<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from ________ to _________
Commission file No. 2-78580
---------------------------
PNB FINANCIAL GROUP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
California 95-3847640
-------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Reorganization)
4665 MacArthur Court
Newport Beach, California 92660
----------------------------------------
(Address of Principal Executive Offices)
(949) 851-1033
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares of Registrant's common stock outstanding at November 12,
1998 was 2,779,733
THIS REPORT INCLUDES A TOTAL OF 24 PAGES
<PAGE>
PNB FINANCIAL GROUP
Index To Form 10-Q
For the quarter ended September 30, 1998
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Income
and Comprehensive Income (unaudited) Nine Months 4
ended September 30, 1998 and 1997
Condensed Consolidated Statements of Income 5
and Comprehensive Income (unaudited) Three Months
ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) 6
Nine Months ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7-8
ITEM 2. Management's Discussion and Analysis of Financial 9-22
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings. 23
ITEM 2. Changes in Securities. 23
ITEM 3. Defaults upon Senior Securities. 23
ITEM 4. Submission of Matters to a Vote of Security Holders. 23
ITEM 5. Other Information. 23
ITEM 6. Exhibits and Reports on Form 8-K 23
Signatures of Registrants. 24
2
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited) December 31,
September 30, 1998 1997
------------------- ---------------
Assets
- ------
<S> <C> <C>
Cash and due from banks $ 29,191,000 $ 15,185,000
Investment securities available for sale 6,093,000 6,910,000
Federal funds sold 2,500,000 -0-
Mortgage loans held for sale 95,137,000 96,852,000
Loans 137,142,000 118,184,000
Less allowance for loan losses (2,061,000) (1,558,000)
------------ ------------
Net loans 135,081,000 116,626,000
Premises and equipment, net 1,074,000 1,094,000
Other real estate owned 759,000 476,000
Other assets 5,182,000 5,731,000
------------ ------------
Total assets $275,017,000 $242,874,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $215,456,000 $211,090,000
Short term borrowings 22,855,000 5,000,000
Other liabilities 5,200,000 2,787,000
------------ ------------
Total liabilities 243,511,000 218,877,000
------------ ------------
Shareholders' equity:
Common stock, no par value, 20,000,000
shares authorized; 2,779,733 and 2,265,280
shares issued and outstanding at
September 30, 1998 and December 31, 1997 25,593,000 16,234,000
Retained earnings 5,876,000 7,754,000
Accumulated other comprehensive income:
Net unrealized gain on investment securities
available for sale 37,000 9,000
------------ ------------
Total shareholders' equity 31,506,000 23,997,000
------------ ------------
Total liabilities and shareholders' equity $275,017,000 $242,874,000
============ ============
</TABLE>
See accompanying notes
3
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income and Comprehensive Income
Nine Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Interest income 15,014,000 11,824,000
Interest expense 4,111,000 2,915,000
----------- -----------
Net interest income 10,903,000 8,909,000
Provision for loan losses 575,000 765,000
----------- -----------
Net interest income after provision for loan losses 10,328,000 8,144,000
----------- -----------
Other income:
Income from mortgage banking operations 16,627,000 10,437,000
Service charges, fees and other 887,000 963,000
Gain on sale of SBA loans 323,000 415,000
----------- -----------
Total other income 17,837,000 11,815,000
----------- -----------
Other expenses:
Mortgage banking operations 12,095,000 7,461,000
Salaries & employee benefits 2,962,000 3,246,000
Occupancy 903,000 1,043,000
Other 2,662,000 2,539,000
----------- -----------
Total other expense 18,622,000 14,289,000
----------- -----------
Income before income taxes 9,543,000 5,670,000
Provision for income taxes 4,007,000 2,341,000
----------- -----------
Net income $ 5,536,000 $ 3,329,000
=========== ===========
Other Comprehensive Income, net of tax:
Unrealized gains on securities available for sale 31,000 61,000
Less: reclassification adjustment for losses
included in net income (3,000) (6,000)
----------- -----------
Other Comprehensive Income 28,000 55,000
----------- -----------
Comprehensive Income $ 5,564,000 $ 3,384,000
=========== ===========
Earnings per share
Basic $ 2.04 $ 1.32
=========== ===========
Diluted $ 1.93 $ 1.23
=========== ===========
Weighted average number of shares for computing
earnings per share:
Basic 2,708,170 2,522,110
----------- -----------
Diluted 2,875,477 2,699,646
----------- -----------
</TABLE>
See accompanying notes
4
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income and Comprehensive Income
Three Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Interest income 5,234,000 4,276,000
Interest expense 1,384,000 1,082,000
---------- ----------
Net interest income 3,850,000 3,194,000
Provision for loan losses 225,000 570,000
---------- ----------
Net interest income after provision for loan losses 3,625,000 2,624,000
---------- ----------
Other income:
Income from mortgage banking operations 6,114,000 3,779,000
Service charges, fees and other 243,000 402,000
Gain on sale of SBA loans 108,000 129,000
---------- ----------
Total other income 6,465,000 4,310,000
---------- ----------
Other expenses:
Mortgage banking operations 4,393,000 2,678,000
Salaries & employee benefits 969,000 1,006,000
Occupancy 303,000 327,000
Other 935,000 830,000
---------- ----------
Total other expense 6,600,000 4,841,000
---------- ----------
Income before income taxes 3,490,000 2,093,000
Provision for income taxes 1,465,000 858,000
---------- ----------
Net income $2,025,000 $1,235,000
========== ==========
Other Comprehensive Income, net of tax:
Unrealized gains on securities available for sale 23,000 30,000
Less: reclassification adjustment for losses
included in net income -0- -0-
