charged to the Bank. In addition to
the deposit insurance premium, effective January 1, 1997, all insured
institutions are subject to Financing Corporations (FICO) debt service
assessment in accordance with the Deposit Insurance Act of 1996. FICO rates
for BIF and SAIF are determined quarterly. During 1997 these rates were
approximately 1.2 cents per $100 of deposits for BIF deposits and 6.3 cents
per $100 of deposits for SAIF deposits.
In 1991, the Bank acquired certain assets and liabilities of the Beverly
Hills, California branch of Unity Savings and Loan Association, F.A. Due to
this acquisition, some of the deposit base of the Bank is insured under SAIF.
In September of 1996, Congress passed legislation to recapitalize the SAIF to
1.25% of total insured deposits. As a result of this legislation, the FDIC
levied a one time special assessment to SAIF insured institutions.
Accordingly, the Bank paid a one time assessment of $307,000. Due to this
special assessment, effective October 1, 1996, the deposit premiums on SAIF
insured deposits were adjusted to equal the deposit premiums paid on BIF
insured deposits. Management estimates that the reduction in the 1997 and 1998
SAIF insurance premiums will offset the one time special assessment.
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.
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FIRREA also gives the FDIC authority to approve or require changes in an
institution's management in certain circumstances; imposes limitations on
certain investment activities and on certain deposit-generating activities;
amends the Federal Deposit Insurance 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. In that the Bank now utilizes
brokered deposits to, in part, fund lending operations, an adverse change in
the FDIC's brokered deposit regulations, or a significant drop in the Bank's
capital could have an adverse impact on the liquidity and performance of the
Bank.
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 is the Community Reinvestment Act ("CRA"), which
requires banking institutions to address the credit needs of their assessment
areas, 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 its
assessment area, 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. For CRA purposes, PNB qualifies as a Asmall institution,@ which is an
independent institution having total assets under $250 million as of either of
the prior two calendar year ends or an affiliate of bank holding companies
having total banking and thrift assets of less than $1 billion as of either of
the prior two calendar year ends. Streamlined evaluation procedures are in
place for small institutions. These procedures emphasize CRA performance,
reduce unnecessary compliance burden, and permit more effective enforcement
against institutions demonstrating poor performance.
The Bank's CRA performance will be measured against five performance
standards: (1) the reasonableness of its loan to deposit ratio, (2) the
percentage of its loans within its assessment area, (3) its record of lending
to borrowers of different income levels and businesses and farms of different
sizes, (4) the geographic distribution of its loans, and (5) its record of
taking action, if warranted, in response to written complaints about its
performance in helping to meet credit needs in its assessment area. In 1997,
the Bank underwent a CRA examination by the Comptroller and received a
"Satisfactory" CRA rating.
Insured depository institutions are required by FDICIA 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 Federal banking agencies'
policy regarding the allowance for possible loan losses 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.
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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 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 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
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PNB Financial Group
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The Company, as a bank holding company, is subject to regulation under the
Act. The Bank Holding 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 Bank Holding Company and
any non-bank 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 Bank Holding 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 Bank
Holding 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 Bank Holding Company may, subject
to the approval of the FRB, engage in, or acquire shares of companies engaged
in any activities which
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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
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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.
Pacific National Bank
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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.
Capital Adequacy
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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 to risk-weighted assets of 4%
and 8%, respectively.
A bank's risk-based capital ratio is calculated by dividing its qualifying
total capital by its risk-weighted assets. 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. Supplementary capital
consists primarily of the allowance for loan losses which is limited to 1.25%
of total risk-weighted assets.
Total risk-weighted assets are ascertained by assigning a bank's balance sheet
assets and credit equivalent amounts of off-balance sheet items, such as
letters of credit, outstanding loan commitments and interest rate swap
agreements to one of four broad risk categories. The risk categories 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 investment loans
and investments in fixed assets, premises and other real estate owned.
Residential mortgage loans are risk rated 50% if they are not government
guaranteed and 20% if they are guaranteed. 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.
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
10
<PAGE>
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.
At December 31, 1997, 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% 8.8% 10.5%
Risk Based Capital:
Tier I Capital 4.0% 12.3% 14.5%
Total Capital 8.0% 13.2% 15.5%
</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. 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 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 Bank Holding Company, since
the Bank Holding Company does not maintain daily average information. In
addition, the Bank Holding 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.
11
<PAGE>
<TABLE>
<CAPTION>
PNB Financial Group
Average Balance Report
Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Assets
------
Cash and due from banks $ 13,604 $ 11,168 $ 9,620
Interest bearing deposits in other banks -0- 597 -0-
Federal funds sold 4,360 9,566 2,286
-------- -------- --------
Total cash and cash equivalents 17,964 21,331 11,906
Securities available for sale 7,177 8,018 14,911
Mortgage loans held for sale 66,307 46,164 21,660
Loans 108,221 99,609 107,713
Allowance for loan losses (1,869) (2,259) (2,674)
-------- -------- --------
Net loans 106,352 97,350 105,039
Premises and equipment, net 1,056 1,222 1,485
Other real estate owned 2,685 3,835 2,240
Other assets 2,650 2,109 2,208
-------- -------- --------
Total assets $204,191 $180,029 $159,449
======== ======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 75,992 $ 57,942 $ 51,140
Interest bearing 100,697 101,571 91,976
-------- -------- --------
Total deposits 176,689 159,513 143,116
Short-term borrowings 3,332 723 1,044
Other liabilities 2,667 2,813 1,415
-------- -------- --------
Total liabilities 182,688 163,049 145,575
Stockholders' equity:
Capital stock 16,219 16,006 16,130
Retained earnings (deficit) 5,321 1,107 (1,913)
Unrealized loss on securities available for sale (37) (131) (343)
-------- -------- --------
Total stockholders' equity 21,503 16,980 13,874
-------- -------- --------
Total liabilities and stockholders' equity $204,191 $180,029 $159,449
======== ======== ========
</TABLE>
12
<PAGE>
The Company's consolidated earnings are affected by the difference between the
income the Company receives from its loan portfolio, investment in mortgage
loans held for sale, and securities available for sale and the Company's cost
of funds, principally interest paid on deposits and borrowings. Interest rates
charged on the Company'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 Bank Holding Company, and all dollar amounts shown are in
thousands.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1997 1996
---------- ----------
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) $108,221 $10,654 9.8% $ 99,609 $ 9,392 9.4%
Mortgage loans held for sale 66,307 5,117 7.7% 46,164 3,623 7.8%
Securities available for sale 7,177 422 5.9% 8,018 438 5.5%
Federal funds sold 4,360 228 5.2% 9,566 493 5.2%
Interest-bearing deposits with banks - - - 597 32 5.4%
-------- ------- --- -------- ------- ---
Total interest-earning assets $186,065 $16,421 8.8% $163,954 $13,978 8.5%
-------- ------- --- -------- ------- ---
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
------------------------------------------
Average Interest Average
Balance Income Rate
--------- -------- ---------
<S> <C> <C> <C>
Earning Assets
- --------------
Total loans (1) (2) $107,713 $10,335 9.6%
Mortgage loans held for sale 21,660 1,681 7.8%
Securities available for sale 14,911 762 5.1%
Federal funds sold 2,286 128 5.6%
Interest-bearing deposits with banks - - -
-------- ------- ---
Total interest-earning assets $146,570 $12,906 8.8%
-------- ------- ---
</TABLE>
13
<PAGE>
(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 $337,000, $292,000 and $189,000 for the years
ended December 31, 1997,1996 and 1995, respectively.
(2) Average loan balances includes average loans on nonaccrual status of
$2,144,000, $6,333,000 and $7,592,000 in 1997, 1996 and 1995,
respectively, and are recorded net of average unearned income of
$537,000, $505,000 and $287,000 as of December 31, 1997, 1996 and 1995,
respectively. Without nonaccrual loans, the average rate on loans would
be 10.0%, 10.1% and 10.3% for the years ended December 31, 1997, 1996 and
1995, 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 Bank Holding Company, and all dollar amounts are in
thousands.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1997 1996
---------- ----------
Average Interest Average Average Interest Average
Balance Expense Rate Balance Expense Rate
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Deposits and Borrowed Money
- ---------------------------
Interest bearing demand deposits $ 52,804 $1,458 2.8% $ 54,126 $1,416 2.6%
Time deposits 36,393 1,901 5.2% 42,725 2,293 5.4%
Savings deposits 4,741 114 2.4% 4,720 116 2.5%
Brokered deposits 6,759 379 5.6% - - -
Short-term borrowings 3,331 192 5.8% 723 63 8.7%
-------- ------ --- -------- ------ ---
Total interest-bearing liabilities $104,026 $4,044 3.9% $102,294 $3,888 3.8%
======== ====== === ======== ====== ===
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
----------------------------------------------
Average Interest Average
Balance Expense Rate
---------- ---------- -----------
Deposits and Borrowed Money
- ---------------------------
<S> <C> <C> <C>
Interest bearing demand deposits $49,241 $1,266 2.6%
Time deposits 37,023 1,935 5.2%
Savings deposits 5,711 154 2.7%
Brokered deposits - - -
Short-term borrowings 1,044 49 4.7%
------- ------ ---
Total interest-bearing liabilities $93,019 $3,404 3.7%
======= ====== ===
</TABLE>
14
<PAGE>
Net interest earnings (in thousands) and net yield on average earning assets
are shown in the table below:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Total interest income (1) $ 16,421 $ 13,978 $ 12,906
Total interest expense 4,044 3,888 3,404
-------- -------- --------
Net Interest Earnings $ 12,377 $ 10,090 $ 9,502
======== ======== ========
Average earning assets (2) $186,065 $163,954 $146,570
Net yield on average earning assets (3) 6.7% 6.2% 6.5%
</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
$2,144,000, $6,333,000 and $7,593,000 in 1997, 1996 and 1995,
respectively, and are recorded net of average unearned income of
$537,000, $505,000 and $287,000 as of December 31, 1997, 1996 and 1995,
respectively.
(3) Without average nonaccrual loans, net yield on average earning assets
would be 6.7%, 6.4% and 6.8% for the years ended December 31, 1997, 1996
and 1995, 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 courier, bookkeeping and payroll accounting services 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>
Years ended December 31,
-------------------------------------------
1997 1996
---------- ----------
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 $38,000 $1,424 3.7% $25,000 $1,039 4.2%
======= ====== === ======= ====== ===
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------
Average Deposit Average
Balance Expense Rate
------- ------- -------
<S> <C> <C> <C>
Approximate noninterest bearing
accounts for which external
services are provided $20,000 $944 4.7%
======= ==== ===
</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.
15
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------
1997 1996
---------- ----------
Average Deposit Average Average Deposit Average
Balance Expense Rate Balance Expense Rate
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing accounts for
which external services are
provided and interest bearing
liabilities $142,026 $5,468 3.8% $127,294 $4,927 3.9%
======== ====== === ======== ====== ===
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
--------------------------------------
Average Deposit Average
Balance Expense Rate
---------- ---------- ---------
<S> <C> <C> <C>
Non interest bearing accounts for
which external services are
provided and interest bearing
liabilities $113,019 $4,348 3.8%
======== ====== ===
</TABLE>
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>
Years ended December 31,
--------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Net interest earnings $ 12,377 $ 10,090 $ 9,502
Other deposit expense 1,424 1,039 944
-------- -------- --------
Net interest earnings after other
deposit expense $ 10,953 $ 9,051 $ 8,558
======== ======== ========
Average earning assets $186,065 $163,954 $146,570
Net yield on average earning assets after
other deposit expense 5.9% 5.5% 5.8%
</TABLE>
The Company's rate and volume analysis for the interest bearing assets and
interest bearing liabilities for 1997 as compared to 1996, as well as 1996
compared to 1995, and 1995 compared to 1994, 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.
16
<PAGE>
<TABLE>
<CAPTION>
Change in Net Interest Income in 1997 from 1996
-----------------------------------------------
(In Thousands)
Volume Rate Total
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans $ 797 $273 $1,070
Mortgage loans held for sale 1,568 (74) 1,494
Securities available for sale (48) 32 (16)
Deposits in other banks (32) - (32)
Federal funds sold (270) 6 (264)
------ ---- ------
Total 2,015 237 2,252
Change in loan fees 191 - 191
------ ---- ------
Total change in interest and loan fee income $2,206 $237 $2,443
====== ==== ======
Interest expense:
Interest bearing demand deposits $ (36) $ 78 $ 42
Time deposits (includes brokered deposits) 23 (36) (13)
Savings deposits - (1) (1)
Short-term borrowings 191 (63) 128
------ ---- ------
Total change in interest expense $ 178 $(22) $ 156
====== ==== ======
Change in net interest and loan fee income $2,028 $259 $2,287
====== ==== ======
<CAPTION>
Change in Net Interest Income in 1996 from 1995
-----------------------------------------------
(In Thousands)
Volume Rate Total
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans $ (752) $(294) $(1,046)
Mortgage loans held for sale 1,912 30 1942
Securities available for sale (364) 40 (324)
Deposits in other banks 32 0 32
Federal funds sold 391 (26) 365
------ ----- -------
Total 1,219 (250) 969
Change in loan fees 103 - 103
------ ----- -------
Total change in interest and loan
fee income $1,322 $(250) $ 1,072
====== ===== =======
Interest expense:
Interest bearing demand deposits $ 127 $ 23 $ 150
Time deposits 301 56 357
Savings deposits (25) (12) (37)
Short-term borrowings (22) 36 14
------ ----- -------
Total change in interest expense $ 381 $ 103 $ 484
====== ===== =======
Change in net interest and loan fee income $ 941 $(353) $ 588
====== ===== =======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Change in Net Interest Income in 1995 from 1994
-----------------------------------------------
(In Thousands)
Volume Rate Total
------------- ------------- -------------
Interest income:
<S> <C> <C> <C>
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>
Securities Available for Sale
-----------------------------
As required by SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" all investments in equity securities that have readily
determinable fair values and all investments in debt securities are 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. All equity securities are classified as available for sale. 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 net
of any income tax effect, for securities available for sale is 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, 1997, 1996 and
1995, has recorded $9,000, $(63,000) and ($84,000), respectively as unrealized
gains (losses), net of income tax effect, as a separate component of
stockholders' equity. The Company has no securities classified as held to
maturity or trading. The Bank has an equity investment in the Federal Home
Loan Bank which was required to acquire membership in this institution. The
Bank sought membership into this institution to obtain favorable financing
arrangements which the Federal Home Loan Bank offers.
In 1997, the Bank Holding Company invested in a private Real Estate Investment
Trust (the "REIT"). The shares of stock which the Bank Holding Company owns
were issued as a private placement and, as of December 31,1997, there was no
established market for this investment. As such, the equity securities in the
REIT are not reportable under SFAS 115 and are reported in the other assets
section of the Company's Consolidated Financial Statements. For more
information regarding the REIT investment, please see footnote 4 of the
Company's Consolidated Financial Statements on page F-15 of this report.
18
<PAGE>
The book value of securities available for sale as of December 31, 1997, 1996
and 1995 are shown in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
U. S. Treasury securities $1,014,000 $1,185,000 $ 4,734,000
U. S. Government agencies securities 2,034,000 2,096,000 2,221,000
Mortgage backed securities 2,577,000 2,930,000 3,331,000
Federal Reserve Bank stock 340,000 340,000 340,000
Federal Home Loan Bank stock 945,000 830,000 -0-
---------- ---------- -----------
$6,910,000 $7,381,000 $10,626,000
========== ========== ===========
</TABLE>
The maturity distribution for securities available for sale, as well as the
weighted average yield for each range of maturity at December 31, 1997, 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
---------- --------
U.S. Government Securities
--------------------------
<S> <C> <C>
Maturities one year or less $1,014 4.76%
Maturities over one year through five years - -
U.S. Government Agency Securities
---------------------------------
Maturities one year or less - -
Maturities over one year through five years 2,034 6.45%
Mortgage backed securities 2,577 6.00%
Federal Reserve Board stock 340 6.00%
Federal Home Loan Bank stock 945 6.23%
</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. One of
the representations the Bank makes with respect to the mortgage loans sold is
that the mortgage loan does not contain any fraudulent information. Such
fraud generally relates to false or materially inaccurate information on the
borrower or on the underlying collateral which was provided to the Bank by the
borrower or broker presenting the loan to the Bank. During the life of the
loan, if the investor finds that there was fraud in the loan package, the Bank
may be required to either repurchase the loan or indemnify the investor
against any losses incurred from the loan. In addition, some 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 two 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.
19
<PAGE>
After October 1, 1996, the majority of the mortgage loans sold were to
investors who did not have a recourse provision tied to loan delinquency.
This significantly reduced the number of delinquent loans which the Bank
indemnified during 1997.
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 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 nongovernment loans are reduced due to stricter
underwriting guidelines and generally lower loan to value requirements. In
addition, some of the nongovernment loans also are required to have mortgage
insurance. If the Bank incurs a loss, the Bank generally has recourse and
attempts to recover the loss from the broker who provided the loan to the
Bank. In many cases, the broker does not have the financial capacity or the
willingness to reimburse the Bank for the loss. In these cases, the only
course of action open to the Bank may be to stop conducting any further
business with that particular broker.
Management is continually assessing its risks associated with both
representations and warranties and the recourse provisions on mortgage loans
sold and has created a reserve for the estimated future losses. Management
believes that this risk has been adequately reserved in the Company's
financial statements. The following is a summary of transactions affecting
this reserve for the years ending December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Beginning balance $ 461,000 $ 232,000 $ 246,000
Provision for losses 276,000 1,080,000 385,000
Amounts charged to reserve, net
of recoveries (355,000) (851,000) (399,000)
--------- ---------- ---------
Ending balance $ 382,000 $ 461,000 $ 232,000
========= ========== =========
</TABLE>
The following table indicates the obligations which have been incurred in
connection with representations and warranties and the recourse provision for
the years ending December 31, 1997, 1996 and 1995. All dollar amounts, except
for the number of loans, are in thousands.
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Total mortgage loans sold $1,094,000 $794,000 $337,000
Number of loans repurchased/indemnified 48 94 26
Dollar volume of loans repurchased/indemnified $ 5,657 $ 11,038 $ 3,163
</TABLE>
Another risk which the Bank has in regard to its mortgage lending operation is
the refund of servicing premiums which were earned in connection with the sale
of the mortgage loan, if the mortgage loan is paid off within a short period
of time after sale. The period of time that the Bank is responsible for the
refund of the servicing premium is different with each investor and ranges
from 0 to 90 days after the investor's purchase of the loan. The Bank
minimizes its risk of refinancing by limiting the amount of broker rebate and
enhancing its underwriting policies to discourage loans which appear to be
frequently refinanced.
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
20
<PAGE>
to the purchaser within the required time frames. The total amount of mortgage
loans which had purchase commitments at December 31, 1997, 1996 and 1995 was
$59,644,000, $38,690,000 and $23,898,000, respectively.
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 $30,465,000, $27,174,000 and $17,266,000 as of
December 31, 1997, 1996 and 1995. At December 31, 1997, 1996 and 1995, the
Bank had $56,000,000, $43,000,000 and $34,000,000, respectively, of mandatory
forward commitments to sell whole loans relating to their unfunded pipeline of
rate-locked loans and unallocated funded 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, 1997, 1996 and 1995, the unrealized (loss) gain on the
Bank mandatory forward commitments was ($286,000), $270,000 and ($200,000),
respectively.
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 income 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 its investment 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 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. A
portion of the Bank's real estate loan portfolio consists of non-owner
21
<PAGE>
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.
The Bank's 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 an annual review by the Comptroller
and a regular monthly loan review by an outside third party. This third party
loan review audits certain loans based upon guidelines set by the Audit
Committee, and reports its findings directly to the Audit Committee.
In 1997, the Bank opened an Accounts Receivables Factoring Department.
Factoring is a form of accounts receivable financing in which the Bank
purchases the customer's invoices. This form of financing is more dependent
upon the paying ability of the customer's debtors than the Bank's typical
asset based borrowers. Consequently, field audits are required prior to
funding and periodically during the duration of the contract. The product is
priced by discounting the amount paid for each invoice to achieve a targeted
yield. In addition, to reduce the risk, an additional discount is set aside as
a reserve account to cover charge backs of purchased invoices. The reserve is
established by the Bank's underwriting criteria and generally ranges from 15%
to 50% of purchased invoices.
The Company's loans are summarized in the following table according to loan
types. Loans have been recorded net of loan purchase discounts of $551,000,
$598,000, $729,000, $995,000 and $1,269,000, and unearned income of $551,000,
$347,000, $251,000, $297,000 and $149,000 as of December 31, 1997, 1996, 1995,
1994 and 1993, respectively. Such purchase discounts will be amortized to
income over the life of the loans, which range from one to twenty years as of
December 31, 1997. The Company has no foreign loans. All dollar amounts are in
thousands. During 1996, certain loans were reclassified from commercial loans
to real estate loans as management determined that they had more
characteristics of a real estate loan than a commercial loan. The Company has
no foreign loans. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial loans $ 46,218 $ 38,666 $ 55,291 $ 57,741 $ 48,840
Real estate loans 48,892 43,556 26,984 26,050 29,177
Construction loans 15,996 14,301 12,001 10,345 18,326
Consumer loans 7,078 7,703 9,461 10,790 12,920
-------- -------- -------- -------- --------
Total Loans 118,184 104,226 103,737 104,926 109,263
Allowance for possible loan losses (1,558) (1,812) (2,659) (2,727) (3,473)
-------- -------- -------- -------- --------
Net loans $116,626 $102,414 $101,078 $102,199 $105,790
======== ======== ======== ======== ========
</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 Company typically will establish an annual maturity date. This enables the
Company to monitor the borrower's financial condition and past performance
along with their compliance with any loan conditions. If the Company
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 Company's underwriting guidelines. Under
either of these circumstances, the commercial loan is renewed, not repaid.
Before renewing a loan, the Company 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.
22
<PAGE>
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 Company may change the interest rate charged and/or charge
additional loan fees.
Scheduled maturities of all investment loans outstanding at December 31, 1997
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, 1997, a majority of the Company'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 $ 44,876
After one year but less than five 34,453
Over 5 years 38,855
--------
Total loans $118,184
========
</TABLE>
On a floating interest rate loan, the Company 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 Company limits its exposure to
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, 1997 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 $19,347
Floating interest rates 53,961
-------
Total Loans $73,308
=======
</TABLE>
Interest Rate Sensitivity Analysis
----------------------------------
Management attempts to match the maturities of rate sensitive assets and rate
sensitive liabilities to the extent believed necessary to minimize interest
rate risk. Management monitors rates and maturities of rate sensitive assets
and liabilities and attempts to minimize interest rate risk by adjusting terms
of new loans and deposits and by investing in securities which mitigate the
Bank's overall interest rate risk.
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, 1997. All
dollar amounts are in thousands.
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Greater
Less than 3 - 12 1 - 5 than
3 Months Months Years 5 years Total
-------- ------- ------- ------- --------
Rate Sensitive Assets:
Loans (1) $ 72,312 $14,461 $16,395 $13,779 $116,947
Interest rate swap (2) (20,000) - 20,000 - -
Mortgage loans held for sale 96,852 - - - 96,852
Investment securities (3) 1,360 1,243 4,291 - 6,894
Federal funds sold - - - - -
-------- ------- ------- ------- --------
Total Rate Sensitive Assets $150,524 $15,704 $40,686 $13,779 $220,693
Rate Sensitive Liabilities:
Time deposits $ 33,821 $13,647 $ 2,895 $ 123 $ 50,486
Interest bearing demand deposits 54,906 - - - 54,906
Savings deposits 4,355 - - - 4,355
Other demand deposits (4) 35,798 - - - 35,798
Borrowings on line of credit 5,000 - - - 5,000
-------- ------- ------- ------- --------
Total Rate Sensitive Liabilities 133,880 13,647 2,895 123 150,545
Cumulative GAP $ 16,644 $18,701 $56,492 $70,148
======== ======= ======= =======
Cumulative Rate Sensitive Assets
as a Percentage of Rate Sensitive
Liabilities 1.12 1.13 1.38 1.47
======== ======= ======= =======
</TABLE>
(1) Loans do not include nonaccrual loans of $1,237,000 as of December 31,
1997.
(2) The Bank has entered into an interest rate swap agreement with a total
notional principal amount of $20 million. Management entered into the
agreement to reduce the impact of a decrease in interest rates on its
balance sheet. The agreement effectively transfers variable rate assets
to fixed rate assets. The agreement provides for the Bank to pay a
variable rate of prime on the notional amount with the counterpart paying
a fixed rate. The agreement terminates in April 2000.
(3) Securities are recorded at their amortized cost and mortgage back
securities are included at their estimated repayment dates.
(4) These deposits consist of the rate sensitive portion of the noninterest
bearing demand deposits of escrow and title companies. A portion of 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, 1997, was 1.13% and
is within the acceptable range of 1.25% as determined by the Company's
asset/liability policy.
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 Company strategies, (such as delaying increases in interest
rates paid on interest-bearing deposit accounts) on the Company=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
24
<PAGE>
collection of interest to be in doubt. As a result of placing loans on
nonaccrual status, the Company did not accrue interest of approximately
$126,000, $343,000 and $650,000 during 1997, 1996 and 1995, respectively,
which would have been earned had such loans been performing throughout the
year. 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, 1997, $78,000 of loans
classified past due 90 days or more consists of FHA insured 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, 1997, the Bank had 12 loans totaling $248,000
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 principal and interest income as if
the loan was on accrual status. During the year ended December 31, 1997, the
Company has no loans which were being accounted for in this manner.
The following table sets forth the total amount of nonperforming loans and the
percentage of nonperforming loans to total loans for December 31, 1997, 1996,
1995, 1994 and 1993, respectively. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Percent of Percent of
Total Total
Amount Loans Amount Loans
------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Performing loans accounted for on
a nonaccrual basis $ 248 .2% $ 878 .8%
Nonperforming loans accounted for
on a nonaccrual basis 989 .9% 2,342 2.3%
Accruing loans contractually past
due 90 days or more 160 .1% 277 .3%
------ --- ------ ---
Total $1,397 1.2% $3,497 9.7%
====== === ====== ===
Loans not included above which are
"troubled debt restructuring" as
defined in SFAS 15 $4,100 3.5% $4,100 4.0%
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%
======= === ====== ===
Loans not included above which are "troubled
debt restructuring" as defined in SFAS 15 - - - -
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
1993
--------------------
Percent of
Total
Amount Loans
------- ----------
<S> <C> <C>
Performing loans accounted for on a nonaccrual basis $ - -
Nonperforming loans accounted for on a nonaccrual basis 9,005 8.2%
Accruing loans contractually past due 90 days or more 4,826 4.4%
------- ----
Total $13,831 12.6%
======= ====
Loans not included above which are "troubled
debt restructuring" as defined in SFAS 15 - -
</TABLE>
As of December 31, 1997, 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. Yet, due to the risks inherent in the Company's
loan portfolio, Management recognizes that loans now current may become
doubtful as to repayment.
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. As of December 31, 1997, 1996 and 1995, all of the Company's
OREO was acquired in settlement of real estate or construction loans.
The following table sets forth the type of property which is included in other
real estate owned as of December 31, 1997, 1996 and 1995. All amounts are in
thousands.
<TABLE>
<CAPTION>
Type of Real Estate 1997 1996 1995
- ------------------------------ ----- ------- ------
<S> <C> <C> <C>
Single family residence $ 309 $1,535 $ -
Commercial and Industrial - 1,258 283
Condominium 102 626 254
Land 64 64 405
Apartment building - - 395
----- ------ ------
Total $ 476 $3,483 $1,337
===== ====== ======
</TABLE>
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.
26
<PAGE>
As required by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, 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 $1,237,000 of impaired loans as of
December 31, 1997, of which the majority were collateral dependent. The total
allowance for loan losses relating to $99,000 of impaired loans was $ 50,000 on
December 31, 1997. Impaired loans for which there is no specific allowance for
loan losses at December 31, 1997, is $1,138,000.
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.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan losses
at beginning of period $ 1,812 $ 2,659 $ 2,727 $ 3,473 $ 2,131
Loans changed off:
Commercial 1,178 340 616 800 391
Consumer 24 20 32 39 80
Real Estate 399 1,695 1,097 1,350 1,927
-------- -------- -------- -------- --------
Total loans charged-off $ 1,601 $ 2,055 $ 1,745 $ 2,189 $ 2,398
Recoveries of loans previously
charged-off:
Commercial 270 257 62 347 185
Consumer 12 5 10 38 10
Real Estate 195 43 102 146 145
-------- -------- -------- -------- --------
Total loan recoveries 477 305 174 531 340
-------- -------- -------- -------- --------
Net loans charged off 1,124 1,750 1,571 1,658 2,058
Provision charged to operating expense 870 903 1,503 912 3,400
-------- -------- -------- -------- --------
Balance of allowance for loan losses
at end of period $ 1,558 $ 1,812 $ 2,659 $ 2,727 $ 3,473
======== ======== ======== ======== ========
Amount of loans outstanding at end
of period $118,184 $104,226 $103,737 $104,926 $109,263
Average amount of loans outstanding
during the year $108,221 $ 99,609 $107,713 $102,964 $114,627
Ratio of net charge-offs during the
period to average loans outstanding
during the period 1.04% 1.76% 1.46% 1.61% 1.80%
======== ======== ======== ======== ========
</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. At December 31, 1997, the allowance for loan losses was
approximately $1,026,000 in excess of the amounts computed using the migration
analysis discussed above. This excess was determined necessary because certain
historical loss percentages as indicated in the migration analysis were
considered to be below the minimum amount that management believes is necessary
to establish an adequate allowance for loan losses. The following tables set
forth the loan pools the Company utilizes and its respective
27
<PAGE>
allowance established for December 31, 1997, 1996, 1995, 1994 and 1993,
respectively. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Percent of Percent of Percent of Percent of
Loans to Allowance Allowance Loans to Allowance Allowance
Total Loans Amount to Loans Total Loans Amount to Loans
------------ --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Classified loans
- ----------------
Construction loans 1.7% $ 159 7.9% .9% $ 58 5.9%
First trust deed loans 2.3% 229 8.6% 2.6% 274 10.3%
Real estate commercial borrowers .3% 56 13.8% .9% 237 26.7%
Guaranteed mortgage loans - - - .7% 55 7.9%
All other loans .3% 67 19.6% .8% 125 14.6%
---- ------ ---- ---- ------ ----
Total classified loans 4.6% $ 511 9.4% 5.8% $ 749 12.3%
---- ------ ---- ---- ------ ----
Nonclassified loans
- -------------------
Construction loans 10.9% $ - - 10.7% $ - -%
First trust deed loans 35.8% - - 39.4% 232 .6%
All other loans 48.7% 21 - 44.1% 32 -
Unallocated reserve - 1,026 N/A - 799 N/A
---- ------ ---- ---- ------ ----
Total nonclassified loans 95.4% 1,047 .9% 94.2% 1,063 1.1%
---- ------ ---- ---- ------ ----
Total 100% $1,558 1.3% 100% $1,812 1.7%
==== ====== ==== ==== ====== ====
<CAPTION>
December 31, 1995 December 31, 1994
------------------------ ------------------------
Percent of Percent of Percent of Percent of
Loans to Allowance Allowance Loans to Allowance Allowance
Total Loans Amount to Loans Total Loans Amount to Loans
------------ --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Classified loans
- ----------------
Construction loans 4.2% $ 608 14.0% 2.3% $ 407 16.9%
First trust deed loans 7.1% 887 12.0% 8.9% 876 9.4%
Real estate commercial borrowers 2.8% 538 18.6% 2.1% 234 10.8%
Guaranteed mortgage loans - - - 1.1% 46 3.8%
All other loans 1.4% 139 9.3% 3.7% 442 11.4%
---- ------ ---- ---- ------ ----
Total classified loans 15.6% $2,172 13.5% 18.1% $2,005 10.6%
---- ------ ---- ---- ------ ----
Nonclassified loans
- -------------------
Construction loans 8.7% $ - - 11.3% $ 100 .8%
First trust deed loans 16.0% 91 .6% 16.0% 35 -
All other loans 59.6% 396 .7% 54.6% 536 .9%
Unallocated reserve - - - - 51 N/A
---- ------ ---- ---- ------ ----
Total nonclassified loans 84.4% 487 .6% 81.9% 671 .8%
---- ------ ---- ---- ------ ----
Total 100% $2,659 2.6% 100% $2,727 2.6%
==== ====== ==== ==== ====== ====
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
December 31, 1993
---------------------
Percent of Percent of
Loans to Allowance Allowance
Total Loans Amount to Loans
------------ --------- -----------
<S> <C> <C> <C>
Classified loans
- ----------------
Construction loans 7.9% $ 188 2.2%
First trust deed loans 9.1% 1,101 11.0%
Real estate commercial borrowers 1.8% 477 24.7%
Guaranteed mortgage loans 3.5% 46 1.2%
All other loans 4.2% 934 20.4%
---- ------ ----
Total classified loans 26.5% $2,746 9.5%
---- ------ ----
Nonclassified loans
- -------------------
Construction loans 12.1% $ 230 1.7%
First trust deed loans 16.9% 5 -
All other loans 44.5% 492 1.0%
Unallocated reserve - - N/A
---- ------ ----
Total nonclassified loans 73.5% 727 .9%
---- ------ ----
Total 100% $3,473 3.2%
==== ====== ====
</TABLE>
Deposits
- --------
As a well capitalized Bank, as defined by the FDIC, the Bank can obtain brokered
deposits without any restriction by the regulators. The Bank utilizes brokered
deposits to help fund its mortgage loans held for sale. Management monitors its
use of brokered deposits very closely and the board of directors of the Bank has
placed limits on the use of brokered deposits. Due to the lower cost, management
anticipates the utilization of brokered deposits when necessary to fund its
mortgage loans held for sale.
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, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 75,992 0% $ 57,942 0% $ 51,140 0%
Interest-bearing demand deposits 52,804 2.8% 54,126 2.6% 49,241 2.6%
Savings deposits 4,741 2.4% 4,750 2.5% 5,711 2.7%
TCD's of $100,000 or more 21,784 5.1% 20,708 5.3% 18,269 5.5%
Other time deposits 14,609 5.3% 22.017 5.4% 18,754 5.0%
Broker deposits 6,759 5.6% - - - -
-------- --- -------- --- -------- ---
Total $176,689 $159,513 $143,115
======== ======== ========
</TABLE>
29
<PAGE>
The following table shows the maturity schedule of time certificate of deposits
of $100,000 or more at December 31, 1997. All of the Bank's brokered deposits,
as of December 31, 1997, have a maturity date of three months or less.
<TABLE>
<S> <C>
Three months or less $27,852
Over 3 through 6 months 3,554
Over 6 through 12 months 4,473
Over 12 months 308
-------
Total $36,187
=======
</TABLE>
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>
Years ended December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net interest spread on average assets 6.1% 5.6% 6.0%
Return on average assets 2.5% 2.0% 1.3%
Return on average equity 23.3% 20.9% 14.7%
Dividend payout rate None None None
Average equity on average assets 10.5% 9.4% 8.7%
</TABLE>
Short-Term Borrowings
- ---------------------
From time to time during the year ended December 31, 1997, the Bank borrowed on
its short-term borrowing facilities. These borrowings, together with the Bank's
brokered deposits were used to fund the Bank's mortgage loans held for sale
which could not be fully funded by the Bank's deposits. These back up sources of
liquidity include $8.5 million of unsecured lines with other banks, a line of
credit with the Federal Home Loan Bank (See Note 5 of the Company's Consolidated
Financial Statements on page F-17 of this report), and borrowings against the
Bank's securities available for sale. The primary source of borrowed funds was
the Bank's credit line with the Federal Home Loan Bank of San Francisco. As a
member of this federally assisted government agency, the Bank has secured a line
of credit collateralized by certain portfolio loans of the Bank. As the mortgage
loans held for sale are generally presold to institutional investors via the
mandatory forward commitments, the risk to the Bank that the Bank cannot repay
these short term borrowings by the ultimate sale of the mortgage loans is
minimal. 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, 1997, 1996 or 1995.
Item 2. PROPERTIES
- ------------------
As of December 31, 1997 the Bank leases nine properties. The properties are used
as administrative offices, branch offices, and mortgage banking offices. Other
than real estate acquired through foreclosed loans, neither the Bank Holding
Company nor the Bank owns 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 Bank Holding Company does not lease any
property. The following table sets forth certain information with respect to
leases of the Bank.