---------- ----------
Other Comprehensive Income 23,000 30,000
---------- ----------
Comprehensive Income $2,048,000 $1,265,000
========== ==========
Earnings per share
Basic $ .73 $ .48
========== ==========
Diluted $ .70 $ .45
========== ==========
Weighted average number of shares for computing
earnings per share:
Basic 2,770,815 2,552,387
---------- ----------
Diluted 2,909,520 2,756,293
---------- ----------
</TABLE>
See accompanying notes
5
<PAGE>
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities: $ 12,461,000 $(19,786,000)
------------ ------------
Cash flows from investing activities:
Net change in loans (20,219,000) (11,474,000)
Net change in investment securities 835,000 389,000
Other 591,000 4,861,000
------------ ------------
Net cash used in investing activities (18,793,000) (6,224,000)
------------ ------------
Cash flows from financing activities:
Net change in deposits 4,366,000 27,843,000
Net change in short-term borrowings 17,854,000 (1,351,000)
Net change in common stock 618,000 186,000
------------ ------------
Net cash provided by financing activities 22,838,000 26,678,000
------------ ------------
Net increase in cash and cash equivalents 16,506,000 668,000
Cash and cash equivalents at beginning of period 15,185,000 18,701,000
------------ ------------
Cash and cash equivalents at end of period $ 31,691,000 $ 19,369,000
============ ============
</TABLE>
See accompanying notes
6
<PAGE>
PNB FINANCIAL GROUP
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
1. Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
PNB Financial Group (the "Bank Holding Company") and its wholly-owned
subsidiary, Pacific National Bank (the "Bank"), (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated. The
condensed consolidated financial statements contain all adjustments (consisting
only of normal, recurring accruals) which are, in the opinion of Management,
necessary to present fairly the consolidated financial position of the Company
at September 30, 1998, and the consolidated statements of income, and
comprehensive income, for the nine and three month periods ended September 30,
1998 and September 30, 1997 and consolidated statements of cash flow for the
nine month periods ended September 30, 1998 and 1997. Results for the nine and
three months ended September 30, 1998 are not necessarily indicative of results
which may be expected for any other interim period, or for the year as a whole.
These condensed consolidated financial statements do not include all disclosures
associated with the Company's annual financial statements and, accordingly,
should be read in conjunction with such statements.
2. Consolidated Statement of Cash Flows
------------------------------------
For purposes of reporting cash flows, the Company defines cash and cash
equivalents as cash on hand, cash due from banks, interest-bearing deposits in
other banks and federal funds sold.
3. Shareholder's Equity
--------------------
The Company has authorized 10,000,000 shares, no par value, preferred stock.
No shares of preferred stock have been issued. On April 15, 1998, the Company
declares a 15% stock dividend. As a result of the dividend, an additional
344,838 common shares were issued totaling $7,414,000. During the nine month
period ended September 30, 1998, 169,615 stock options with a weighted average
exercise price of $3.65 per share were exercised. In connection with the
exercise, the Company recognized a tax benefit of approximately $1.3 million
which was recorded directly to common stock.
4. Impact of Recently Issued Accounting Standards - Derivative Instruments and
---------------------------------------------------------------------------
Hedging Activities
------------------
In June 1998, the financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The primary purpose of Statement No. 133 is to recongnize the fair
value of derivative instruments on the face of financial statements.
The Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application is to be at the beginning of an
entity's fiscal quarter. Earlier application is encouraged, but only at the
beginning of any fiscal quarter that occurs prior to the effective date. The
Statement must be applied on January 1, 2000.
Upon adoption, Statement No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in the balance sheet and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated
7
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
forecasted transaction. Accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Gains and losses on derivatives not designated as hedging instruments are
recognized in earnings in the period of change.
The Company has not determined the effect, if any, the adoption will have on
the Company's financial statements.
5. Significant Event - Merger with Western Bancorp
-----------------------------------------------
On October 6, 1998, the Company entered into a definitive agreement to merge
with Western Bancorp. Shareholders of the Company will receive one share of
Western Bancorp stock for each outstanding share of the Company in what is
expected to qualify as a tax free exchange. The acquisition is expected to
qualify for pooling-of-interest accounting and close during the fourth quarter
of 1998 or the first quarter of 1999.
In connection with the definitive agreement the Company entered into a stock
option agreement with Western Bancorp to increase the likelihood that the merger
will be completed and discourage offers by third parties to acquire the Company
prior to the merger. Pusuant to the stock option agreement the Company granted
to Western Bancorp an option, exercisable under certain limited and specifically
defined circumstances, to purchase up to 553,166 authorized but unissued shares
of the Company common stock for a purchase price per share of $29.625. The
number of shares and the purchase price are adjustable under certain
circumstances, but Western may not acquire more than 19.9% of the Company's
shares of common stock pursuant to this agreement.