30
<PAGE>
<TABLE>
<CAPTION>
Lease 1997 1997
---------- -------- --------------
Location Square Expiration Rental Effective
- -------- ------ ---------- -------- --------------
Branch Offices Feet Date Expense Lease Rate (8)
- -------------- ------ ---------- -------- --------------
<S> <C> <C> <C> <C>
4665 MacArthur Court, Newport Beach (1) 17,130 12/31/00 $421,000 $1.85
8501 Wilshire Boulevard, Beverly Hills (2) 4,040 04/30/01 88,000 1.95
1045 West Katella Boulevard, Orange (3) 7,465 02/28/99 138,000 1.45
Mortgage Banking
- ----------------
41 Corporate Park, Irvine (4) 22,186 07/31/02 285,000 1.32
6390 Greenwich Drive, Suite 240, San Diego 2,531 09/30/99 40,000 1.30
Mortgage Loan Production Offices
- --------------------------------
4041 North Central Ave., Phoenix, AZ (5) 2,556 04/01/00 27,000 1.00
5546 E. 4th Street, Suite 112, Tucson AZ 273 06/30/98 2,300 1.41
405 No. Beaver Street, #1, Flagstaff, AZ (6) 250 02/25/98 3,540 1.18
3550 Watt Ave., #140, Sacramento, CA (7) 200 06/30/98 0 2.02
</TABLE>
(1) During 1997, the Bank subleased approximately 2,700 square feet of these
premises on a month to month basis and received rental income from the
sublease of $35,000. This sublease ended on 10/31/97. Senior Management,
financial services department, loan administration, the Bank's SBA
department, and its construction loan department occupy approximately 7,000
square feet of the Newport Beach location.
(2) The lease expires on 4/30/01, but the Bank has the right to cancel the
lease for a small cancellation charge, on or after March 1, 1999 with six
months notification to the landlord.
(3) Approximately 2,000 square feet of this location is utilized for the Bank's
data processing center.
(4) On July 31, 1997, the Bank entered into a new lease agreement whereby the
Bank increased its rentable square footage and extended its current lease
to 7/31/02. The Bank's effective lease rate during the lease term is $1.43
per square foot.
(5) The Bank subleases this space. The expiration of the sublessor's master
lease expires 4/1/00. The Bank's sublease terminates on 4/1/00, but the
Bank has the right to cancel the lease with a four month notification to
the sublessor.
(6) The Bank has subleased one third portion of a CPA's office. The
approximately square footage is indicated. After the initial lease term,
the lease term converts to month-to-month.
(7) This lease consists of one office within an executive office suite. Other
services, such as phone and receptionist, are included in the rental fee.
This lease went into effect on January 1, 1998.
(8) Calculated as monthly charge per actual square foot over the life of the
lease, except for 41 Corporate Park, Irvine, which, due to a lease
extension in July 1997, is calculated as an average paid during 1997.
Item 3. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings to which the Company is a party
or to which any of their respective properties are subject, other than ordinary
routine litigation incidental to the Company's business.
31
<PAGE>
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------
During the Bank Holding Company's Annual Meeting of Shareholders on November 20,
1997, the shareholders voted on three matters. They elected all of the nominees
of the board of directors, approved the appointment of McGladrey & Pullen, LLP
as the Company's independent public auditors for 1997, and increased the
aggregate number of shares of common stock available for grant under the
Corporation's 1995 Incentive Stock Option Plan from 200,000 to 250,000 shares.
The following schedule sets forth the number of votes cast for, against, and
withheld, as well as the number of abstentions and broker non-votes, including a
separate tabulation with respect to each nominee for office.
<TABLE>
<CAPTION>
Votes Broker
For Withheld Abstain Non-Votes
--------- -------- ------- ---------
<S> <C> <C> <C> <C>
Election of Directors:
- ----------------------
Allen C. Barbieri 1,182,700 0 0 287,449
Martin T. Hart 1,182,700 0 0 287,449
G. Mitchell Morris 1,180,445 2,255 0 287,449
Jon A. Salquist 1,182,700 0 0 287,449
Bernard E. Schneider 1,182,700 0 0 287,449
Appointment of Independent Public
- ---------------------------------
Auditors
- --------
McGladrey & Pullen, LLP 1,179,700 0 3,000 287,449
Increase in Shares of Common 1,174,100 4,990 3,610 287,449
- ----------------------------
Stock Available Under 1995
- --------------------------
Incentive Stock Option Plan
- ---------------------------
</TABLE>
32
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Bank Holding Company's common stock is traded on the NASDAQ Bulletin Board
market under the symbol of PNBF. The Bank Holding Company is aware of three
security dealers who seek to handle trades in its stock: Mitchell Securities
Corporation of Portland, Oregon, Sutro and Company of San Francisco,
California, and Hoefer & Arnett of San Francisco, California. The number of
shareholders of record as of January 1, 1998 was approximately 338. The
following table shows the range of bid quotations for each quarter within the
last two fiscal years from Mitchell Securities Corporation. 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. The Bank Holding Company has
not historically paid dividends on any of its shares. However, management
periodically reviews the possibility of paying dividends and may decide to pay
dividends in the future.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fourth Quarter, 1997 $19.75 $16.50
Third Quarter, 1997 16.50 14.50
Second Quarter, 1997 14.50 11.50
First Quarter, 1997 11.50 11.50
Fourth Quarter, 1996 $11.50 $11.00
Third Quarter, 1996 7.50 6.50
Second Quarter, 1996 7.00 6.00
First Quarter, 1996 6.00 5.00
</TABLE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATION
------------
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This annual report contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, which
represent the Company's expectations or beliefs including, but not limited to,
statements regarding the growth of the Company, the future profitability of
the Company and the sufficiency of the Company's liquidity and capital. For
this purpose, any statements contained in this report that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "estimate" or "continue" or the negative or other
variations thereof or comparable terminology are intended to identify forward-
looking statements. These statements by their nature involve substantial
risks and uncertainties, including those described below.
SUMMARY
- -------
The Company's diluted earnings per common and common equivalent share was
$2.13 in 1997, a 36% increase over its diluted earnings per common and common
equivalent shares of $1.57 in 1996. The Company's return on average assets
was 2.5% in 1997 compared to 2.0% in 1996, and its return on average
stockholder's equity was 23.3% in 1997 compared to 20.9% in 1996. Due to net
operating loss carryforwards and the elimination of its valuation allowance on
deferred tax assets, the Company's income tax expense was less than the tax at
the statutory rates in 1996. On a fully taxed basis, the Company's return on
average assets would have been 1.5% for 1996 and its return on average equity
would have been 15.6%.
RESULTS OF OPERATIONS
- ---------------------
The Company reported a record net profit of $5,020,000 in 1997 compared to a
net profit of $3,556,000 in 1996. The 1997 net income is the highest earnings
the Company has reported since its inception in 1982. The increase in net
income was due to an increase in the Bank's net interest margin, along with an
increase in income from the Bank's residential
33
<PAGE>
mortgage division. The increase in net interest income in 1997 compared to
1996 was a result of an increase in total assets along with a decrease in
nonperforming assets. The Company reduced its nonperforming assets from $6.7
million, or 3.4% of total assets at December 31, 1996, to $1.7 million, or .7%
of total assets at December 31, 1997. The Bank's residential mortgage division
contributed $4,319,000 to pretax profit during 1997 compared to a pretax
profit of $2,725,000 during 1996. The increase in profit of this division was
a result of increased lending activity and a significant reduction of problem
loan indemnification expense. During 1997, the Bank funded 8,552 mortgage
loans totaling $1.13 billion compared to 1996 during which the Bank funded
6,528 mortgage loans totaling $815 million.
During the year ended December 31, 1997, the Company had total average assets
of $204.2 million, total average portfolio loans of $108.2 million and total
average deposits of $176.7 million compared to total average assets of $180.0
million, total average portfolio loans of $99.6 million and total average
deposits of $159.5 million during the year ended December 31, 1996. The
increase in average assets primarily occurred within the mortgage loans held
for sale and portfolio loan products. In 1997, the average balance of mortgage
loans held for sale increased 44% and the average balance of portfolio loans
increased 9% over 1996 levels. The increase in average deposits in 1997
compared to 1996 is primarily due to an increase in noninterest bearing demand
deposits. A portion of this increase was due to an increased level of deposits
from the Bank's escrow customers. The increases in loans and deposits were the
result of continued marketing efforts and a strong economy in Southern
California.
NET INTEREST INCOME
- -------------------
Although fee generating activity such as the Bank's mortgage division and the
Bank's SBA division are an integral part of the Company's revenue, the
Company's primary source of revenue is its net interest income. Net interest
income before the provision for loan losses totaled $12,377,000 in 1997
compared to $10,090,000 in 1996. The increase of net interest income of
$2,287,000 (23%), in 1997 compared to 1996 was primarily due to an increase in
the Company's interest income which was partially offset by an increase in
the Company's interest expense. The increase of interest income was primarily
due to an increase in the average balance of mortgage loans held for sale and
portfolio loans. During 1997, the balance of mortgage loans held for sale
averaged $66.3 million compared to an average of $46.2 million in 1996. In
addition, the balance of portfolio loans average $108.2 million in 1997
compared to an average of $99.6 million in 1996.
The average yield on total interest bearing assets was 8.8% in 1997 compared
to 8.5% in 1996, an increase of 30 basis points. The primary reasons for the
increase in average yield was a increase in the average interest rates earned
on portfolio loans from 9.4% in 1996, to 9.8% in 1997. The primary reason for
this increase is the reduction of nonperforming loans in 1997 as compared to
1996. The average cost of interest bearing liabilities was 3.9% in 1997
compared to 3.8% in 1996, an increase of 10 basis points. This increase was
primarily attributed to the increase in the volume of short term borrowings
and brokered deposits. These higher costing liabilities were used to
partially fund the growth of the Bank's assets.
As a result of its normal operations, the Company assumes the risk that
general interest rate levels will change. Management regularly monitors this
risk, but substantial change in the interest rate environment could have an
impact on the Company's net interest income and profitability. A significant
portion of the Company's portfolio loans are based on a variable interest rate
tied to prime. The Company mitigates the risk of a decrease in interest
income due to a lower prime rate by entering into an interest rate swap
agreement totaling $20 million. The agreement effectively transfers $20
million of variable rate assets tied to prime for assets with a fixed rate of
8.49% through April 1998 and 9.10% from April 1998 to April 2000. The rate
the Company earns on its mortgage loans held for sale is not based on prime,
but rather on the prevailing mortgage loan interest rates. During the last
three months of 1997, fixed rate mortgage interest rates decreased to
approximately 7.0% This reduction increased the volume of mortgage loan
refinancings but reduced the interest earned on the Company's inventory of
mortgage loans held for sale. Future changes in the prevailing residential
mortgage rate environment can effect the volume and the interest earnings of
the Bank's mortgage loans held for sale.
34
<PAGE>
PROVISIONS FOR LOAN LOSSES
--------------------------
The Company's provision for loan losses was $870,000 in 1997 compared to
$903,000 in 1996. This resulted in an allowance of $1,558,000 at December 31,
1997 compared to $1,812,000 at December 31, 1996. The decrease in the
allowance for loan losses was a result of, among other factors, a significant
decrease in the classified and nonaccrual loans as of December 31, 1997.
Nonaccrual loans were $1.2 million on December 31, 1997, compared to $3.2
million on December 31, 1996. Classified loans decreased 15% during 1997
from $6.1 million to $5.4 million. These decreases, along with a nominal
historical loss percentage on the Company's nonclassified loans during the
past three years and a strong Southern California economy have been the most
significant reason for the reduction in the allowance for loan loss.
The allowance for loan loss is a result of Management's analysis of the
estimated inherent losses in the Company'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 judgments different
from those of Management. Management believes that the allowance at December
31, 1997 is adequate to absorb the inherent risks in the Company's loan
portfolio. 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, 1997 December 31, 1996
<S> <C> <C>
Allowance for possible loan losses $1,558 $1,812
Loans past due 90 days or more and accruing 160 277
Nonaccrual loans 1,237 3,220
Classified loans 5,433 6,087
Troubled debt restructuring 4,102 4,108
Other real estate owned 476 3,483
Allowance for possible loan losses as a percent of:
Total loans 1.3% 1.7%
Nonaccruing loans 125.9% 56.3%
Classified loans 28.7% 29.8%
Nonperforming loans and real estate owned
as a percent of total assets: .7% 3.4%
</TABLE>
OTHER INCOME
------------
Residential mortgage loan processing fees, premiums earned on the sale of
residential mortgage loans held for sale and SBA loans, and service charges
and other fees charged to Bank customers continue to be the primary components
of other income. Mortgage division gross income was $15.1 million in 1997, an
increase of 36% from the 1996 gross income of $11.1 million. 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 the division's continued reputation for quality service and
competitive pricing, along with a continual effort to increase its market
share within its current market and expand into new marketing areas. In
addition, the strong economic environment in Southern California, and the
lower interest rate environment added to a strong home buyer's market in 1997.
Purchase money loans dominated the Bank's mortgage loan volume in 1996 and
1997. These loans are less volatile to changes in mortgage loan interest rates
than refinancing mortgage loans, but are more dependent on a good economy.
With the reduction of fixed mortgage interest rates in the fourth quarter of
1997 the Bank experienced an increase in the volume of loan refinancings. As
the volume of mortgage loan refinancings increase
35
<PAGE>
more mortgage companies enter the industry. This creates more competition
along with increased demand for knowledgeable mortgage loan employees. If the
low interest rate environment continues, management anticipates an increase in
the volume of mortgage loan refinancings and increases in salaries and wages.
When the low interest rate environment changes, the competition becomes
fierce, pricing margins tend to tighten significantly, and the loan volume
tends to decrease. These changes could have a significant impact on the
profitability of this department.
During 1997, the Bank's SBA department had gain on the sale of SBA loans of
$638,000 compared to $463,000 in 1996. Including interest income on SBA loans
held in portfolio and loan servicing income on SBA loans sold, the Bank's SBA
department contributed $937,000 to pretax profit compared to a contribution of
$649,000 in 1996. The increase in gross revenue in this department is due to
an increase in SBA loan activity which is due to management's efforts to grow
this department of the Bank. The Bank has a Preferred Lender status with the
Santa Ana, Los Angeles, and San Diego Counties' SBA District Offices. These
SBA offices cover all loans within Orange, Los Angeles, San Bernardino,
Riverside, Ventura, Santa Barbara and San Diego counties. This status has
enabled the Bank to give quicker loan approval and better customer service.
From time to time, the government changes its SBA policies, guidelines, and
funding availability. These changes could have a material impact on the Bank's
ability to continue to generate a profit from this department.
OTHER EXPENSES
--------------
Total other expenses were $19,744,000 in 1997, compared to other expenses of
$17,513,000 in 1996. Outside of the mortgage division, the Company's other
expenses increased $35,000 while the Bank's residential mortgage division's
expenses increased $2,196,000. The increase in the mortgage division expenses
is a direct result of the large increase in the loan activity of the
department. The increase in mortgage division expenses is primarily due to
an increase in salaries and benefits, commissions, occupancy and other direct
costs associated with the origination and sale of mortgage loans. These
increases were partially offset with a decrease of problem loan
indemnification expenses. This expense, which relates to the Bank's liability
associated with representations, warranties and certain recourse provisions
tied to loan delinquencies made to purchasers and insurers of mortgage loans
was $276,000 in 1997 compared to $1,080,000 in 1996. This reduction was due in
part to the elimination of certain delinquency recourse provisions in the
purchase contracts of several mortgage loan purchasers. These more favorable
contract provisions took effect in the fourth quarter of 1996.
Aside from the mortgage division expenses, increases in the Company's salaries
and other deposit expenses were offset with reductions in insurance, occupancy
and legal expenses. The increase in salaries was primarily due to an employee
performance bonus plan that was based on a combination of the increase in net
income of the Company along with the reduction of nonperforming assets. The
increase in other deposit expense is a result of the increase 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
insurance was the result of lower SAIF deposit insurance premiums in 1997 as a
result of a one time special assessment of $307,000 to recapitalize the SAIF
fund in 1996. The decrease in occupancy costs was partially a result of the
full depreciation of the Bank's data processing equipment along with a
reduction of telephone costs.
PROVISION FOR INCOME TAXES
--------------------------
The Company recognized a provision for income tax of $3,561,000 during 1997
compared to a provision for income taxes of $945,000 in 1996. The 1997
provision for income tax represents a full income tax provision of 42% of
pretax income. During 1997, management eliminated the valuation allowance on
deferred tax assets as they believe that it was more likely than not that the
Company's deferred tax assets will be realized in the future. This
elimination of the valuation allowance lowered the Company's 1997 effective
tax rate on the statement of income from 42% to 21%. The Company expects to
record a full income tax provision of 42% of the pretax income in 1998.
36
<PAGE>
LIQUIDITY
---------
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. The Bank's portfolio loan-to-deposit ratio
(excluding brokered deposit) at December 31, 1997 was 59.0% as compared to
60.0% at December 31, 1996. The Bank's total nonbrokered deposits increased
$27.7 million (16.2%) from December 31, 1996 to December 31, 1997. 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,
1997, escrow and title insurance companies' deposits totaled $45.4 million or
22.9% of total nonbrokered deposits. This compared to escrow and title
insurance deposits of approximately $28.2 million or 16.6% of total deposits
at December 31, 1996. 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.
The Bank's residential mortgage division utilizes the Bank's funding sources
to fund its mortgage loans held for sale. During 1997, the average time
between funding and sale of a mortgage loan was 22 days. 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. In 1997, mortgage
loans held for sale earned 7.7%, while federal funds sold earned 5.2%. Due to
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 1996, and
throughout 1997, the Bank utilized its back up borrowing relationships, along
with brokered deposits, to help fund the mortgage loans held for sale. These
back up sources include unsecured lines of credit with other banks, a line of
credit with the Federal Home Loan Bank and borrowings against the Bank's
securities available for sale. During 1997 the average balance of short term
borrowing and brokered deposits was $3.3 million and $6.8 million,
respectively.
Liquidity as its relates to the Bank Holding Company represents the ability to
obtain funds to support investment activities and operating needs. The Bank
Holding Company'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. During 1997 the Bank paid
a $2.0 million cash dividend to the Bank Holding Company. This dividend,
along with the principal payments of its loan portfolio, helped the Bank
Holding Company fund a $2.5 million investment in Alta Residential Mortgage,
Inc. ("Alta"). Alta is a newly formed real estate investment trust which will
focus on the investment in and management of residential mortgage loans.
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 holding company and bank maintain a minimum ratio of
core capital and total capital to risk-weighted assets of 4% and 8%,
respectively. Leverage capital guidelines 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. During 1997,
the Company's strong earnings out paced the Company's growth in assets and,
therefore, its capital ratios increased. The Bank's earnings, after the
dividend to the Bank Holding Company, were proportional to the growth of the
Bank's assets and, therefore, its capital ratios remained relatively stable.