8
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
Item 2.
- -------
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This 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,
the sufficiency of the Company's liquidity and capital and the Company's
assessment of it's Year 2000 issues. 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 reported net income of $5,536,000 for the nine months ended
September 30, 1998 compared to a net income of $3,329,000 for the same period in
1997. The Company's diluted earnings per common share was $1.93 for the first
three quarters of 1998 a 57% increase over its diluted earnings per common share
of $1.23 in the same period of 1997. The earnings per share for 1997 has been
adjusted for the 15% stock dividend recorded on April 15, 1998. The Company's
annualized return on average assets was 3.0% for the first nine months of 1998
compared to 2.3% for the same period in 1997 and its annualized return on
average stockholders equity was 26.1% for the first nine months of 1998 compared
to 22.3% in 1997. The increase in earnings was primarily a result of an
increase in the net interest margin of the Company along with an increase in
earnings from the Bank's residential mortgage loan department. The increase in
the net interest income was a result of increases in commercial loans, and
residential mortgage loans held for sale. In addition, the Company reduced its
nonperforming assets from $2.4 million or 1.0% of total assets as of September
30, 1997 to $1.3 million or .5% of total assets as of September 30, 1998. The
increase in profits from the residential mortgage loan department was due to a
41% increase in the volume of mortgage loans funded during the nine month
periods presented. The Company funded a record $1,117 million of mortgage loans
in the first three quarters of 1998, compared to $792 million in the same period
in 1997.
As of September 30, 1998, the Company had total assets of $275 million, total
loans of $137.1 million, and total deposits of $215.5 million, as compared to
total assets of $242.9 million, total loans of $118.2 million, and total
deposits of $211.1 million as of December 31, 1997. Average assets for the
first three quarters of 1998 were $247 million as compared to average assets of
$196.7 million during the first three quarters of 1997. The increase in average
assets of $50.3 million (25.6%) was primarily concentrated in an increase in
mortgage loans held for sale of $30.1 million (49.8%) and an increase in
portfolio loans of $17.2 million (16.3%). The increase in assets was funded
with an increase in average deposits of $38 million (22.2%) and an increase in
average short term borrowings of $3.6 million (149%). The increase in deposits
was partially due to an increase in the utilization of brokered deposits.
During the first nine months of 1998, the Bank's brokered deposits averaged
$22.5 million compared to an average of $6.1 million during the first nine
months 1997. The Bank utilizes brokered deposits to partially fund its mortgage
loans held for sale.
The following section sets forth the Company's condensed consolidated average
balances of each principal category of assets, liabilities, and shareholders'
equity for the nine month period ended September 30, 1998 as compared to the
same period in 1997. Average balances are based on daily averages for the Bank,
and monthly averages for the Bank Holding Company, since the Bank Holding
Company does not maintain daily average information. Management believes that
the difference between monthly and daily average data (where monthly data has
been used) is not significant.
9
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Assets
Cash and due from banks $ 11,747,000 $ 12,923,000
Investment securities 7,793,000 7,240,000
Federal funds sold 7,302,000 5,227,000
Mortgage loans held for sale 90,617,000 60,535,000
Loans 122,927,000 105,746,000
Less allowance for loan losses (1,709,000) (1,816,000)
------------ ------------
Net loans 121,218,000 103,930,000
Premises and equipment, net 1,127,000 1,062,000
Other real estate owned 1,112,000 3,422,000
Other assets 6,122,000 2,371,000
------------ ------------
Total assets $247,038,000 $196,710,000
============ ============
Deposits:
Noninterest-bearing $ 84,455,000 $ 72,240,000
Interest-bearing 124,575,000 98,814,000
Short-term borrowings 6,014,000 2,413,000
Other liabilities 3,642,000 2,524,000
------------ ------------
Total liabilities 218,686,000 175,991,000
------------ ------------
Shareholders' equity:
Capital stock 22,501,000 16,182,000
Retained earnings 5,839,000 4,579,000
Accumulated other comprehensive income:
Net unrealized gain (loss) on investment securities available for sale 12,000 (42,000)
------------ ------------
Total shareholders' equity 28,352,000 20,719,000
------------ ------------
Total liabilities and shareholders' equity $247,038,000 $196,710,000
============ ============
</TABLE>
10
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
Capital Resources
- -----------------
The federally-mandated minimum capital requirements and the actual
capitalization of the Company and the Bank as of September 30, 1998 are set
forth below.
CAPITAL REQUIREMENTS AS OF September 30, 1998
<TABLE>
<CAPTION>
PNB Pacific
Regulatory Financial National
Requirements Group Bank
------------- ---------- ---------
<S> <C> <C> <C>
Leverage Capital Ratio 4.0% 12.3% 10.2%
Risk Based Capital:
Tier 1 Capital 4.0% 16.7% 13.8%
Total Capital 8.0% 17.8% 14.9%
</TABLE>
Liquidity
- ---------
Liquidity, as it relates to the Bank Holding Company, represents the
ability to obtain funds to support its investment activities and operating
needs. The Bank Holding Company's principal sources of funds are its cash
balances, short-term loan portfolio, cash dividends from its subsidiary bank, as
well as its ability to raise capital by selling additional shares of common
stock. As of September 30, 1998, the Bank Holding Company has cash balances of
approximately $1,528,000. These liquid assets, along with cash generated from
its loan portfolio should support its 1998 and 1999 operating requirements,
including all of the Company's merger related expenses.
Liquidity, as it relates to banking, represents the ability to obtain funds
to meet loan commitments and to satisfy demand for deposit withdrawals. The
principal sources of funds that provide liquidity to the Bank are its cash
balances, federal funds sold, securities available for sale and a portion of
mortgage loans held for sale. The Bank's portfolio loan-to-deposit ratio
(excluding brokered deposits) at September 30, 1998 was 68.4% as compared to
59.5% at September 30, 1997 and 59% as of December 31, 1997. The increase in
the Company's loan to deposit ratio was primarily due to an increase of 20.8% in
portfolio loans from September 30, 1997 to September 30, 1998. The Bank's
residential mortgage division utilizes the Bank's funding sources to fund its
mortgage loans held for sale. Management can slow down or speed up the shipping
and sale of these loans, and manages the balance of the mortgage loans held for
sale to match its funds available. In this way, management maximizes the yield
on its liquid assets. Due to the fluctuations in funding and sale of mortgage
loans, along with changes in the deposit balances of the Bank, the matching of
liquid assets and mortgage loans held for sale is not always achieved. At
certain times during the year, the Bank utilizes its 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 the first three quarters of
1998, the average balance of short term borrowings and brokered deposits was
$28.5 million compared to $8.5 million during the first three quarters of 1997.
11
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
A large portion of the Bank's deposits consist of deposits maintained by
escrow companies and, to a lesser degree, title insurance companies. At
September 30, 1998, escrow and title insurance companies' deposits totaled
approximately $57.1 million or 28.5% of total nonbrokered deposits. This
compared to escrow and title insurance deposits of approximately $40.0 million
or 20.2% and $45.4 million or 22.9% of total nonbrokered deposits as of
September 30, 1997 and December 31, 1997, respectively. The increase in these
deposits is primarily due to the strong real estate market in Southern
California. The market among banks in Southern California for these types of
deposits is very competitive. The Bank believes that at a minimum, it will
maintain its historic level of escrow and title deposits although a significant
reduction below the historical levels could have material impact on the Bank's
liquidity and cost of funds.
Market and Interest Rate Risk
- -----------------------------
Market risk arises from changes in interest rates, exchange rates, commodity
prices and equity prices. The Company does not engage in trading of financial
instruments, nor does it have exchange rate risk. The Bank has risk management
policies to monitor and limit exposure to market risk arising due to changes in
interest rates and commodity prices. Disclosures about fair value of financial
instruments, which reflect changes in market prices and rates, can be found in
Note 11 of the Company's Annual Consolidated Financial Statements.
The Company uses asset liability management to control the overall interest
rate risk exposure of its balance sheet. 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 rates 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 September 30, 1998. All dollar amounts are in thousands.
12
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30,1998
<TABLE>
<CAPTION>
Expected Repricing Period
-------------------------
Greater
Less than 3-12 1-5 than
3 Months Months Years 5 Years Total
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans $ 96,672 $15,064 $14,261 $11,145 $137,142
Interest rate swap (20,000) - 20,000 - -
Mortgage loans held for sale 95,237 - - - 95,137
Investment securities 1,674 1,141 3,278 - 6,093
Federal funds sold 2,500 - - - 2,500
-------- ------- ------- ------- --------
Total Rate Sensitive Assets 175,983 16,205 37,539 11,145 240,872
Rate Sensitive Liabilities:
Time deposits 37,653 20,806 2,840 99 61,398
Interest bearing demand deposits 59,187 - - - 59,187
Savings deposits 3,547 - - - 3,547
Other demand deposits 35,472 - - - 35,472
Borrowings on line of credit 22,855 - - - 22,855
-------- ------- ------- -------- --------
Total Rate Sensitive Liabilities $158,714 $20,806 $ 2,840 $ 99 $182,459
Cumulative GAP $ 17,269 $12,668 $47,367 $58,413
======== ======= ======= =======
Cumulative Rate Sensitive Assets to 1.11 1.07 1.26 1.32
Rate Sensitive Liabilities ==== ==== ==== ====
</TABLE>
In order to reduce the impact of a decrease in interest rates on its net
interest margin, the Company has entered into an interest rate swap agreement.
The interest rate swap agreement effectively transfers variable rate assets to
fixed rate assets. The agreement is for a total notional principal amount of
$20 million and provides that the Company pay a variable interest rate of prime
on the notional amount with the counterparty paying the Company a fixed rate of
9.11%. The agreement terminates on April 3, 2000. The unrealized gain on this
swap as of September 30, 1998 is approximately $470,000.
As the GAP analysis demonstrates, the Company is in a positive one year gap
position of 1.07. The estimated effect on the Company's net interest income for
a 10% decrease in the prime interest rate (82.5 basis points) over a one-year
period would be a decrease of approximately $350,000. Similarly, if there was a
10% increase in the prime interest rate over a one-year period, the Company's
net interest income would be enhanced by $350,000. Following the Federal
Reserve Board action to reduce the targeted Federal Funds interest rate, the
U.S. prime interest rate was reduced from 8.5% to 8.25% on September 30, 1998,
and from 8.25% to 8.0% on October 16, 1998. These reductions and any further
reductions in the prime interest rate should reduce the Banks net interest
margin over the next year. The Bank's policy is
13
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
to limit the change in the Bank's net interest margin to plus or minus 1.25% of
the Bank's capital based on a 50 basis point immediate change in the prime rate.