At December 31, 1997 and 1996, the Company's and the Bank's capital ratios
were well 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.
37
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
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% 8.8% 10.5% 8.8% 10.0%
Risk Based Capital
Tier I Capital 4.0% 12.3% 14.5% 12.0% 13.7%
Total Capital 8.0% 13.2% 15.5% 13.3% 14.9%
</TABLE>
YEAR 2000 COMPUTER COMPLIANCE
-----------------------------
The Bank has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 issue is
the result of computer programs being written using two digits (rather than
four) to define the applicable year. Any of the Bank's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Bank presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will
not pose significant operational problems for the Bank's computer systems as
so modified and converted. However, if such modifications and conversions are
not completed timely, the Year 2000 may have a material impact on the
operations of the Bank. In addition, management does not expect the
modifications to existing software or new software which is purchased to have
a material impact on future earnings.
Item 7. FINANCIAL STATEMENTS
----------------------------
The financial statements of the Company are included in a separate section of
this annual report beginning on page F-1, following signature page 46.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None
38
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ---------------------------------------------------------------------
As of December 31, 1997, the board of directors of the Company consists of
five (5) members, all of whose terms expire at the next annual meeting of
shareholders. 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>
Position in PNB Served
Financial Group Since Age
----------------------- ------ ---
<S> <C> <C> <C>
Allen C. Barbieri Director/President/CEO 1994 39
Martin T. Hart Director 1990 62
Doug L. Heller Chief Financial Officer 1990 40
G. Mitchell Morris Director 1997 77
Jon A. Salquist Director 1996 53
Bernard E. Schneider Director/Chairman 1991 52
</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.
Martin T. Hart is an active private investor. He serves on the board of
--------------
directors of private and publicly held companies, including Mass Mutual
Corporate Investors, Inc., Mass Mutual Participation Investors, PJ America,
Schuler Homes, Inc., Optical Securities Group, Inc., Ardent Software Inc.,
and T-Netix Communications. Mr. Hart is a graduate of Regis College.
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 and
earned his certified public accountant license in 1983.
G. Mitchell Morris is retired and a private investor. Mr. Morris is a
------------------
graduate of the University of Pennsylvania.
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. Mr. Schneider has served as Chairman of
the Board of the Company since 1996 and the Bank since 1993. Mr. Schneider
graduated from Whittier College and received his Juris Doctor from the
University of Southern California.
Item 10. EXECUTIVE COMPENSATION
- --------------------------------
The total compensation paid or accrued by the Company and the Company's
subsidiaries for the years ended December 31, 1997, 1996 and 1995, to the
Company's Chief Executive Officer ("CEO") and the four most highly compensated
executive officers ("Named Executive Officers") are presented below in the
summary compensation table.
39
<PAGE>
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Other
Annual
Name (1) Year Salary Bonus Comp.(2) Options
- -------- ---- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
Allen C. Barbieri 1997 $150,000 $250,000 440 125,000
1996 146,833 120,000 1,292 0
1995 131,000 35,000 1,493 0
Doug L. Heller 1997 130,000 100,000 224 20,000
1996 128,333 60,000 864 0
1995 120,000 20,000 808 0
Allan Gibson 1997 120,000 60,000 1,880 5,000
1996 120,000 32,500 1,780 0
1995 120,000 10,000 1,831 0
Gregory M. Savino 1997 114,000 20,000 900 5,000
1996 114,000 35,000 284 3,000
1995 114,000 10,000 536 0
Herb Reynolds 1997 125,812 40,000 1,539 3,750
1996 125,812 12,500 1,492 0
1995 129,058 5,000 1,391 0
</TABLE>
(1) Allen C. Barbieri President and Chief Ex ecutive Officer of Pacific
National Bank and the Company
Doug L. Heller Executive Vice President and Chief Financial Officer
of Pacific National Bank, Chief Financial Officer of
the Company
Allan Gibson Executive Vice President and Chief Operating Officer
of Pacific National Bank
Gregory M. Savino Executive Vice President and Senior Loan and Credit
Officer of Pacific National Bank
Herb Reynolds Executive Vice President
(2) Other fringe benefits.
The Company has no stock appreciation rights, restricted stock awards or long
term incentive plan payouts. The following table sets forth the number of stock
options granted in 1997 for the named executive officers:
Options Granted in Last Fiscal Year
-----------------------------------
<TABLE>
<CAPTION>
Number of Percent of Total Options Exercise or
Securities Underlying Granted to Base Price Expiration
Options Granted (#) Employees in Fiscal Year ($/Share) Date
---------------------- ------------------------- ------------------------- -----------
<S> <C> <C> <C> <C>
Allen C. Barbieri 125,000 71.3% $11.50 3/1/08
Doug L. Heller 20,000 11.4% 11.50 3/1/08
Allan Gibson 5,000 2.9% 11.50 3/1/08
Gregory M. Savino 5,000 2.9% 11.50 3/1/08
Herb Reynolds 3,750 2.1% 11.50 3/1/08
</TABLE>
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, 1997 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 $19.75 per share based upon the high bid price for the 4th
quarter of 1997 as reported by Mitchell Securities.
40
<PAGE>
Aggregate Options Exercised in Last Fiscal Year and
---------------------------------------------------
Fiscal Year End Options Value
-----------------------------
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised
Acquired Options in-the-money options
on at FY-End(#) at FY-End($)
Exercise Value Exercisable/ Exercisable/
Name (#) Realized Unexerciseable Unexerciseable
---- -------- -------- --------------------- --------------------
<S> <C> <C> <C> <C>
Allen C. Barbieri N/A N/A 75,000/100,000 $1,018,750/$825,000
Doug L. Heller 10,000 $130,000 14,000/16,000 195,500/132,000
Allan Gibson N/A N/A 11,000/4,000 170,750/33,000
Gregory M. Savino 2,000 16,000 9,000/4,000 138,250/33,000
Herb Reynolds 2,000 16,000 0/3,000 0/24,500
</TABLE>
The Bank Holding Company and the Bank have entered into employment agreements
with its three key executive officers, Allen Barbieri, Doug Heller and Allan
Gibson, which set forth the terms and conditions under which each would be
employed by the Bank Holding Company or the Bank. Other than a termination
clause and a not to compete clause, this agreement is consistent with all normal
employment policies of the Company. The agreements set forth that each
employee's initial term of employment shall be for one year and shall be
extended by the board for additional successive terms of one year. The board may
terminate their employment for cause without any additional compensation at any
time during the term of the agreement. If their employment is terminated without
cause, or if the Bank Holding Company or the Bank gives written notice to either
Messrs. Barbieri, Heller or Gibson of its intention not to renew for a
successive term, then the employee is entitled to an amount equal to one times
his annual base salary. In addition, the agreement stipulates that if the
employee terminates his employment or if the Bank Holding Company or the Bank
terminates the employment for cause, the employee agree for a one year period,
effective on the date of termination, not to engage in any business which is in
competition with the business of the Company within the general location of the
Company, or not to contact or solicit any person or entity which is a customer
or employee of the Company or the Bank. If the Bank Holding Company or the Bank
terminates the employment without cause, then the noncompete clause is limited
to a three month period effective on the date of termination. This agreement
shall be assignable to and shall be binding upon and inure to the benefit of any
successor of the Bank Holding Company or the Bank including the transfer,
directly or indirectly, of all or substantially all of the assets of the Bank
Holding Company or the Bank whether by merger, consolidation, sale or otherwise.
The Bank 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 Bank Holding Company does not
compensate its outside directors for their participation in the board of
directors meetings or any other committee meeting. The Bank Holding Company does
reimburse its directors for travel expenses associated with their attendance at
the board meetings. The schedule below sets forth the compensation which each
outside Bank director was paid during 1997 for their 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 Bank 500 Monthly
Audit Committee Bank 200 Bi-Monthly
Loan Committee Bank 200 Weekly
Asset Liability Committee Bank 200 Quarterly
Community Reinvestment Act Committee Bank 200 As needed
Compensation Committee Bank 200 As needed
</TABLE>
41
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth, as of March 17, 1998, information with respect
to the securities holdings of all persons which the Registrant has reason to
believe may be deemed the beneficial owners of more than 5% of the Registrant's
outstanding Common Stock. The following table indicates the beneficial
ownership of such individuals numerically calculated based upon the total number
of shares of common stock outstanding. Also set forth in the table is the
beneficial ownership of all shares of the Registrant's outstanding stock, as of
such date, of all directors and named executive officers, individually, and all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature % of
Beneficial Owner of Beneficial Ownership Ownership
- ---------------- ----------------------- ---------
<S> <C> <C>
Allen C. Barbieri 278,958(1) 11.70%
9 Carnelian
Irvine, CA 92614
Allan Gibson 15,000(2) *
4704 East Hastings
Orange, CA 92667
Martin T. Hart 411,022 18.02%
875 Race Street
Denver, CO 80206
Doug L. Heller 55,191(3) 2.40%
14 Estrella
Irvine, CA 92714
G. Mitchell Morris 241,312 10.58%
4277 Park Terrace Drive
Salt Lake City, UT 84124
Herb Reynolds -0- 0%
213 Louise Drive
Placentia, CA 92870
Jon A. Salquist 266,000 ll.66%
2725 N. W. Circle A Drive
Portland, OR 97229
Gregory M. Savino 14,080(4) *
28461 Rancho De Juana
Laguna Niguel, CA 92656
Bernard E. Schneider 20,000 *
326 Emerald Bay
Laguna Beach, CA 92651
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
James Schuler 380,062 16.66%
828 Fort Street Mall
Honolulu, Hawaii 96813
All Directors and Executive Officers 1,301,563(5) 54.09%
as a Group (9 Persons)
</TABLE>
(1) Includes options to purchase 100,000 shares of the Company stock pursuant
to the Company's stock option plan, which are exercisable within 60 days.
(2) Includes options to purchase 12,000 shares of common stock of the Company
pursuant to the Company's stock option plan, which are exercisable within
60 days.
(3) Includes options to purchase 18,000 shares of the Company stock pursuant to
the Company's stock option plan which are exercisable within 60 days.
(4) Includes options to purchase 10,000 shares of common stock of the Company
pursuant to the Company's stock option plan which are exercisable within 60
days.
(5) Includes options to purchase 140,000 shares of the Company stock pursuant
to the Company's stock option plan which are exercisable within 60 days.
* Less than 1%
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The Bank Holding Company and the following directors, executive officers and
principal shareholders of the Company, Messrs. Barbieri, Hart, Heller, Morris,
Salquist, Schneider and Schuler have invested in, and are shareholders of Alta
Residential Mortgage, Inc. ("Alta"). Alta is a privately held real estate
investment trust which was capitalized on 12/24/97 by issuing 1,951,500 shares
of common stock at $10.00 per share and warrants to purchase an additional
1,951,500 shares of Alta's common stock. The warrants are exercisable at $10.00
per common share and are exercisable for a period of 5 years from issuance. The
Bank Holding Company purchased 100,000 shares of common stock at $10 per share,
and was granted warrants to purchase an additional 100,000 shares at a price of
$10 per share. In addition, the Bank Holding Company loaned $1.5 million to Alta
as convertible debt which will convert into 150,000 shares of common stock at
such time as Alta increases its capitalization to 5 million shares of issued and
outstanding common stock. Upon conversion of the 1.5 million convertible debt,
the Bank Holding Company will be issued a warrant to purchase an additional
150,000 shares of Alta's common stock at $10.00 per share. As of December 31,
1997, the Bank Holding Company and Messrs. Barbieri, Hart, Heller, Morris,
Salquist, Schneider and Schuler own 5.12%, 2.05%, 3.84%, .92%, 2.56%, 9.74%,
.13% and 2.56%, respectively, of the outstanding common shares of Alta.
In addition to the security holdings, Messrs. Barbieri, Hart and Salquist are
board members of Alta. Along with his position in the Bank Holding Company and
the Bank, Mr. Barbieri is also the Chairman and C.E.O. of Alta. In connection
with his position in Alta, effective January 1998, Alta is reimbursing the Bank
$100,000 of Mr. Barbieri's salary. The Bank has also entered into two agreements
with Alta. The agreements provide that Alta will be given a first right of
refusal to purchase residential mortgage loans originated by the Bank and that
the Bank will provide certain administrative and other services to Alta. All
transactions between the two companies have been based upon the fair market
value for such services or sales of mortgage loans.
43
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
Financial Reports
- -----------------
The following consolidated financial statements of the Company are included in a
separate section of this annual report on form 10-KSB on the page numbers
specified below:
Page(s)
-------
Report of Independent Auditors for 1997 and 1996 F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
through
F-30
Exhibits
- --------
No. Exhibit
--- -------
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws of the Company (2)
3.3 Amended Articles of Incorporation (3)
4 Section Eight of the By-laws of the Company (2)
10.1 1985 Incentive Stock Option Plan (4)
10.2 1985 Amended Non Qualified Stock Option Plan (5)
10.3 1996 Incentive Stock Option Plan (6)
10.4 Executive Officer Employment Contracts
21 Subsidiaries of the Company
23.1 Consent of McGladrey & Pullen, LLP
27 Financial Data Schedule
(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.
44
<PAGE>
(3) Filed as Exhibit 3.3 to Registrant's 1990 Annual Report on Form 10-K, which
is incorporated herein by reference.
(4) Filed on Form S-8 on April 5, 1989, which is incorporated herein by
reference.
(5) Files on Form S-8 on December 16, 1996, File # 333-17997, which is
incorporated herein by reference.
(6) Filed on Form S-8 on December 16, 1996, File #333-17999, and amended on
September 24, 1997, File #333-36255 which is incorporated herein by
reference.
Reports on Form 8-K.
- -------------------
During the last quarter of 1997, the Company filed no reports on Form 8-K.
45
<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 28th day of March 1998.
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.
Signature Title Date
- --------- ----- ----
/s/ ALLEN C. BARBIERI President and Director March 30, 1998
- --------------------------------
ALLEN C. BARBIERI
/s/ DOUG L. HELLER Chief Financial Officer March 30, 1998
- --------------------------------
DOUG L. HELLER
/s/ MARTIN T. HART Director March 30, 1998
- --------------------------------
MARTIN T. HART
/s/ G. MITCHELL MORRIS Director March 30, 1998
- --------------------------------
G. MITCHELL MORRIS
/s/ JON A. SALQUIST Director March 30, 1998
- --------------------------------
JON A. SALQUIST
46
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 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, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Anaheim, California
January 29, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
PNB FINANCIAL GROUP
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Banks (Note 14) $ 15,185,000 $ 12,700,000
Federal Funds Sold - 6,000,000
------------------------------
Total cash and cash equivalents 15,185,000 18,700,000
Securities Available for Sale (Notes 2 and 6) 6,910,000 7,381,000
Mortgage Loans Held for Sale (Note 3) 96,852,000 62,620,000
Loans, net of allowance for loan losses 1997
$1,558,000; 1996 $1,812,000 (Notes 3, 5 and 6) 116,626,000 102,414,000
Premises and Equipment (Note 4) 1,094,000 1,150,000
Other Real Estate Owned 476,000 3,483,000
Other Assets (Notes 4 and 9) 5,731,100 2,450,000
------------------------------
Total assets $242,874,000 $198,198,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
Deposits (Note 5)
Noninterest bearing $101,343,000 $ 70,754,000
Interest bearing 109,747,000 99,285,000
------------------------------
Total deposits 211,090,000 170,039,000
Line of Credit (Note 5) 5,000,000 7,000,000
Other Liabilities 2,787,000 2,476,000
------------------------------
Total liabilities 218,877,000 179,515,000
------------------------------
Commitments and Contingencies (Notes 3, 6 and 14)
Stockholders' Equity (Notes 7 and 14)
Common stock, no par value; 20,000,000 shares
authorized; 2,265,280 and 2,170,783 shares
issued and outstanding at December 31, 1997
and 1996, respectively 16,234,000 16,012,000
Retained earnings 7,754,000 2,734,000
Unrealized gain (loss) on securities available for sale,
net (Note 2) 9,000 (63,000)
------------------------------
Total stockholders' equity 23,997,000 18,683,000
------------------------------
$242,874,000 $198,198,000
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Interest Income (Note 8) $16,421,000 $13,978,000
Interest Expense (Note 8) 4,044,000 3,888,000
-------------------------
Net interest income 12,377,000 10,090,000
Provision for Loan Losses (Note 3) 870,000 903,000
-------------------------
Net interest income after provision
for loan losses 11,507,000 9,187,000
-------------------------
Other Income
Commissions and other revenue from mortgage
banking operations (Note 10) 15,146,000 11,129,000
Service charges, fees and other (Note 2) 1,034,000 1,235,000
Gain on sale of SBA loans (Note 3) 638,000 463,000
-------------------------
16,818,000 12,827,000
-------------------------
Other Expenses
Mortgage banking operations (Notes 3 and 10) 10,585,000 8,390,000
Salaries and employee benefits 4,303,000 3,953,000
Other deposit expense (Note 5) 1,424,000 1,039,000
Occupancy (Note 6) 1,380,000 1,538,000
Other expenses (Note 8) 2,052,000 2,593,000
-------------------------
19,744,000 17,513,000
-------------------------
Income before provision
for income taxes 8,581,000 4,501,000
Provision for Income Taxes (Note 9) 3,561,000 945,000
-------------------------
Net income $ 5,020,000 $ 3,556,000
=========================
Earnings per Share
Basic $ 2.27 $ 1.64
=========================
Diluted $ 2.13 $ 1.57
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Stock Retained on Securities Total
--------------------------- Earnings Available Stockholders'
Shares Amount (Deficit) for Sale, net Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995 2,187,933 $16,134,000 $ (822,000) $(840,000) $15,228,000
Exercise of stock options 7,500 29,000 - - 29,000
Repurchase of common
stock (24,650) (151,000) - - (151,000)
Decrease in unrealized
loss on securities
available for sale, net - - - 21,000 21,000
Net income - - 3,556,000 - 3,556,000
-----------------------------------------------------------------------------
Balance, December 31,
1996 2,170,783 16,012,000 2,734,000 (63,000) 18,683,000
Exercise of stock options 127,500 453,000 - - 453,000
Repurchase of common
stock (33,003) (521,000) - - (521,000)
Tax benefit on exercise
of stock options - 290,000 - - 290,000
Decrease in unrealized
loss on securities
available for sale, net - - - 72,000 72,000
Net income - - 5,020,000 - 5,020,000
-----------------------------------------------------------------------------
Balance, December 31,
1997 2,265,280 $16,234,000 $ 7,754,000 $ 9,000 $23,997,000
=============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 5,020,000 $ 3,556,000
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 541,000 585,000
Provision for loan losses 870,000 903,000
Provision for indemnification losses 276,000 1,080,000
Gain on sale of other real estate owned (288,000) (472,000)
Gain on sale of mortgage loans held for sale, net (9,584,000) (7,842,000)
Proceeds from sale of mortgage loans held for sale 1,103,690,000 802,208,000
Origination of mortgage loans held for sale (1,128,338,000) (815,018,000)
Change in other assets and liabilities, net (37,000) (1,573,000)
--------------------------------
Net cash (used in) operating activities (27,850,000) (16,573,000)
--------------------------------
Cash Flows from Investing Activities
Proceeds from sale of available for sale securities 2,052,000 3,052,000
Proceeds from maturities of available for sale securities 568,000 1,000,000
Purchase of available for sale securities (2,206,000) (830,000)
Net change in loans (17,273,000) (6,178,000)
Proceeds from sale of other real estate owned 5,464,000 2,329,000
Acquisitions of premises and equipment (402,000) (380,000)
Investment and convertible debt in REIT (Note 4) (2,500,000) -
--------------------------------
Net cash (used in) investing activities (14,297,000) (1,007,000)
--------------------------------
Cash Flows from Financing Activities
Proceeds from borrowings on notes payable 794,228,000 15,360,000
Payments on notes payable (796,579,000) (8,009,000)
Net change in deposits 41,051,000 12,737,000
Sale of common stock 453,000 29,000
Repurchase of common stock (521,000) (151,000)
--------------------------------
Net cash provided by financing activities 38,632,000 19,966,000
--------------------------------
Net increase (decrease) in cash and
cash equivalents (3,515,000) 2,386,000
Cash and Cash Equivalents
Beginning of year 18,700,000 16,314,000
--------------------------------
End of year $ 15,185,000 $ 18,700,000
================================
Supplemental Disclosures (Note 13)
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
The Bank operates three commercial loan and depository regional offices, two
mortgage loan offices and four mortgage loan production offices. With the
exception of the four mortgage loan production offices, all of the offices are
in the Southern California marketplace with deposit taking offices in Newport
Beach, Beverly Hills, and Orange, and mortgage division offices in Irvine and
San Diego. The four mortgage loan production offices are located in Phoenix,
Flagstaff, and Tucson, Arizona and Sacramento, California.