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 the Bank strategies, (such as delaying increases in interest
paid on interest bearing deposit accounts) on the Company's net interest income.
It also estimates the relationship between movements in the prime interest rate
and the movement in other asset and liability interest rates used in the gap
model. Therefore, a gap analysis is only one tool with which to analyze
interest rate risk and must be reviewed in conjunction with other information
and in conjunction with the likely changes in the yield curve.
In addition, the Bank has available for sale securities recorded at their
fair market value of $6,093,000 as of September 30, 1998. The value of these
securities is subject to fluctuations based upon the current interest rate
yield. A 10% change in short-term interest rates should not have a material
impact on the market value of the Banks available for sale securities.
The Bank also has interest rate risk associated with the lending activity of
the Bank's residential mortgage loan department. Unfunded rate-locked loans,
together with the portion of mortgage loans held for sale that are not allocated
to an existing purchase commitment, 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. The Bank does not hedge against interest rate risk on its
subprime residential mortgage loan volume. A 10% change in mortgage interest
rates should not have a material impact on the market value of these loans. As
of September 30, 1998, the Bank had $3.8 million of rate-locked unfunded sub-
prime and closed sub-prime loans.
As of September 30, 1998, the Bank had $74.5 million of mandatory forward
commitments to sell whole loans. This represented 85.3% coverage of the
estimated rate-locked loans which will fund and unallocated mortgage loans held
for sale. The Bank's policy is to limit the change in the economic value of the
mandatory forward commitments together with the rate-locked loans and
unallocated loans held for sale to plus or minus 2% of the Bank's capital based
on a 50 basis point immediate change in residential mortgage interest rates. As
of September 30, 1998, the Bank will incur a decrease in the economic value of
its residential mortgage on and off balance sheet assets of approximately
$256,000 for an immediate increase of 50 basis points in residential mortgage
interest rates, while the economic value would increase approximately $256,000
for an immediate decrease of 50 basis points.
14
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
Results of Operations for the Nine Months
Ended September 30, 1998 and September 30, 1997
-----------------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $3,190,000 (27%) between the
periods presented primarily due to the significant increase in the average
balance of mortgage loans held for sale and, to a lesser degree, its' portfolio
loans. The increase in the average balance of mortgage loans held for sale is
due to the increased activity in the Bank's residential mortgage loan
department. The increase in the Bank's portfolio loans was due to the Bank's
continual marketing effort along with a strong economic environment in the
Bank's primary lending area.
Over the periods presented, the Bank also experienced an increase in the
yield on its portfolio loans and a decrease in the yield on its mortgage loans
held for sale. The increase in the yield on portfolio loans was primarily due
to the reduction in nonperforming loans. The decrease in the yield on mortgage
loans held for sale is due to the lower long term interest rate environment
which, in part, has fueled the increase in mortgage loan volume.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the nine months ended September 30, 1998 as compared
to the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
Change in interest income due to:
Volume Rate Total
------------ ---------- -----------
<S> <C> <C> <C>
Loans $1,229,000 $ 333,000 $1,562,000
Mortgage loans held for sale 1,717,000 (190,000) 1,527,000
Investment securities 25,000 19,000 44,000
Federal funds sold 82,000 6,000 88,000
---------- --------- ----------
Total $3,053,000 $ 168,000 $3,221,000
========== ========= ----------
Change in loan fees (31,000)
----------
Total change in interest and loan fee income $3,190,000
==========
</TABLE>
Total interest expense
- ----------------------
Total interest expense increased $1,196,000 (41%) between the periods
presented primarily due to an increase in the volume of time deposits, interest
bearing demand deposits, and short term borrowings. Primarily all of the
increased volume of time deposits is a result of the increased utilization of
brokered deposits. The increased volume of short-term borrowings and brokered
deposits were used to fund the growth of mortgage loans held for sale. For the
first nine months of 1998, the average cost of brokered deposits was 36 basis
points above the average cost of the Bank's time deposits. The following table
sets forth the Company's rate and volume analysis for interest-bearing
liabilities for the nine months ended September 30, 1998 as compared to the
corresponding period ended September 30, 1997.
15
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
<TABLE>
<CAPTION>
Change in interest expense due to:
Volume Rate Total
----------- ----------- -----------
<S> <C> <C> <C>
Interest-bearing demand deposit $ 116,000 $ (5,000) $ 111,000
Time deposits 882,000 76,000 958,000
Savings deposits (20,000) (5,000) (25,000)
Short-term borrowings 157,000 (5,000) 152,000
---------- ---------- ----------
Total $1,135,000 $ 61,000 $1,196,000
========== ========== ==========
</TABLE>
Allowance for loan losses
- -------------------------
An analysis of the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Balance at beginning of period $1,558,000 $1,812,000
---------- ----------
Charge-offs (196,000) (480,000)
Recoveries 124,000 308,000
---------- ----------
Net charge-offs (72,000) (172,000)
---------- ----------
Contribution to allowance for loan losses 575,000 765,000
---------- ----------
Balance at end of period $2,061,000 $2,405,000
========== ==========
Allowance as a percentage of total loans 1.5% 2.1%
</TABLE>
16
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
The following table sets forth the total amount of nonaccrual loans,
accruing loans past due 90 days or more, troubled debt restructurings,
classified loans and other real estate owned as of September 30, 1998 and 1997
as well as December 31, 1997.
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997 Sept. 30, 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $ 514,000 $1,237,000 $1,836,000
Accruing loans contractually past due 90 days or more 430,000 160,000 90,000
Total classified loans 4,078,000 5,433,000 6,094,000
Other real estate owned 759,000 476,000 563,000
Troubled debt restructurings 1,044,000 4,102,000 4,041,000
</TABLE>
The Company's contribution to the provision for loan losses was $575,000 for
the first nine months of 1998 compared to $765,000 during the same period in
1997. The decreased provision is a result of the reduction of nonaccrual and
classified loans between the periods presented along with a strong southern
California economy. The loan loss reserve as a percentage of loans decreased
from 2.1% as of September 30, 1997 to 1.5% as of September 30, 1998. This
decrease is due to the increase in portfolio loans along with the reduction of a
specific reserve allocated to one loan that was written off in the fourth
quarter of 1997. The allowance is a result of Management's analysis of the
estimated inherent losses in the Bank's loan portfolio. This analysis takes
into consideration the level and trend of loan losses, loan delinquencies,
classified loan volumes and Management's analysis of current market conditions.
Other Income
- ------------
Other income increased $6,022,000 (51%) between the periods presented. The
increase was primarily due to higher revenue generated from the Bank's
residential mortgage operation. During the first nine months of 1998, gross
revenue from the mortgage operation was $16,627,000 compared to $10,437,000 in
the corresponding period in 1997. The increase in the mortgage divisions gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $4,504,000 during the first three quarters of 1998, compared to
$2,961,000 during the same period in 1997. The increase in net income of this
department is primarily due to the higher volume of loans funded and sold. The
increase in loan volume was attributed to the lower mortgage interest rate
environment which has fueled an increase in mortgage loan refinancings. During
the nine months ended September 30, 1998, 49% of the mortgage loan volume was
from refinancings compared to 25% in the same period in 1997. When the low
interest rate environment changes, the mortgage loan volume might significantly
decrease. This could have a material impact on the profitability of this
department. To reduce this possible impact, the Bank in conjunction with Alta
Residential Mortgage Trust ("Alta"), has developed adjustable rate mortgage
loans which the Bank is offering to its customers for sale to Alta. It is
anticipated that this product could be the choice of preference to consumers
when the mortgage loan fixed interest rates environment materially increases.
Historically, the Bank has not secured an investor willing to purchase these
adjustable rate types of loans and therefore has not offered them.
17
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
The gain on the sales of SBA loans declined $103,000 (24.8%) between the
periods presented. During the second quarter of 1998, management changed its
policy with regard to the sale of the guaranteed portion of the SBA loans which
it generates. Rather than sell the guaranteed portion of the SBA loan, as has
been its practice, the Bank is looking to portfolio the guaranteed portion.
This change will increase the Bank's balance sheet and the long term
profitability of the Bank. By holding these loans, the Bank will earn the
interest spread between the interest earned on the loan and the Bank's cost of
funds. If the loan pays off before its expected life, the Bank could lose some
of the benefit of holding the loan. Therefore, in order to maximize the profit
of the Bank and to reduce its risk from loan prepayments, the Bank may, from
time to time, decide to sell some of its SBA loans. As of September 30, 1998,
the Bank has approximately $4.7 million of the guaranteed portion of SBA loans
which could be sold.
Other Expenses
- --------------
Other expenses increased $4,333,000 (30.3%) between the periods presented.
The Company's other expenses decreased $301,000 (4.4%) while the Bank's
residential mortgage division's expenses increased $4,634,000 (62.1%). The
increase in the mortgage division's expenses was due to the increased level of
activity and was substantially associated with the increase in salaries,
employee benefits, and commissions and reserves for residential mortgage loan
losses. The decrease in the Company's other expenses of $301,000 was primarily
due to a decrease in salaries and employee benefits of $284,000 (8.7%), REO
expenses of $329,000 (71.4%) and occupancy expenses of $140,000 (13.4%).
Salaries, employee benefits, and occupancy expenses were reduced primarily as a
result of the consolidation of the Irvine Spectrum branch into the Bank's
Newport Beach and Orange branches. The reduction of REO expenses is a direct
result of the reduction of REO properties. These decreases were partially
offset with increases in other deposit expenses of $291,000 (29.3%), which was
attributable to the increase in escrow and title insurance deposit balances.
Provision for Income Taxes
- --------------------------
The Company recognized a provision for income tax of $4,007,000 during the
first three quarters of 1998 compared to a provision for income taxes of
$2,341,000 during the same period in 1997. These tax provisions represent a
full income tax provision of 42% of pretax income.
Cash and Cash Equivalents
- -------------------------
As of September 30, 1998, cash and cash equivalents increased $16.5 million
from December 31, 1997 balances. The change was due to increases in short-term
borrowings of $17.9 million, deposits of $4.4 million, and cash generated from
operating activities of $12.5 million. These increases were partially offset
with increases in portfolio loans of $20.2 million.