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 assets 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. The Company has not experienced any losses in such
accounts.
F-6
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
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 and equity securities in the Federal Home Loan Bank and the Federal
Reserve Bank which is a required investment to acquire membership privileges in
those institutions. 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. These
fair values are based on quoted prices when such quotes are available. In the
absence of quoted market prices, securities are priced based on quotes obtained
from certain brokers who estimate the fair value based upon quoted prices for
similar securities. There can be no assurance that prices estimated for such
securities can be realized upon ultimate sale. 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.
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 also 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 and cost are deferred and
recognized as income or expense when the loan is sold.
Loans:
Loans are stated at amounts advanced less payments received, unearned fees and
loan discounts. Impaired loans are measured based 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 less estimated selling cost 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. Cash payments received after the
accrual of interest income is discontinued is applied to principal. 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.
F-7
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
Loans: (continued)
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.
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 write-down 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.
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.
Interest rate exchange agreements:
Interest rate exchange agreements (swaps) used in asset/liability management
activities are accounted for using the accrual method. Net interest income or
expense resulting from the differential between exchanging floating and fixed
rate interest payments is recorded on an accrual basis.
F-8
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
Earnings per share:
Effective December 31, 1997, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 128, "Earnings Per Share", which supersedes Account
Principles Board (APB) Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants and convertible securities
outstanding that trade in a public market. Under Statement No. 128, the Company
is required to present basic and diluted earnings per share amounts. Diluted per
share amounts assume the conversion, exercise or issuance of all potential
common stock instruments unless the effect is to reduce a loss or increase the
income per common share from continuing operations. The Company initially
applied Statement No. 128 for its annual and interim period ending December 31,
1997. The reported earnings per share for 1996 have been restated to conform to
the new requirements.
The weighted average shares outstanding for computing basic and diluted earnings
per share were 2,212,558 and 2,361,045, respectively, for the year ended
December 31, 1997 and 2,169,000 and 2,263,371, respectively, for the year ended
December 31, 1996. The difference in the weighted average shares outstanding for
computing basic and diluted earnings per share is due to dilutive stock options
of 148,487 and 94,034 in 1997 and 1996, respectively.
Accounting for transfers and servicing of financial assets:
Effective January 1, 1997, the Company adopted FASB Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities", which distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. A transfer of financial assets
in which the transferor surrenders control over those assets is accounted for as
a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. The Statement also establishes
standards on the initial recognition and measurement of servicing assets and
other retained interests and servicing liabilities, and their subsequent
measurement.
The Statement requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. In addition, the Statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability either judicially or by the creditor.
The adoption of this Statement did not have a material effect on the financial
statements.
F-9
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
New accounting pronouncements:
During the year, FASB issued several accounting pronouncements that will effect
or possibly effect the accounting and reporting of the Company. Following are
the requirements of these pronouncements:
Reporting comprehensive income:
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
consolidated financial statements. It does not address issues of recognition or
measurement for comprehensive income and its components. The Statement requires
a company to disclose in the financial statements the various components of
comprehensive income. The provisions of this Statement will be effective for
the Company's financial statements issued for the year ending December 31,
1998.
Segment disclosure:
The FASB has also issued Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 131 modifies the disclosure
requirements for reportable segments and is effective for the Company's year
ending December 31, 1998. The Company has not determined the effect, if any,
the adoption of this Statement will have on the Company's reported segments.
Note 2. Securities Available for Sale
Securities available for sale as of December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,018,000 $ - $ (4,000) $ 1,014,000
U.S. Government agencies
securities 2,004,000 30,000 - 2,034,000
Mortgaged-backed securities 2,587,000 9,000 (19,000) 2,577,000
Federal Reserve Bank stock 340,000 - - 340,000
Federal Home Loan Bank stock 945,000 - - 945,000
-----------------------------------------------------
$ 6,894,000 $ 39,000 $(23,000) $ 6,910,000
=====================================================
</TABLE>
F-10
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities Available for Sale (Continued)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,202,000 $ - $ (17,000) $ 1,185,000
U.S. Government agencies
securities 2,112,000 - (16,000) 2,096,000
Mortgage-backed securities 3,004,000 - (74,000) 2,930,000
Federal Reserve Bank stock 340,000 - 340,000
Federal Home Loan Bank stock 830,000 - 830,000
------------------------------------------------------
$ 7,488,000 $ - $(107,000) $ 7,381,000
======================================================
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1997 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 $ 1,018,000 $ 1,014,000
Due after one year through five years 2,004,000 2,034,000
Mortgage-backed securities 2,587,000 2,577,000
Bank stocks 1,285,000 1,285,000
----------------------------
$ 6,894,000 $ 6,910,000
============================
</TABLE>
Gross realized losses from the sale of securities available for sale were
$11,000 and $1,000 for the years ended December 31, 1997 and 1996, respectively.
There were no gross realized gains from the sale of securities available for
sale for the years ended December 31, 1997 and 1996. As of December 31, 1997
and 1996, securities available for sale with a fair value of $1,950,000 and
$2,650,000, respectively, were pledged as collateral for various purposes as
required or permitted by law.
F-11
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans
Loan portfolio composition:
The composition of the Company's loan portfolio as of December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Commercial $ 46,218,000 $ 38,666,000
Real estate and construction 64,888,000 57,857,000
Consumer 7,078,000 7,703,000
Allowance for loan losses (1,558,000) (1,812,000)
-------------------------------
$116,626,000 $102,414,000
===============================
</TABLE>
Loans have been recorded net of purchase discounts of $551,000 and $598,000 and
net deferred origination fees of $193,000 and $158,000 as of December 31, 1997
and 1996, respectively. Such amounts will be amortized to income over the lives
of the loans.
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, which is 56% of the
Bank's net loan portfolio, consists of loans on real estate located throughout
Southern California. Changes in economic conditions in Southern California 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.
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>
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning $ 1,812,000 $ 2,659,000
Provision for loan losses 870,000 903,000
Amounts charged off (1,601,000) (2,055,000)
Recoveries 477,000 305,000
----------------------------
Balance, ending $ REF $ 1,812,000
============================
</TABLE>
F-12
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans (Continued)
SBA loans:
The Bank sells the guaranteed portion of substantially all of its SBA loans it
originates in the secondary market. The Bank sells these loans to generate sales
premiums and servicing income along with providing additional funds for lending.
Under such agreements, the Bank continues to service the loans and the buyer
receives the principal collected together with interest. In connection with
these sales, the Bank serviced approximately $19,861,000 and $13,619,000 of SBA
loans for others as of December 31, 1997 and 1996, respectively, which are not
included in the accompanying consolidated balance sheets.
The Bank has issued various representations and warranties associated with the
sale of SBA loans. These representations and warranties may require the Bank to
repurchase loans for a period of 90 days after the date of sale as defined per
the applicable sales agreement. The Bank experienced no losses during the years
ended December 31, 1997 and 1996 regarding these representations and warranties.
The Bank's SBA Department, together with the residential mortgage division,
utilize federal governmental agencies in providing loans to its customers. A
prolonged shutdown or slowdown of the SBA Department and Housing and Urban
Development ("HUD") 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
Residential Mortgage Loan Department.
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 and changes the fees charged by
the SBA. The level of funding and changes to the fee structure could severely
effect the operation of the Bank's SBA Department.
Nonaccrual and impaired loans:
Loans on which the accrual of interest has been discontinued amounted to
$1,237,000 and $3,220,000 at December 31, 1997 and 1996, respectively. If
nonaccrual loans had been maintained in accordance with their terms, additional
interest income of approximately $126,000 ($.06 per share, basic) and $343,000
($.16 per share, basic) would have been recorded during the years ended December
31, 1997 and 1996, respectively.
Impaired loans having recorded investments of $1,237,000 and $3,220,000 at
December 31, 1997 and 1996, respectively, 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 $50,000 and $397,000 at
December 31, 1997 and 1996, respectively. Impaired loans for which there is no
specific allowance for loan losses at December 31, 1997 and 1996 is $1,138,000
and $721,000, respectively. The average recorded investment for all impaired
loans during 1997 and 1996 was $2,218,630 and $6,333,000, respectively. No
interest income was recognized on impaired loans in 1997 and $120,000 was
recognized in 1996, all of which was recognized using a cash-basis method of
accounting during the time within that period that the loans were impaired.
F-13
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans (Continued)
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.
Until September 30, 1996, substantially all mortgage loans were sold with a
recourse provision. After October 1, 1996, the majority of the loans sold were
without a recourse provision. 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. During 1997 and 1996, the Bank chose to
indemnify the majority of the loans subject to a recourse provision. The Bank
estimates its loss exposure to loans sold under the recourse and representation
and warranty provisions and has recorded this estimate at December 31, 1997 and
1996. The following is a summary of transactions affecting this reserve for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning $ 461,000 $ 232,000
Provision for losses, included in mortgage banking
operations expenses 276,000 1,080,000
Amounts charged to reserve, net of recoveries (355,000) (851,000)
----------------------
Balance, ending $ 382,000 $ 461,000
======================
</TABLE>
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 year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
<S> <C>
Balance, beginning $ 4,961,000
Additional advances 1,453,000
Repayments (2,716,000)
Loans no longer with related parties (1,626,000)
-----------
Balance, ending $ 2,072,000
===========
Maximum balance during the year (month-end balances) $ 4,953,000
===========
</TABLE>
At December 31, 1997, none of the related party loans were past due, impaired,
on nonaccrual, or restructured to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower.
F-14
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Premises and Equipment and Other Assets
Premises and equipment:
Components of premises and equipment are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 2,704,000 $ 2,442,000
Leasehold improvements 1,288,000 1,402,000
------------------------------
3,992,000 3,844,000
Accumulated depreciation and amortization (2,898,000) (2,694,000)
------------------------------
$ 1,094,000 $ 1,150,000
==============================
</TABLE>
Other assets:
In December 1997, the Company invested in a real estate investment trust (REIT)
by purchasing 100,000 shares of stock in the REIT (approximately 4.7% of total
shares outstanding) for $1 million. In addition, the Company loaned $1.5
million to the REIT as convertible debt which can be converted into 150,000
shares of common stock at such time as the REIT increases its capitalization to
5 million shares of issued and outstanding common stock.
Also in December 1997, the Company was issued a warrant to purchase an
additional 100,000 shares of the REIT's common stock at $10.00 per share. Upon
conversion of the $1.5 million convertible note into 150,000 shares of common
stock of the REIT, the Company will be issued a warrant to purchase an
additional 150,000 shares of REIT common stock at $10.00 per share. The
warrants are exercisable at the discretion of the Company in part or in whole at
any time for a period of five years from issuance.
The REIT will focus on the investment in and management of residential mortgage
loans. The REIT shall be headquartered in West Los Angeles and, with the
exception of Allen C. Barbieri who is the Chairman and C.E.O. of the REIT and is
currently the President and C.E.O. of PNB Financial Group, shall be managed by a
separate and outside management team. Additionally, two of REIT's four outside
board seats shall be held by current board members of PNB Financial Group.
In addition to the equity investment of $1 million and the convertible loan in
the amount of $1.5 million, the Company has also entered into agreements to
perform operational services to the REIT through the Bank and also grant the
REIT a first right of refusal to purchase residential mortgages from the Bank.
F-15
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits and Line of Credit
Deposits:
The composition of the Bank's interest bearing deposits as of December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Demand $ 54,906,000 $ 49,720,000
Savings 4,355,000 5,390,000
Time certificates of deposit of $100,000 or more 36,187,000 24,976,000
Other time deposits 14,299,000 19,199,000
---------------------------
$109,747,000 $ 99,285,000
===========================
</TABLE>
As of December 31, 1997 and 1996, approximately $46,000,000 and $25,000,000,
respectively, of the Bank's noninterest bearing demand deposits consist of
demand accounts currently maintained by title insurance, escrow and property
management companies. These industries are dependent upon the real estate
market in Southern California. 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 courier, bookkeeping and payroll accounting services. The
expense of these external services totaled $1,424,000 and $1,039,000 for the
years ended December 31, 1997 and 1996, respectively, and is classified as other
deposit expense in the accompanying consolidated statements of income.
During 1997 the Bank obtained deposits through brokers in order to fund a
portion of its mortgage loans held for sale. At December 31, 1997, the Bank had
$13,400,000 of these deposits which are included in time certificates of deposit
of $100,000 or more above.
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
<S> <C>
Three months or less $ 33,822,000
Over three months through one year 13,647,000
Over one year through three years 2,305,000
Over three years 712,000
------------
$ 50,486,000
============
</TABLE>
F-16
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits and Line of Credit (Continued)
Line of credit:
The Bank has a line of credit with the Federal Home Loan Bank (FHLB).
Borrowings on the line are collateralized by certain loans with a carrying value
totaling $30,337,000 at December 31, 1997. Borrowings bear interest at the FHLB
daily reference rate (6.57% at December 31, 1997 with an average rate for the
month of December 1997 of 5.97%). The maximum amount the Bank may borrow under
this agreement is limited to the lesser of the eligible collateral and borrowing
base established in the agreement or 25% of the Bank's total assets. At
December 31, 1997, the maximum available was $12,700,000 of which $5,000,000 was
outstanding.
The Bank has a line of credit facility with Union Bank of California for
$5,000,000 which expires on July 31, 1998. There was no outstanding balance as
of December 31, 1997. The Bank also has two other nonbinding agreements with
financial institutions to borrow up to $3,500,000.
Note 6. Commitments and Contingencies
Operating leases:
At December 31, 1997, all of the Company's operations are conducted in leased
facilities under noncancelable operating leases expiring at various dates
through 2006. Several of the leases contain options to extend the lease terms.
The Company incurred rental expense of $1,189,000 and $1,025,000, during the
years ended December 31, 1997 and 1996, respectively.
The future minimum lease payments required under operating leases total
$6,035,000 and are due in the years ending: 1998 $1,049,000; 1999 $916,000; 2000
$906,000; 2001 $911,000; 2002 $743,000, and thereafter $1,510,000.
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. Such financial instruments are
recorded in the financial statements when they are funded. 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, 1997
and 1996, the Bank had unfunded commitments related to its portfolio loans to
extend credit of $35,691,000 and $24,442,000 and obligations under standby
letters of credit of $358,000 and $635,000, respectively.
F-17
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Commitments and Contingencies (Continued)
Financial instruments with off-balance sheet risk (continued):
These 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.
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 and mandatory forward commitments. These instruments
involve, to varying degrees, elements of credit and interest rate risk.
Interest rate risk is managed by the Bank by entering into agreements with Wall
Street investment bankers and with 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 forward 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 $38,465,000 as of December 31, 1997. These
commitments as well as $35,797,000 of uncommitted mortgage loans held for sale
are hedged by the Bank by entering into mandatory forward commitments.
At December 31, 1997, the Bank had $56,000,000 of mandatory forward commitments
to sell whole loans relating to their unfunded pipeline of rate-locked loans and
loans held for sale uncommitted to investors. Gains and losses on mandatory
forward commitments are realized in the period the commitment is terminated.
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, 1997, the unrealized (loss) on the Bank's mandatory forward
commitments was $(283,000). 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, 1997 was $59,592,000.
F-18
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Commitments and Contingencies (Continued)
Interest rate swap:
The Bank is a party to an interest rate swap agreement with a total notional
principal amount of $20,000,000. Management entered into the agreement to
reduce the impact of changes in interest rates on its balance sheet. The
agreement effectively transfers interest rate risk on a portion of the excess of
interest bearing assets over interest bearing liabilities. The agreement
provides for the Bank to pay a variable rate of prime on the notional amount
with the counterparty paying a fixed rate. The agreement terminates in April
2000 and requires the Bank to maintain collateral with the counterparty totaling
4% of the notional amount. In accordance with the agreement, $808,000 of
securities were pledged at December 31, 1997 by the Bank with a similar amount
being pledged by the counterparty.
Note 7. 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, 1997, options for
17,000 and 142,500 shares, respectively, of the Company's common stock were
outstanding under these Plans. In 1995, the Company adopted a 1995 Incentive
Stock Option (ISO) Plan which provides for a maximum of 50,000 options to be
granted. During 1997, the stockholders' increased the number of options that
can be granted under the ISO Plan to 250,000. As of December 31, 1997, 183,750
options under the 1995 Plan have been granted of which 750 had been exercised.