18
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
Results of Operations for the Three Months
Ended September 30, 1998 and September 30, 1997
-----------------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $958,000 (22.4%) between the
periods presented primarily due to the significant increase in the average
balance of portfolio loans and mortgage loans held for sale.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997.
<TABLE>
<CAPTION>
Change in interest income due to:
Volume Rate Total
---------- -------- --------
<S> <C> <C> <C>
Loans $465,000 $109,000 $574,000
Mortgage loans held for sale 353,000 (58,000) 295,000
Investment securities 24,000 16,000 40,000
Federal funds sold 69,000 -0- 69,000
-------- -------- --------
Total $911,000 $ 67,000 $978,000
======== ======== --------
Change in loan fees (20,000)
Total change in interest and loan fee income $958,000
========
</TABLE>
Total interest expense
- ----------------------
Total interest expense increased $302,000 (27.9%) between the periods
presented primarily due to an increase in the volume of interest bearing demand
and time deposits. The following table sets forth the Company's rate and volume
analysis for interest-bearing liabilities for the three months ended September
30, 1998 as compared to the corresponding period ended September 30, 1997.
Change in interest expense due to:
<TABLE>
<CAPTION>
Volume Rate Total
--------- ---------- ----------
<S> <C> <C> <C>
Interest-bearing demand deposit $ 12,000 $(38,000) $(26,000)
Time deposits 259,000 1,000 260,000
Savings deposits (5,000) -0- (5,000)
Short-term borrowings 70,000 3,000 73,000
-------- -------- --------
Total $336,000 $(34,000) $302,000
======== ======== ========
</TABLE>
19
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
Allowance for loan losses
- -------------------------
An analysis of the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three months ended September 30
--------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Balance at beginning of period $1,793,000 $1,751,000
---------- ----------
Charge-offs -0- (13,000)
Recoveries 43,000 97,000
---------- ----------
Net recoveries 43,000 84,000
---------- ----------
Contribution to allowance for loan losses 225,000 570,000
---------- ----------
Balance at end of period $2,061,000 $2,405,000
========== ==========
Allowance as a percentage of total loans 1.5% 2.1%
</TABLE>
Other Income
- ------------
Other income increased $2,155,000 (50%) between the periods presented. The
increase was due to higher revenue generated from the Bank's residential
mortgage operation. During the three months ended September 30, 1998, gross
revenue from the mortgage division was $4,393,000 compared to $2,678,000 in the
corresponding period in 1997. The increase in the mortgage division's gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $1,693,000 during the three months ended September 30, 1998,
compared to $1,086,000 during the same period in 1997. The increase in net
income of this department is primarily due to the higher volume of loans funded.
During the three months ended September 30, 1998, this department funded $380
million in loans, a 23.5% increase over the same period in 1997. The increase
was primarily due to the higher number of loan refinancings due to the lower
interest rate environment. Of the loans funded in the third quarter of 1998, 46%
were loan refinancings, compared to 26% in the third quarter of 1997.
Other Expenses
- --------------
Other expenses increased $1,759,000 (36.3%) between the periods presented.
The Company's other expenses increased $44,000 (2.6%) while the Bank's
residential mortgage division's expenses increased $1,715,000 (64%). The
increase in the mortgage division's expenses was due to the increased level of
activity and was substantially associated with the increase in salaries,
employee benefits, commissions and reserves for residential mortgage loan
losses. The increase in the Company's other expenses of $44,000 was primarily
due to increases in professional expenses which was partially offset with
decreases in salaries, employee benefits and occupancy expenses.
20
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
Provision for Income Taxes
- --------------------------
The Company recognized a provision for income taxes of 41.5% and 42% of
pretax income for the three months ended September 30, 1997 and 1998,
respectively.
Year 2000 Risks and Preparedness
- --------------------------------
Many existing computer programs use only two digits to identify a year in a
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 or
possibly earlier. The Year 2000 issue affects the Company in that the Banking
business is highly dependent on computer applications in a variety of ways,
including the following: (i) The Bank relies on computer systems in almost all
aspects of its business, including the processing of deposits, loans and other
services and products offered to customers, the failure of which in connection
with the Year 2000 could cause systemic disruptions and failures in the products
and services offered by the Bank; (ii) other banks, clearing houses and vendors
whose products and services are used by the Bank are at risk of systemic
disruptions and potential failures in the event that such entities have not
adequately addressed their Year 2000 issues ; (iii) the creditworthiness of the
Bank's borrowers might be diminished by significant disruptions of their
business as result of their own or others' failure to address adequately the
Year 2000 issue; and (iv) federal banking agencies have issued interagency
guidance on the business-wide risk posed to financial institutions by the Year
2000 problem pursuant to which the federal banking agencies may take supervisory
action against financial institutions that fail to address appropriately Year
2000 issues prior to the Year 2000, including formal and informal enforcement
actions, denial of applications to the federal banking agencies, civil money
penalties and a reduction in the management component rating of the
institution's composite rating.