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 vest and are available for exercise either at the grant date or for
those granted in 1997 over a four-year period with 20% immediately and 20% each
year thereafter.
A summary of the status of the stock option plans at December 31, 1997 and 1996
and changes during the years ended on those dates is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 294,750 $ 3.62 295,750 $3.52
Granted 175,250 11.50 8,500 7.44
Exercised (127,500) 3.55 (7,500) 3.83
Expired -- -- (2,000) 3.50
-------- -------
Outstanding, end of year 342,500 $ 7.68 294,750 $3.62
======== =======
Exercisable, end of year 202,300 294,750
======== =======
</TABLE>
F-19
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Stockholders' Equity (Continued)
A further summary about options outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------------------
Weighted- Weighted-
Average Average
Remaining Remaining
Number Contractual Number Contractual
Exercise Prices Outstanding Life Outstanding Life
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 3.50 157,500 5.8 years 157,500 5.8 years
4.50 2,000 7.9 2,000 7.9
7.00 6,000 8.6 6,000 8.6
8.50 2,500 8.8 2,500 8.8
11.50 174,500 9.3 34,300 9.3
------- -------
342,500 7.4 years 202,300 6.1 years
======= =======
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its Plans.
Accordingly, no compensation cost has been recognized. The Company has elected
not to adopt FASB Statement No. 123, "Accounting for Stock-Based Compensation"
for options issued to employees. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates for
awards under this Plan consistent with the method of Statement No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $5,020,000 $3,556,000
Pro forma 4,820,000 3,546,000
Earnings per share As reported
Basic $ 2.27 $ 1.64
Diluted 2.13 1.57
Pro forma
Basic $ 2.18 $ 1.63
Diluted 2.04 1.57
</TABLE>
The pro forma compensation cost was recognized for the fair value of the stock
options granted, which was estimated using the Black-Scholes model with the
following weighted-average assumptions for 1997 and 1996, respectively:
expected volatility of 27.6% and 25.3%, risk-free interest rate of 6.6% and
6.3%, expected life of 5 years and no expected dividends for all years. The
estimated weighted-average fair value of stock options granted in 1997 and 1996
was $4.28 and $3.68, respectively.
Preferred stock:
The Company has authorized 10,000,000 shares, no par value, preferred stock. No
shares of preferred stock have been issued.
F-20
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Stockholders' Equity (Continued)
Dividend restrictions:
The Company and the Bank are limited 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. 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 14).
Note 8. Income Statement Information
Interest income and interest expense for the years ended December 31, 1997 and
1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans (Note 3) $15,771,000 $13,015,000
Interest on investment securities 422,000 438,000
Interest on federal funds sold 228,000 493,000
Interest on deposits in other banks -- 32,000
--------------------------
$16,421,000 $13,978,000
==========================
- -------------------------------------------------------------------------------------
Interest expense:
Demand $ 1,458,000 $ 1,446,000
Savings 114,000 116,000
Time certificates of deposit of $100,000 or more 1,504,000 1,100,000
Other time deposits 776,000 1,193,000
Short term borrowings 192,000 33,000
--------------------------
$ 4,044,000 $ 3,888,000
==========================
</TABLE>
F-21
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Income Statement Information (Continued)
Other expense:
Other expense for the years ended December 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Other real estate owned expense $ 510,000 $ 400,000
Professional services 408,000 472,000
Insurance 268,000 672,000
Business development expense 213,000 181,000
Legal 213,000 322,000
Supplies 182,000 212,000
Miscellaneous 258,000 334,000
------------------------
$2,052,000 $2,593,000
========================
</TABLE>
In September 1996, Congress passed legislation which began the process of
merging the bank (BIF) and savings and loans (SAIF) insurance funds into one
fund. As a result of the legislation, all institutions that had SAIF deposits
were required to pay a one time assessment for those deposits that brought up
the SAIF fund to a level commensurate with the BIF fund. During 1996, the Bank
paid approximately $307,000 for this special one time assessment which is
included in insurance expense. This payment will reduce the Bank's future SAIF
deposit insurance premiums.
Note 9. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Current
Federal $2,729,000 $ 896,000
State 482,000 505,000
Deferred 350,000 (456,000)
-----------------------
Provision for income taxes $3,561,000 $ 945,000
=======================
</TABLE>
F-22
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Income Taxes (Continued)
The provision for income taxes resulted in an effective tax rate different from
the federal income tax statutory rate. The reasons for this difference is as
follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Federal income tax computed at a statutory
rate of 35% $3,003,000 $1,575,000
State franchise tax, net of federal income tax benefit 632,000 278,000
Change in valuation allowance -- (890,000)
Other items (74,000) (18,000)
-------------------------
Total provision for income taxes $3,561,000 $ 945,000
=========================
</TABLE>
Components of the Company's deferred tax assets and liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual interest income $ 12,000 $ 170,000
Indemnification reserve 158,000 188,000
Mortgage loans held for sale 273,000 281,000
State income taxes 242,000 167,000
Other 72,000 92,000
-----------------------
Total deferred tax assets 757,000 898,000
-----------------------
Loan loss reserve (353,000) (68,000)
Discount on loans (146,000) (145,000)
Other (108,000) (69,000)
Premises and equipment -- (116,000)
-----------------------
Total deferred tax liabilities (607,000) (398,000)
-----------------------
Net deferred tax assets
included in other assets $ 150,000 $ 500,000
=======================
</TABLE>
F-23
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Income Taxes (Continued)
During 1996, management eliminated the valuation allowance on deferred tax
assets as they believe it is more likely than not that the deductible temporary
differences will be realized. Management considered the Company's recent past
and expected future performance in making the determination to eliminate the
valuation allowance. If the Company is unable to generate the income necessary
to recognize the deferred tax assets recorded, a valuation allowance will need
to be provided in the future.
Note 10. Segment Data, Mortgage Banking Operations
The Bank operates a residential mortgage division for the origination and sale
of mortgage loans. The operations of this division are very sensitive to
changes in the prevailing market rates of interest. Substantially all of the
mortgage loans the Bank originates are located in Los Angeles, Orange, San
Bernardino and San Diego Counties and all loans are sold to institutional
investors. The majority of the loans were sold to two investors for the years
ended December 31, 1997 and 1996. For the years ended December 31, 1997 and
1996, 35% of the loans were sold to Countrywide Home Loans, Inc. and for 1997
and 1996, 38% and 27%, respectively, were sold to Norwest Funding, Inc. The
Bank does not maintain the servicing on the loans which it sells. The mortgage
division operates both a wholesale and retail department. During 1997,
approximately 91% of the loan volume was originated from the wholesale
department, and approximately 53% of the mortgage loans originated were FHA-
insured or VA-guaranteed loans. In addition, approximately 73% of the mortgage
loan volume originated in 1997 were purchase money loans. All revenue earned by
this division is from unaffiliated third parties.
Income from operations of the mortgage division was $4,319,000 and $2,725,000
for the years ended December 31, 1997 and 1996, respectively. Income from the
mortgage division 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 $101,176,000 and $66,253,000 as of December
31, 1997 and 1996, respectively. As of December 31, 1997, the Bank employed 229
people, of whom 156 were engaged in the mortgage division.
F-24
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. 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, 1997 and 1996 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>
1997 1996
---------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 15,185 $ 15,185 $ 12,700 $ 12,700
Federal funds sold -- -- 6,000 6,000
Securities available for sale 6,910 6,910 7,381 7,381
Mortgage loans held for sale 96,852 97,452 62,620 62,979
Loans 116,626 116,742 102,414 102,381
Investment in REIT 1,000 1,000 -- --
Convertible note from REIT 1,500 1,500 -- --
Accrued interest receivable 950 950 848 848
Liabilities
Savings and demand deposits 160,604 160,604 125,864 125,864
Time deposits 50,486 50,517 44,175 44,147
Borrowing on line of credit 5,000 5,000 7,000 7,000
Accrued interest payable 287 287 205 205
Gain (Loss) on Off-Balance Sheet
Financial Instruments
Mandatory forward commitments -- (286) -- 270
Mortgage loan commitments -- 345 -- (172)
Interest rate swap -- 194 -- 61
Portfolio loan commitments -- (178) -- (122)
</TABLE>
The fair value of cash and due from banks, federal funds sold, accrued interest
receivable and payable, and borrowings on the line of credit, approximate their
carrying amounts. The fair value of securities available for sale, mortgage
loans held for sale and mandatory forward commitments 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.
There can be no assurance that the prices estimated for such securities can be
realized upon ultimate sale.
F-25
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Estimated Fair Value of Financial Instruments (Continued)
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, 1997 and 1996, variable rate loans comprised approximately 82% and
79%, respectively, 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 not held for sale are expected to be held to maturity and any unrealized
gains or losses are not expected to be realized.
The fair value of the Company's investment in the REIT is estimated to be equal
to the carrying value of the investment as the REIT was capitalized in late
December and operations have not commenced on any significant level.
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. This calculation uses
interest rates currently being offered on certificates with similar maturities.
Early withdrawals of fixed rate certificates of deposit are not expected to be
significant.
The fair value of mortgage loan commitments is estimated by taking into account
the rates being demanded on mortgage loans without the value of servicing.
The fair value of portfolio loan commitments is based on fees currently charged
to enter into similar agreements taking into account the remaining terms of the
agreements and the counterparty credit standings.
The fair value of the interest rate swap at December 31, 1997 and 1996, is
estimated based on the present value of the payments currently being received
over the swaps contractual life. Changes in the interest rate will have a
significant effect on the swaps fair value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. 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.
F-26
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Estimated Fair Value of Financial Instruments (Continued)
Interest rate risk:
The Bank assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations. As a result, fair value of
the Bank's financial instruments will change when interest rate levels change
and that change may be either favorable or unfavorable to the Bank. Management
attempts to match maturities of rate sensitive assets and liabilities to the
extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to repay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of rate
sensitive assets and liabilities and attempts to minimize interest rate risk by
adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Bank's overall interest rate risk.
Note 12. Condensed Financial Information - Parent Company Only
A condensed summary of financial information of PNB Financial Group (parent
company only) is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 327,000 $ 338,000
Loans, net 1,285,000 1,879,000
Investment in subsidiary 19,850,000 16,778,000
Investment and convertible debt in REIT (Note 4) 2,500,000 --
Other assets 39,000 75,000
---------------------------
Total assets $24,001,000 $19,070,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
Liabilities $ 4,000 $ 387,000
Stockholders' equity 23,997,000 18,683,000
---------------------------
Total liabilities and stockholders' equity $24,001,000 $19,070,000
===========================
</TABLE>
F-27
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Condensed Financial Information - Parent Company Only (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues, including dividends received
from Bank of $2,000,000 in 1997 $ 2,219,000 $ 469,000
Expenses 199,000 263,000
---------------------------
Income before equity in net
income of subsidiary 2,020,000 206,000
Equity in net income of subsidiary 3,000,000 3,350,000
---------------------------
Net income $ 5,020,000 $ 3,556,000
===========================
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Net income $ 5,020,000 $ 3,556,000
Equity in net income of subsidiary (3,000,000) (3,350,000)
Other 295,000 346,000
---------------------------
Cash flows from operating activities 2,315,000 552,000
Cash flows (used in) investing activities (1,906,000) (864,000)
Cash flows (used in) financing activities (420,000) (122,000)
---------------------------
Net (decrease) in cash (11,000) (434,000)
Cash at beginning of year 338,000 772,000
---------------------------
Cash at end of year $ 327,000 $ 338,000
===========================
</TABLE>
During 1997, the Bank paid dividends to the Company totaling $2,000,000. There
were no dividends paid from the Bank to the Company during the year ended
December 31, 1996.
F-28
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. 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>
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information
Interest paid $3,974,000 $3,929,000
=========================
Income taxes paid, net $3,851,000 $1,282,000
=========================
Supplemental Disclosure of Noncash Investing Activities
Real estate acquired in settlement of loans $2,238,000 $7,343,000
=========================
Loans to facilitate sale of other real estate owned $1,537,000 $2,423,000
=========================
</TABLE>
Note 14. Regulatory Matters
Bank regulations require that all banks maintain a percentage of their deposits
as reserves at the Federal Reserve Bank. At December 31, 1997 and 1996, total
required reserves were $5,582,000 and $3,521,000, 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 consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve 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 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, 1997, that the Company and the Bank met all capital adequacy requirements to
which it is subject.
As of December 31, 1997, 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.
F-29
<PAGE>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Regulatory Matters (Continued)
The Company 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.
The Bank:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $21,225 13.2% $12,834 8.0% $16,043 10.0%
Tier I Capital (to Risk Weighted Assets) $19,723 12.3% $ 6,417 4.0% $ 9,626 6.0%
Tier I Capital (to Average Assets) $19,723 8.8% $ 8,937 4.0% $11,171 5.0%
As of December 31, 1996
Total Capital (to Risk Weighted Assets) $18,025 13.3% $10,868 8.0% $13,589 10.0%
Tier I Capital (to Risk Weighted Assets) $16,327 12.0% $ 5,434 4.0% $ 8,151 6.0%
Tier I Capital (to Average Assets) $16,327 8.8% $ 7,461 4.0% $ 9,326 5.0%
</TABLE>
The Company:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $25,428 15.5% $13,148 8.0% $16,435 10.0%
Tier I Capital (to Risk Weighted Assets) $23,870 14.5% $ 6,574 4.0% $ 9,861 6.0%
Tier I Capital (to Average Assets) $23,870 10.5% $ 9,052 4.0% $11,315 5.0%
As of December 31, 1996
Total Capital (to Risk Weighted Assets) $20,463 14.9% $10,986 8.0% $13,733 10.0%
Tier I Capital (to Risk Weighted Assets) $18,746 13.7% $ 5,493 4.0% $ 8,240 6.0%
Tier I Capital (to Average Assets) $18,746 10.0% $ 7,553 4.0% $ 9,441 5.0%
</TABLE>
F-30
<PAGE>
EXHIBIT 10.4
EXECUTIVE OFFICER EMPLOYMENT CONTRACTS
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
---------
effective as of the 1st day of March, 1998, by and between PNB FINANCIAL GROUP,
a California corporation ("PNBFG"), and ALLEN C. BARBIERI, an individual
-----
("Barbieri").
- ----------
R E C I T A L S
- - - - - - - -
A. PNBFG desires to employ Barbieri and Barbieri desires to be employed by
PNBFG.
B. Barbieri and PNBFG desire to enter into an employment agreement to set
forth the terms of Barbieri's employment by PNBFG.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, conditions, and agreements hereinafter set forth, the parties
hereto agree as follows:
A G R E E M E N T
- - - - - - - - -
1. Employment. PNBFG hires and employs Barbieri, and Barbieri agrees to
----------
serve PNBFG, under and subject to all of the terms, conditions, and provisions
of this Agreement, as President and Chief Executive Officer of PNBFG, as
President and Chief Executive Officer of PNBFG's wholly-owned subsidiary PACIFIC
NATIONAL BANK, a national banking association (the
1
<PAGE>
"Bank"), and in such other executive capacity or capacities as the Board of
----
Directors of PNBFG may from time to time designate. Barbieri's duties shall be
subject to such policies and directions as may be established or given by the
Boards of Directors of PNBFG or the Bank from time to time.
2. Term of Employment. The term of employment of Barbieri shall commence
------------------
on March 1, 1998 and shall continue for a period of one (1) year thereafter (the
"Initial Term") unless sooner terminated as provided herein. The Initial Term
------------
shall be extended for an additional term of one year following the Initial Term
("Successive Term") and thereafter for additional Successive Terms of one year
---------------
following each Successive Term, unless prior to the end of, in the first
instance, the Initial Term, and thereafter, each Successive Term, either party
gives written notice to the other party of its intention not to renew. Such
notice must be given in writing no later than ninety (90) days prior to the
beginning of the subsequent Successive Term.
3. Compensation. For all services rendered by Barbieri under this
------------
Agreement, Barbieri shall be paid as compensation an annual salary of $50,000
("Base Salary") to be paid in equal semi-monthly installments. Except as
- -------------
specifically provided in this Agreement, Barbieri shall not be entitled to
additional compensation of any kind, except as may be agreed to
2
<PAGE>
from time to time after the date hereof by the Board of Directors of PNBFG or
the Bank. It is contemplated that, at the sole discretion of PNBFG, Barbieri may
be granted certain options by PNBFG. Such grant, if any is made, will be
evidenced by a separate agreement.
4. Executive Benefits. Barbieri shall also receive the following
------------------
benefits:
(a) Medical insurance benefits pursuant to the Bank's personnel policy
as it may change from time to time;
(b) Participation in the Bank's 401(k) plan consistent with its terms as
they may change from time to time;
(c) Paid vacation pursuant to the Bank's personnel policy as that policy
shall change from time to time; and
(d) Sick leave pursuant to the Bank's personnel policy as that policy
shall change from time to time.
5. Termination by PNBFG. Barbieri's employment may be terminated by
--------------------
PNBFG without any breach of this Agreement under the circumstances described
below:
(a) Death. Barbieri's employment shall terminate upon his death.
-----
3
<PAGE>
(b) Disability. If, as a result of Barbieri's incapacity due to physical
----------
or mental illness, Barbieri shall have been absent from his duties for a period
of one hundred twenty (120) consecutive days, and, within thirty (30) days after
written notice of PNBFG's intention to exercise its rights under this Section
5(b) is given (which may not be given prior to the expiration of such one
hundred twenty (120) day period) shall not have returned to the performance of
his duties on a full time basis ("Barbieri's Disability"), PNBFG may terminate
---------------------
Barbieri's employment by giving written notice to such effect to Barbieri. In
the event of the termination of Barbieri's employment pursuant to this Section
5(b), the date of termination shall be the date on which notice of termination
is received by Barbieri or his personal representative.
(c) For Cause. PNBFG may terminate Barbieri's employment under this
---------
Agreement at any time for cause. For purposes of this Agreement, the term
"cause" shall be limited to the following: (i) acts by Barbieri involving moral
turpitude which reflect materially and adversely on PNBFG, its reputation, or
its assets; (ii) gross neglect by Barbieri of his duties; (iii) conviction of a
crime involving moral turpitude, including, without limitation, theft or
embezzlement; (iv) alcohol or drug abuse; (v) any instance in which the Federal
4
<PAGE>
Reserve Bank, Federal Deposit Insurance Corporation or the Office of the
Comptroller of Currency directs or indicates in any fashion that Barbieri should
cease serving as President or Chief Executive Officer of PNBFG or the Bank; (vi)
failure to follow any policy, order, or directive of the Board of Directors of
PNBFG or the Bank; or (vii) a material breach of this Agreement. Termination
pursuant to this Section 5(c) shall be by written notice to Barbieri which
notice shall specify the cause for termination.
(d) Without Cause. PNBFG may, at any time upon the vote of a majority of
-------------
the directors of PNBFG then in office, terminate Barbieri without cause. For the
purposes of this Agreement, the term "without cause" shall mean termination for
grounds other than those specified in Subsections (a), (b), or (c) of this
Section 5. In the event that Barbieri is terminated without cause, Barbieri
shall be entitled to the payments provided in Section 7(d).
6. Termination by Barbieri.
-----------------------
(a) Three Month Notice. Barbieri may terminate his employment hereunder
------------------
only upon three (3) months' written notice to PNBFG. If Barbieri terminates his
employment hereunder, PNBFG shall pay Barbieri his full Base Salary, and other
benefits earned or accrued through the date of termination
5
<PAGE>
specified in Barbieri's written notice of termination, at the rate in effect on
the date notice of termination is given.
(b) Termination for "Good Reason". Notwithstanding Section 6(a), if
----------------------------
Barbieri provides written notice of termination for Good Reason (as defined
below), he shall be entitled to any and all severance rights as set forth in
Section 7(d). Barbieri is considered to have terminated his employment for "Good
Reason" if, and only if, his termination is based upon the occurrence of one of
the following: (i) the assignment to Barbieri, by PNBFG or Bank or any successor
of either of them, of duties substantially and materially inconsistent with the
position and nature of his employment as set forth in Section 1; (ii) a
reduction of compensation and benefits, by PNBFG or any successor thereof, that
would substantially diminish the aggregate value of Barbieri's compensation; or
(iii) the failure by PNBFG to obtain from any successor to PNBFG or the Bank an
agreement to assume and perform this Agreement.
7. Compensation Upon Termination or Disability.
-------------------------------------------
(a) Death. If Barbieri's employment is terminated by his death, PNBFG
-----
shall pay Barbieri's full Base Salary, and any accrued benefits through the date
of his death.
6
<PAGE>
(b) Disability. During any period that Barbieri fails to perform his
----------
duties as a result of incapacity due to physical or mental illness (the
"Disability Period") Barbieri shall continue to receive his full Base Salary and
-----------------
other benefits at the rate in effect for such period until his employment is
terminated by PNBFG for Barbieri's Disability pursuant to Section 5(b), provided
that payments so made to Barbieri during the Disability Period shall be reduced
by the sum of the amounts, if any, which were paid to Barbieri at or prior to
the time of such payment under any disability benefit plans of PNBFG or the Bank
and which were not previously applied to reduce any such payment.
(c) For Cause by PNBFG. If Barbieri's employment shall be terminated for
------------------
cause by PNBFG pursuant to Section 5(c), PNBFG shall pay Barbieri his full Base
Salary, and other benefits earned or accrued through the date of termination at
the rate in effect on the date on which notice of termination is received.
(d) Without Cause. If Barbieri's employment is terminated without cause
-------------
pursuant to Section 5(d), or if PNBFG gives written notice to Barbieri of its
intention not to renew for a Successive Term pursuant to Section 2, or if
Barbieri terminates his employment with PNBFG for Good Reason pursuant to
7
<PAGE>
Section 6(b), then PNBFG shall pay to Barbieri, on or before the effective date
of termination, an amount equal to the sum of $150,000.
8. Covenant Not to Compete. Barbieri agrees that he will not, without
-----------------------
the consent of Board of Directors of PNBFG, and subject to regulatory
restrictions (if any), during his employment with PNBFG, act as an officer,
director, consultant to or employee of, any business competing in the business
of PNBFG or the Bank.
In addition, Barbieri will not, except on behalf of PNBFG or the Bank,
directly or indirectly, solicit or accept business in competition with PNBFG or
the Bank from any persons or entities which have been customers of PNBFG or the
Bank during the period from the commencement of the Initial Term to the date of
Barbieri's termination.
If Barbieri terminates his employment with PNBFG other than for Good
Reason, or if Barbieri is terminated for cause, Barbieri will not, for a period
beginning on the date of termination and ending one (1) year thereafter,
directly or indirectly: (1) enter into the employ of, assume an interest in (in
any capacity) or render any services to, any person or entity engaged in any
business competitive with the business of PNBFG or the Bank within Orange or Los
Angeles Counties in California or
8
<PAGE>
within a one hundred (100) mile radius of any location where PNBFG or the Bank
proposes to engage in business on or prior to the termination of employment; (2)
engage in any such business on his own account; (3) contact or solicit any
person or entity which is a customer of PNBFG or the Bank or who has been
contacted orally or in writing by PNBFG or the Bank as a potential customer on
or prior to the termination of employment; or (4) hire, subcontract, employ,
engage, contact or solicit for the purpose of hiring any person or entity who is
an employee of PNBFG or the Bank or who had been employed by PNBFG or the Bank
at any time within six (6) months preceding the date of Barbieri's termination.
If PNBFG terminates the employment of Barbieri without cause or Barbieri
terminates his own employment with PNBFG for Good Reason, then the provisions of
the preceding paragraph shall be effective from the date of termination and
ending three (3) months after the date of termination.
Barbieri and PNBFG agree and stipulate that the period of time and
geographical area specified in the preceding two paragraphs are fair and
reasonable in view of the nature of the business of PNBFG and the Bank,
Barbieri's access to PNBFG and the Bank's confidential information and knowledge
of PNBFG and the Bank's business. However, in the event that a court should
decline to enforce these provisions, Barbieri and PNBFG agree that
9
<PAGE>
the provisions shall be deemed to be modified to restrict Barbieri's competition
with PNBFG and the Bank to the maximum extent, in both time and geography, which
the court shall find enforceable. In no event will the covenant be interpreted
as more restrictive to Barbieri.
Notwithstanding the foregoing, PNBFG and Barbieri agree that this Section 8
will not pertain to, and will not limit in any way, Barbieri's ability to act as
an officer and/or director of Alta Residential Mortgage, Inc.
9. Miscellaneous.
-------------
(a) All notices which are required or permitted to be given pursuant to
this Agreement shall be in writing and shall be sufficient in all respects if
given in writing and delivered personally or by registered or certified airmail,
postage prepaid, addressed as follows:
If to PNBFG:
PNB FINANCIAL GROUP
c/o Bernard Schneider
Chairman, Board of Directors
1301 Dove Street, Suite 500
Newport Beach, California 92660
10
<PAGE>
If to Barbieri:
ALLEN C. BARBIERI
7 Winterbranch
Irvine, California 92714
Notice shall be deemed to have been given upon receipt thereof as to
communications which are personally delivered and five (5) days after deposit of
the same in any United States mail post office box in the state to which the
notice is addressed, or seven (7) days after deposit of same in any such post
office box other than in the state in which the notice is addressed, postage
prepaid, addressed as set forth above. Notice shall not be deemed given under
the preceding sentence unless and until notice is given to all addressees above
other than the sender. The addresses and addressees for the purpose of this
Section may be changed by giving written notice of such change in the manner
provided herein for giving notice. Unless and until such written notice is
given, the addresses and addressees as stated by prior written notice, or as
provided herein if no written notice of change has been given, shall be deemed
to continue in effect for all purposes hereunder.
(b) If any portion of this Agreement is held unenforceable or invalid,
the remaining portions shall nevertheless remain valid and in full force and
effect.
11
<PAGE>
(c) This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter hereof and fully supersedes any and all prior
agreements or understandings whether oral or written. Any amendment to this
Agreement shall be effective only upon the written consent of each of the
parties. Any waiver by any party of any of its rights under this Agreement is
effective only if set forth in a writing delivered to the other party, and no
course of dealing and no delay by any party in exercising any right, power, or
remedy shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers, or remedies.
(d) If any legal action or arbitration or other proceeding is brought
for the enforcement of this Agreement, or because of an alleged dispute,
default, or breach in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorneys' fees, expenses, and other costs incurred in that action or
proceeding in addition to any other relief to which it or he may be entitled.
The right to such attorneys' fees, expenses, and costs shall be deemed to have
accrued upon the commencement or such action and shall be enforceable whether or
not such action is prosecuted to judgment.
12
<PAGE>
(e) This Agreement is being delivered and is intended to be performed in
the State of California and shall be construed and enforced in accordance with
and governed by the laws of the State of California other than and without
giving effect to the laws of the State of California relating to choice of law.
(f) The parties agree that any action, at law or in equity, arising
under this Agreement shall be filed and conducted in and only in the Superior
Court of the State of California for the County of Orange or the United States
District Court for the Central District of California. The parties hereby submit
to the in personam jurisdiction and venue of such courts in the State of
-----------
California for the purposes of litigating any such action.
(g) Except as expressly provided herein, neither this Agreement nor any
of the rights or obligation of Barbieri hereunder shall be assignable or
delegable by Barbieri. Neither this Agreement nor any other rights or
obligations of PNBFG hereunder shall be assignable by PNBFG; provided, however,
that this Agreement shall be assignable to and shall be binding upon and inure
to the benefit of any successor of PNBFG or the Bank, including, directly or
indirectly, all or substantially all of the assets of PNBFG or the Bank whether
by merger,
13
<PAGE>
consolidation, sale or otherwise (and such successor shall thereafter be deemed
"PNBFG" for the purposes of this Agreement), but shall not otherwise be
assignable by PNBFG.
Entered into this 1st day of March, 1998 at Newport Beach, California.
--- -----
PNB FINANCIAL GROUP
By:/s/ BERNARD SCHNEIDER
----------------------------
BERNARD SCHNEIDER
Chairman, Board of Directors
/s/ ALLEN C. BARBIERI
----------------------------
ALLEN C. BARBIERI
14
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
---------
effective as of the 1st day of March, 1998, by and between PACIFIC NATIONAL
BANK, a national banking association (the "Bank"), and ALLAN GIBSON, an
individual ("Gibson").
------
R E C I T A L S
- - - - - - - -
A. The Bank desires to employ Gibson and Gibson desires to be employed
by the Bank.
B. Gibson and the Bank desire to enter into an employment agreement to
set forth the terms of Gibson's employment by the Bank.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, conditions, and agreements hereinafter set forth, the parties
hereby agree as follows:
A G R E E M E N T
- - - - - - - - -
1. Employment. The Bank hires and employs Gibson, and Gibson agrees to
----------
serve the Bank, under and subject to all of the terms, conditions, and
provisions of this Agreement, as Executive Vice President and Chief Operating
Officer of the Bank and in such other executive capacity or capacities as the
Board
-1-
<PAGE>
of Directors of the Bank may from time to time designate. Gibson's duties
shall be subject to such policies and directions as may be established or given
by the Board of Directors of the Bank from time to time. Gibson further agrees
to serve the Bank well and faithfully in the executive capacities to which he is
appointed and to devote his full time, attention, and energy to such services
during normal business hours.
2. Term of Employment. The term of employment of Gibson shall commence
------------------
on March 1, 1998 and shall continue for a period of one (1) year thereafter (the
"Initial Term") unless sooner terminated as provided herein. The Initial Term
------------
shall be extended for an additional term of one year following the Initial Term
("Successive Term") and thereafter for additional Successive Terms of one year
---------------
following each Successive Term, unless prior to the end of, in the first
instance, the Initial Term, and thereafter, each Successive Term, either party
gives written notice to the other party of its intention not to renew. Such
notice must be given no later than ninety (90) days prior to the beginning of
the subsequent Successive Term.
3. Compensation. For all services rendered by Gibson under this
------------
Agreement, Gibson shall be paid as compensation an annual salary of $130,000
("Base Salary") to be paid in equal semi-monthly installments. Except as
- -------------
specifically provided in
-2-
<PAGE>
this Agreement, Gibson shall not be entitled to additional compensation of any
kind, except as may be agreed to from time to time after the date hereof by the
Board of Directors. It is contemplated that Gibson may be granted certain
options by the Bank's parent, PNB Financial Group, Inc. ("PNBFG"), but any such
-----
grant is outside the scope of this Agreement and the Bank has no power or
authority to obligate or bind PNBFG. Such grant, if any is made, will be
evidenced by separate agreement between Gibson and PNBFG.
4. Executive Benefits. Gibson shall also receive the following
------------------
benefits:
(a) Medical insurance benefits pursuant to the Bank's personnel
policy as it may change from time to time;
(b) Participation in the Bank's 401(k) plan consistent with its
terms as they may change from time to time;
(c) Paid vacation pursuant to the Bank's personnel policy as that
policy shall change from time to time; and
(d) Sick leave pursuant to the Bank's personnel policy as that
policy shall change from time to time.
-3-
<PAGE>
5. Termination by the Bank. Gibson's employment hereunder may be
-----------------------
terminated by the Bank without any breach of this Agreement under the
circumstances described below:
(a) Death. Gibson's employment hereunder shall terminate upon
-----
his death.
(b) Disability. If, as a result of Gibson's incapacity due to
----------
physical or mental illness, Gibson shall have been absent from his duties for a
period of one hundred twenty (120) consecutive days, and, within thirty (30)
days after written notice of the Bank's intention to exercise its rights under
this Section 5(b) is given (which may not be given prior to the expiration of
such one hundred twenty (120) day period) shall not have returned to the
performance of his duties on a full time basis ("Gibson's Disability"), the
-------------------
Bank may terminate Gibson's employment hereunder by giving written notice to
such effect to Gibson. In the event of the termination of Gibson's employment
pursuant to this Section 5(b), the date of termination shall be the date on
which notice of termination is received by Gibson or his personal
representative.
(c) For Cause. Bank may terminate Gibson's employment under
---------
this Agreement at any time for cause. For purposes of this Agreement, the term
"cause" shall be limited to the following: (i) acts by Gibson involving moral
turpitude
-4-
<PAGE>
which reflect materially and adversely on the Bank, its reputation, or
its assets; (ii) gross neglect by Gibson of his duties; (iii) conviction of a
crime involving moral turpitude, including, without limitation, theft or
embezzlement; (iv) alcohol or drug abuse; (v) any instance in which the Federal
Reserve Bank, Federal Deposit Insurance Corporation or the Office of the
Comptroller of Currency directs or indicates in any fashion that Gibson should
cease serving as Executive Vice President or Chief Operating Officer of the
Bank; or (vi) a material breach of this Agreement. Termination pursuant to this
Section 5(c) shall be by written notice to Gibson which notice shall specify the
cause for termination.
(d) Without Cause. The Bank may, at any time upon the vote of a
-------------
majority of the directors of the Bank then in office, terminate Gibson without
cause. For the purposes of this Agreement, the term "without cause" shall mean
termination for grounds other than those specified in Subsections (a), (b), or
(c) of this Section 5. In the event that Gibson is terminated without cause,
Gibson shall be entitled to the payments provided in Section 7(d).
6. Termination by Gibson. Gibson may terminate his employment
---------------------
hereunder only upon three (3) months' written notice to the Bank. If Gibson
terminates his employment hereunder,
-5-
<PAGE>
Bank shall pay Gibson his full Base Salary, and other benefits earned or accrued
through the date of termination specified in Gibson's written notice of
termination, at the rate in effect on the date notice of termination is given.
7. Compensation Upon Termination or Disability.
-------------------------------------------
(a) Death. If Gibson's employment is terminated by his death
-----
during the Initial Term, the Bank shall pay Gibson's full Base Salary for the
remainder of the Initial Term and any accrued benefits through the date of his
death. If Gibson's employment is terminated by his death after the Initial Term,
the Bank shall pay Gibson's full Base Salary, and any accrued benefits through
the date of his death.
(b) Disability. During any period that Gibson fails to perform
----------
his duties as a result of incapacity due to physical or mental illness (the
"Disability Period") Gibson shall continue to receive his full Base Salary and
-----------------
other benefits at the rate in effect for such period until his employment is
terminated by the Bank for Gibson's Disability pursuant to Section 5(b),
provided that payments so made to Gibson during the Disability Period shall be
reduced by the sum of the amounts, if any, which were paid to Gibson at or prior
to the time of such payment under any disability benefit plans of
-6-
<PAGE>
the Bank and which were not previously applied to reduce any such payment.
(c) For Cause by the Bank. If Gibson's employment shall be
---------------------
terminated for cause by the Bank pursuant to Section 5(c), the Bank shall pay
Gibson his full Base Salary, and other benefits earned or accrued through the
date of termination at the rate in effect on the date on which notice of
termination is received.
(d) Without Cause. If Gibson's employment is terminated
-------------
by the Bank without cause pursuant to Section 5(d) or the Bank gives written
notice to Gibson of its intention not to renew for a Successive Term pursuant to
Section 2, then the Bank shall pay to Gibson, on or before the effective date of
termination, an amount equal to the sum of (i) that portion of Gibson's Base
Salary and benefits earned or accrued through the effective date of termination
and (ii) an amount equal to the Base Salary. Payment of such severance amounts
will be paid by Bank in equal monthly installments for the three (3) months
subsequent to the effective date of termination.
8. Covenant Not to Compete. Gibson agrees that he will not,
-----------------------
without the consent of Board of Directors of the Bank, and subject to regulatory
restrictions (if any), during his employment with the Bank, act as an officer,
director,
-7-
<PAGE>
consultant to or employee of, any business competing in the business
of the Bank.
In addition, without limitation and notwithstanding the foregoing,
Gibson will not, except on behalf of the Bank, directly or indirectly, solicit
or accept business in competition with the Bank from any persons or entities
which have been customers of the Bank during the period from the commencement of
the Initial Term to the date of Gibson's termination.
If Gibson terminates his employment with the Bank, Gibson will not,
for a period beginning on the date of termination and ending one (1) year
thereafter, directly or indirectly: (1) enter into the employ of, assume an
interest in (in any capacity) or render any services to, any person or entity
engaged in any business competitive with the business of the Bank within Orange
or Los Angeles Counties in California, or within a one hundred (100) mile radius
of any location where the Bank proposes to engage in business on or prior to the
termination of employment; (2) engage in any such business on his or her own
account; (3) contact or solicit any person or entity which is a customer of the
Bank or has been contacted orally or in writing, by the Bank as a potential
customer on or prior to the termination of employment; or (4) hire, subcontract,
employ, engage, contact
-8-
<PAGE>
or solicit for the purpose of hiring any person or entity who is an employee of
the Bank or who had been employed by the Bank at any time within six (6) months
preceding the date of Gibson's termination.
If the Bank terminates the employment of Gibson with or without cause,
the provisions of the preceding paragraph shall be effective from the date of
termination and ending three (3) months after the date of termination.