The Bank has initiated a program to ensure that the Bank's computer systems
and applications will be in compliance with the Year 2000 issues. The primary
focus of the Year 2000 plan is to ensure that the Bank's computer systems and
networks operate unimpeded into the next century. The Bank's efforts to
successfully meet the Year 2000 compliance issues are an extension of the
federal banking agencies efforts to prevent Year 2000 disruptions. The Bank's
goal is to complete the Year 2000 compliance project in a safe and sound manner
which will provide the Bank, its shareholders, customers and regulators with an
institution in full compliance of the Year 2000 century date change.
The Bank's Year 2000 project program contains phase activities including
Awareness, Assessment, Renovation, Validation and Implementation. These
activities are monitored by the Bank's Year 2000 Compliance Committee which
provides project update information to the Board of Directors. Pursuant to the
Year 2000 plan, the Bank is 100% complete in its awareness and assessment phase
and expects to be substantially complete with its renovation phase by December
31, 1998. The validation and implementation phases should be completed by June
30, 1999.
To address the Company's Year 2000 issues, management expects to incur
incremental cost of under $100,000, which will be expended during the Years 1998
and 1999. This cost estimate does not include costs associated with internal
staff's time put into this project, which is considerable, nor does it include
costs associated with the deployment of new software and hardware which is being
installed for additional benefits including its Year 2000 compliance.
21
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September 30, 1998
In addition, as part of the credit review process, the Bank has communicated
with its major borrowers who in the estimation of management have the greatest
risks of the Year 2000 issue. This effort has been made to ensure that such
borrowers have taken appropriate steps to address their Year 2000 issues and
will not be materially affected by any Year 2000 problems. The Bank is also
preparing contingency plans to protect it in the event that it is unable to
attain Year 2000 compliance in certain applications according to the Year 2000
program. The contingency plans being prepared are system and application
specific and are intended to ensure that in the event that one or more of such
systems and/or applications fails by or at the Year 2000, the Bank will be able
to engage in its core business functions in spite of such failure.
Although the Company believes that its Year 2000 program and other steps
being taken are adequate to ensure that it will not be materially affected by
the Year 2000 problem, there can be no assurance that the Year 2000 program and
the Bank's other Year 2000 remedial and contingency plans will fully protect it
from the risks associated with the Year 2000 problem. The analysis of, and
preparations for, the Year 2000 and related problems necessarily rely on a
variety of assumptions about future events, and there can be no assurance that
management has accurately predicted such future events or that the remedial and
contingency plans will adequately address such future events. In the event that
the business of the Bank, vendors of the Bank or customers of the Bank are
disrupted as a result of the Year 2000 problem, such disruption could have a
material adverse effect on the Company.
22
<PAGE>
Part II - Other Information
---------------------------
September 30, 1998
Item 1. Legal Proceedings.
- ------- ------------------
There are no pending legal proceedings to which the Company or the Bank
is a party or to which any of their respective subsidiaries are subject, other
than ordinary routine litigation incidental to the Bank's business.
Item 2. Changes in Securities.
- ------- ----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- ------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
Not applicable.
Item 5. Other Information.
- ------- ------------------
On October 6, 1998, the Company entered into a definitive agreement to
merge with Western Bancorp. Shareholders of the Company will receive one share
of Western Bancorp stock for each outstanding share of the Company in what is
expected to qualify for a tax free exchange. The acquisition is expected to
qualify for a pooling-of-interest accounting and close during the fourth quarter
of 1998 or the first quarter of 1999. For more information on the merger please
see the Company's Form 8-K filed on October 6, 1998.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits Filed - none required.
--------------
(b) Reports on Form 8-K. During the third quarter of 1998, the Company
-------------------
filed a report on Form 8-K on July 27, 1998 to report its second quarter
1998 earnings.
23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
PNB Financial Group
Date: November 12, 1998 By: /s/ Allen C. Barbieri
----------------- --------------------------
Allen C. Barbieri
President and C.E.O.
Date: November 12, 1998 By: /s/ Doug L. Heller
----------------- -----------------------
Doug L. Heller
Chief Financial Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,191
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,093
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 137,142
<ALLOWANCE> 2,061
<TOTAL-ASSETS> 275,017
<DEPOSITS> 215,456
<SHORT-TERM> 22,855
<LIABILITIES-OTHER> 5,200
<LONG-TERM> 0
0
0
<COMMON> 25,593
<OTHER-SE> 5,913
<TOTAL-LIABILITIES-AND-EQUITY> 275,017
<INTEREST-LOAN> 4,965
<INTEREST-INVEST> 147
<INTEREST-OTHER> 122
<INTEREST-TOTAL> 5,234
<INTEREST-DEPOSIT> 1,271
<INTEREST-EXPENSE> 1,384
<INTEREST-INCOME-NET> 3,850
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,600
<INCOME-PRETAX> 3,490
<INCOME-PRE-EXTRAORDINARY> 3,490
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,048
<EPS-PRIMARY> .73
<EPS-DILUTED> .70
<YIELD-ACTUAL> 6.76
<LOANS-NON> 514
<LOANS-PAST> 430
<LOANS-TROUBLED> 1,044
<LOANS-PROBLEM> 4,078
<ALLOWANCE-OPEN> 1,793
<CHARGE-OFFS> 0
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 2,026
<ALLOWANCE-DOMESTIC> 2,026
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