Gibson and the Bank agree and stipulate that the period of time and
geographical area specified in the preceding two paragraphs are fair and
reasonable in view of the nature of the business of the Bank, and Gibson's
access to the Bank's confidential information and knowledge of the Bank's
business. However, in the event that a court should decline to enforce these
provisions, Gibson and the Bank agree that the provisions shall be deemed to be
modified to restrict Gibson's competition with the Bank to the maximum extent,
in both time and geography, which the court shall find enforceable. In no event
will the covenant be interpreted as more restrictive to Gibson.
9. Miscellaneous.
-------------
(a) All notices which are required or permitted to be given
pursuant to this Agreement shall be in writing and
-9-
<PAGE>
shall be sufficient in all respects if given in writing and delivered personally
or by telegraph or by registered or certified airmail, postage prepaid,
addressed as follows:
If to the Bank:
PACIFIC NATIONAL BANK
4665 MacArthur Court
Newport Beach, California 92660
Attention: President and Chief Executive Officer
If to Gibson:
ALAN GIBSON
4665 MacArthur Court
Newport Beach, California 92660
Notice shall be deemed to have been given upon receipt thereof as
to communications which are personally delivered and five (5) days after deposit
of the same in any United States mail post office box in the state to which the
notice is addressed, or seven (7) days after deposit of same in any such post
office box other than in the state in which the notice is addressed, postage
prepaid, addressed as set forth above. Notice shall not be deemed given under
the preceding sentence unless and until notice is given to all addressees above
other than the sender. The addresses and addressees for the purpose of this
Section may be changed by giving written notice of such change in the manner
provided herein for giving notice. Unless and until such written notice is
given, the addresses and addressees as stated by prior written notice, or
-10-
<PAGE>
as provided herein if no written notice of change has been given, shall be
deemed to continue in effect for all purposes hereunder.
(b) If any portion of this Agreement is held unenforceable or
invalid, the remaining portions shall nevertheless remain valid and in full
force and effect.
(c) This Agreement constitutes the entire agreement between the
parties pertaining to the subject matter hereof and fully supersedes any and all
prior agreements or understandings whether oral or written. Any amendment to
this Agreement shall be effective only upon the written consent of each of the
parties. Any waiver by any party of any of its rights under this Agreement is
effective only if set forth in a writing delivered to the other party, and no
course of dealing and no delay by any party in exercising any right, power, or
remedy shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers, or remedies.
(d) If any legal action or arbitration or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
default, or breach in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorneys' fees, expenses, and other costs incurred
-11-
<PAGE>
in that action or proceeding in addition to any other relief to which it or he
may be entitled. The right to such attorneys' fees, expenses, and costs shall be
deemed to have accrued upon the commencement or such action and shall be
enforceable whether or not such action is prosecuted to judgment.
(e) This Agreement is being delivered and is intended to be
performed in the State of California and shall be construed and enforced in
accordance with and governed by the laws of the State of California other than
and without giving effect to the laws of the State of California relating to
choice of law.
(f) The parties agree that any action, at law or in equity,
arising under this Agreement shall be filed and conducted in and only in the
Superior Court of the State of California for the County of Orange or the United
States District Court for the Central District of California. The parties hereby
submit to the in personam jurisdiction and venue of such courts in the
-- --------
State of California for the purposes of litigating any such action.
(g) Except as expressly provided herein, neither the Agreement nor
any of the rights or obligation of Gibson hereunder shall be assignable or
delegable by Gibson. Neither this Agreement nor any other rights or obligations
of the Bank
-12-
<PAGE>
hereunder shall be assignable by the Bank; provided, however, that this
Agreement shall be assignable to and shall be binding upon and inure to the
benefit of any successor of the Bank, including, directly or indirectly, all or
substantially all of the assets of the Bank whether by merger, consolidation,
sale or otherwise (and such successor shall thereafter be deemed "the Bank" for
the purposes of this Agreement), but shall not otherwise be assignable by the
Bank.
Entered into this 25 day of March, 1998 at Newport
-- -----
Beach, California.
PACIFIC NATIONAL BANK
By: /s/ ALLEN BARBIERI
-----------------------------
ALLEN C. BARBIERI
President and Chief Executive
Officer
/s/ ALLAN GIBSON
----------------------------
ALLAN GIBSON
-13-
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
---------
the 1st day of March, 1998, by and between PNB FINANCIAL GROUP, a California
corporation ("PNBFG"), and DOUGLAS HELLER, an individual ("Heller").
----- ------
R E C I T A L S
- - - - - - - -
A. PNBFG desires to employ Heller and Heller desires to be employed by
PNBFG.
B. Heller and PNBFG desire to enter into an employment agreement to set
forth the terms of Heller's employment by PNBFG.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, conditions, and agreements hereinafter set forth, the parties
hereto agree as follows:
A G R E E M E N T
- - - - - - - - -
1. Employment. PNBFG hires and employs Heller, and Heller agrees to
----------
serve PNBFG, under and subject to all of the terms, conditions, and provisions
of this Agreement, as Chief Financial Officer of PNBFG, as Executive Vice
President and Chief Financial Officer of PNBPG's wholly-owned subsidiary PACIFIC
NATIONAL BANK, a national banking association (the
1
<PAGE>
"Bank"), and in such other executive capacity or capacities as the Board of
----
Directors of PNBFG may from time to time designate. Heller's duties shall be
subject to such policies and directions as may be established or given by the
Boards of Directors of PNBFG or the Bank from time to time. Heller further
agrees to serve PNBFG and the Bank well and faithfully in the executive
capacities to which he is appointed and to devote his full time, attention, and
energy to such services during normal business hours.
2. Term of Employment. The term of employment of Heller shall commence
------------------
on March 1, 1998 and shall continue for a period of one (1) year thereafter (the
"Initial Term") unless sooner terminated as provided herein. The Initial Term
shall be extended for an additional term of one year following the Initial Term
("Successive Term") and thereafter for additional Successive Terms of one year
---------------
following each Successive Term, unless prior to the end of, in the first
instance, the Initial Term, and thereafter, each Successive Term, either party
gives written notice to the other party of its intention not to renew. Such
notice must be given in writing no later than ninety (90) days prior to the
beginning of the subsequent Successive Term.
3. Compensation. For all services rendered by Heller under this
------------
Agreement, Heller shall be paid as
2
<PAGE>
compensation an annual salary of $130,000 ("Base Salary") to be paid in equal
semi-monthly installments. Except as specifically provided in this Agreement,
Heller shall not be entitled to additional compensation of any kind, except as
may be agreed from time to time after the date hereof by the Board of Directors
of PNBFG or the Bank. It is contemplated that, at the sole discretion of PNBFG,
Heller may be granted certain options by PNBFG. Such grant, if any is made, will
be evidenced by a separate agreement.
4. Executive Benefits. Heller shall also receive the following benefits:
------------------
(a) Medical insurance benefits pursuant to the Bank's personnel policy
as it may change from time to time;
(b) Participation in the Bank's 401(k) plan consistent with its terms as
they may change from time to time;
(c) Paid vacation pursuant to the Bank's personnel policy as that policy
shall change from time to time; and
(d) Sick leave pursuant to the Bank's personnel policy as that policy
shall change from time to time.
3
<PAGE>
5. Termination by PNBFG. Heller's employment may be terminated by PNBFG
--------------------
without any breach of this Agreement under the circumstances described below:
(a) Death. Heller's employment hereunder shall terminate upon his death.
-----
(b) Disability. If, as a result of Heller's incapacity due to physical
----------
or mental illness, Heller shall have been absent from his duties for a period of
one hundred twenty (120) consecutive days, and, within thirty (30) days after
written notice of PNBFG's intention to exercise its rights under this Section
5(b) is given (which may not be given prior to the expiration of such one
hundred twenty (120) day period) shall not have returned to the performance of
his duties on a full time basis ("Heller's Disability"), PNBFG may terminate
-------------------
Heller's employment hereunder by giving written notice to such effect to Heller.
In the event of the termination of Heller's employment pursuant to this Section
5(b), the date of termination shall be the date on which notice of termination
is received by Heller or his personal representative.
(c) For Cause. PNBFG may terminate Heller's employment under this
---------
Agreement at any time for cause. For purposes of this Agreement, the term
"cause" shall be limited to the following: (i) acts by Heller involving moral
turpitude
4
<PAGE>
which reflect materially and adversely on PNBFG, its reputation, or its assets;
(ii) gross neglect by Heller of his duties; (iii) conviction of a crime
involving moral turpitude, including, without limitation, theft or embezzlement;
(iv) alcohol or drug abuse; (v) any instance in which the Federal Reserve Bank,
Federal Deposit Insurance Corporation or the Office of the Comptroller of
Currency directs or indicates in any fashion that Heller should cease serving as
Chief Financial Officer of PNBFG or the Bank, or Executive Vice President of the
Bank; (vi) failure to follow any policy, order, or directive of the Board of
Directors of PNBFG or the Bank; or (vii) a material breach of this Agreement.
Termination pursuant to this Section 5(c) shall be by written notice to Heller
which notice shall specify the cause for termination.
(d) Without Cause. PNBFG may, at any time upon the vote of a majority of
-------------
the directors of PNBFG then in office, terminate Heller without cause. For the
purposes of this Agreement, the term "without cause" shall mean termination for
grounds other than those specified in Subsections (a), (b), or (c) of this
Section 5. In the event that Heller is terminated without cause, Heller shall be
entitled to the payments provided in Section 7(d).
5
<PAGE>
6. Termination by Heller. Heller may terminate his employment hereunder
---------------------
only upon three (3) months' written notice to PNBFG. If Heller terminates his
employment hereunder, PNBFG shall pay Heller his full Base Salary, and other
benefits earned or accrued through the date of termination specified in Heller's
written notice of termination, at the rate in effect on the date notice of
termination is given.
7. Compensation Upon Termination or Disability.
-------------------------------------------
(a) Death. If Heller's employment is terminated by his death, PNBFG
-----
shall pay Heller's full Base Salary, and any accrued benefits through the date
of his death.
(b) Disability. During any period that Heller fails to perform his
----------
duties as a result of incapacity due to physical or mental illness (the
"Disability Period") Heller shall continue to receive his full Base Salary and
-----------------
other benefits at the rate in effect for such period until his employment is
terminated by PNBFG for Heller's Disability pursuant to Section 5(b), provided
that payments so made to Heller during the Disability Period shall be reduced by
the sum of the amounts, if any, which were paid to Heller at or prior to the
time of such payment under any disability benefit plans of PNBFG and which were
not previously applied to reduce any such payment.
6
<PAGE>
(c) For Cause by PNBFG. If Heller's employment shall be terminated for
------------------
cause by PNBFG pursuant to Section 5(c), PNBFG shall pay Heller his full Base
Salary, and other benefits earned or accrued through the date of termination at
the rate in effect on the date on which notice of termination is received.
(d) Without Cause. If Heller's employment is terminated without cause
-------------
pursuant to Section 5(d) or if PNBFG gives written notice to Heller of its
intention not to renew for a Successive Term pursuant to Section 2 then PNBFG
shall pay to Heller, on or before the effective date of termination, an amount
equal to the sum of (i) that portion of Heller's Base Salary and benefits earned
or accrued through the effective date of termination and (ii) an amount equal to
the Base Salary. Payment of such severance amounts will be paid by Bank in equal
monthly installments for the three (3) months subsequent to the effective date
of termination.
8. Covenant Not to Compete. Heller agrees that he will not, without the
-----------------------
consent of Board of Directors of PNBFG, and subject to regulatory restrictions
(if any), during his employment with PNBFG, act as an officer, director,
consultant to or employee of, any business competing in the business of PNBFG or
the Bank.
7
<PAGE>
In addition, without limitation and notwithstanding the foregoing, Heller
will not, except on behalf of PNBFG or the Bank, directly or indirectly, solicit
or accept business in competition with PNBFG or the Bank from any persons or
entities which have been customers of PNBFG or the Bank during the period from
the commencement of the Initial Term to the date of Heller's termination.
If Heller terminates his employment with PNBFG or if Heller is terminated
for cause, Heller will not, for a period beginning on the date of termination
and ending one (1) year thereafter, directly or indirectly: (1) enter into the
employ of, assume an interest in (in any capacity) or render any services to,
any person or entity engaged in any business competitive with the business of
PNBFG or the Bank within Orange or Los Angeles Counties in California or within
a one hundred (100) mile radius of any location where PNBFG or the Bank proposes
to engage in business on or prior to the termination of employment; (2) engage
in any such business on his own account; (3) contact or solicit any person or
entity which is a customer of PNBFG or the Bank or who has been contacted orally
or in writing by PNBFG or the Bank as a potential customer on or prior to the
termination of employment; or (4) hire, subcontract, employ, engage, contact or
solicit for the purpose of hiring any person or entity who is an
8
<PAGE>
employee of PNBFG or the Bank or who had been employed by PNBFG or the Bank at
any time within six (6) months preceding the date of Heller's termination.
If PNBFG terminates the employment of Heller without cause then the
provisions of the preceding paragraph shall be effective from the date of
termination and ending three (3) months after the date of termination.
Heller and PNBFG agree and stipulate that the period of time and
geographical area specified in the preceding two paragraphs are fair and
reasonable in view of the nature of the business of PNBFG and the Bank, Heller's
access to PNBFG and the Bank's confidential information and knowledge of PNBFG
and the Bank's business. However, in the event that a court should decline to
enforce these provisions, Heller and PNBFG agree that the provisions shall be
deemed to be modified to restrict Heller's competition with PNBFG and the Bank
to the maximum extent, in both time and geography, which the court shall find
enforceable. In no event will the covenant be interpreted as more restrictive to
Heller.
9. Miscellaneous.
-------------
(a) All notices which are required or permitted to be given pursuant to
this Agreement shall be in writing and
9
<PAGE>
shall be sufficient in all respects if given in writing and delivered personally
or by telegraph or by registered or certified airmail, postage prepaid,
addressed as follows:
If to PNBFG:
PNB FINANCIAL GROUP
c/o Allen C. Barbieri
President
4665 MacArthur Court
Newport Beach, California 92660
If to Heller:
DOUGLAS HELLER
4665 MacArthur Court
Newport Beach, California 92660
Notice shall be deemed to have been given upon receipt thereof as to
communications which are personally delivered and five (5) days after deposit of
the same in any United States mail post office box in the state to which the
notice is addressed, or seven (7) days after deposit of same in any such post
office box other than in the state in which the notice is addressed, postage
prepaid, addressed as set forth above. Notice shall not be deemed given under
the preceding sentence unless and until notice is given to all addressees above
other than the sender. The addresses and addressees for the purpose of this
Section may be changed by giving written notice of such change in the manner
provided herein for giving notice. Unless and until such written notice is
given, the
10
<PAGE>
addresses and addressees as stated by prior written notice, or as provided
herein if no written notice of change has been given, shall be deemed to
continue in effect for all purposes hereunder.
(b) If any portion of this Agreement is held unenforceable or invalid,
the remaining portions shall nevertheless remain valid and in full force and
effect.
(c) This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter hereof and fully supersedes any and all prior
agreements or understandings whether oral or written. Any amendment to this
Agreement shall be effective only upon the written consent of each of the
parties. Any waiver by any party of any of its rights under this Agreement is
effective only if set forth in a writing delivered to the other party, and no
course of dealing and no delay by any party in exercising any right, power, or
remedy shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers, or remedies.
(d) If any legal action or arbitration or other proceeding is brought
for the enforcement of this Agreement, or because of an alleged dispute,
default, or breach in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
11
<PAGE>
reasonable attorneys' fees, expenses, and other costs incurred in that action or
proceeding in addition to any other relief to which it or he may be entitled.
The right to such attorneys' fees, expenses, and costs shall be deemed to have
accrued upon the commencement or such action and shall be enforceable whether or
not such action is prosecuted to judgment.
(e) This Agreement is being delivered and is intended to be performed in
the State of California and shall be construed and enforced in accordance with
and governed by the laws of the State of California other than and without
giving effect to the laws of the State of California relating to choice of law.
(f) The parties agree that any action, at law or in equity, arising
under this Agreement shall be filed and conducted in and only in the Superior
Court of the State of California for the County of Orange or the United States
District Court for the Central District of California. The parties hereby submit
to the in personam jurisdiction and venue of such courts in the State of
-----------
California for the purposes of litigating any such action.
(g) Except as expressly provided herein, neither this Agreement nor any
of the rights or obligation of Heller hereunder shall be assignable or delegable
by Heller. Neither
12
<PAGE>
this Agreement nor any other rights or obligations of PNBFG hereunder shall be
assignable by PNBFG; provided, however, that this Agreement shall be assignable
to and shall be binding upon and inure to the benefit of any successor of PNBFG
or the Bank, including, directly or indirectly, all or substantially all of the
assets of PNBFG or the Bank whether by merger, consolidation, sale or otherwise
(and such successor shall thereafter be deemed "PNBFG" for the purposes of this
Agreement), but shall not otherwise be assignable by PNBFG or the Bank.
Entered into this 11th day of March, 1998 at Newport Beach, California.
---- -----
PNB FINANCIAL GROUP
By:/s/ ALLEN C. BARBIERI
-----------------------------
ALLEN C. BARBIERI
President and Chief Executive
Officer
/s/ DOUGLAS HELLER
-----------------------------
DOUGLAS HELLER
13
<PAGE>
EXHIBIT NO. 21
SUBSIDIARIES OF THE COMPANY
SUBSIDIARIES OF PNB FINANCIAL GROUP
-----------------------------------
At December 31, 1997, the only subsidiary of PNB Financial Group was Pacific
National Bank.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
PNB Financial Group
Newport Beach, CA
We consent to the incorporation of our report dated January 29, 1998, included
in this form 10KSB in the previously filed Registration Statements of PNB
Financial Group on Form S-8 (Commission file Numbers 333-03241, 333-17997, 333-
17999 and 333-36255.
McGladrey & Pullen, LLP
Anaheim, California
March 30, 1998
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,185
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
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<INVESTMENTS-HELD-FOR-SALE> 103,762
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<LOANS> 118,184
<ALLOWANCE> 1,558
<TOTAL-ASSETS> 242,874
<DEPOSITS> 211,090
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 2,787
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0
0
<COMMON> 16,234
<OTHER-SE> 7,763
<TOTAL-LIABILITIES-AND-EQUITY> 242,874
<INTEREST-LOAN> 15,771
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<INTEREST-TOTAL> 16,421
<INTEREST-DEPOSIT> 3,852
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<NET-INCOME> 5,000,000
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.13
<YIELD-ACTUAL> 6.65
<LOANS-NON> 1,237
<LOANS-PAST> 160
<LOANS-TROUBLED> 4,102
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