<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
December 30, 1998
-----------------
Date of Report (Date of Earliest Event Reported)
WESTERN BANCORP
---------------
(Exact Name of Registrant As Specified In Its Charter)
CALIFORNIA
----------
(State or Other Jurisdiction of Incorporation)
0-13551 95-3863296
--------- ----------
(Commission File Number) (IRS Employer Identification No.)
4100 Newport Place, Suite 900
Newport Beach, California 92660
-------------------------------
(Address of Principal Executive Offices)(Zip Code)
(949) 863-2444
--------------
(Registrant's Telephone Number, including Area Code)
1
<PAGE>
ITEM 2. MERGER WITH PNB FINANCIAL GROUP.
Western Bancorp (the "Company") serves as the holding company for
Southern California Bank ("SCB") and Santa Monica Bank ("SMB", and together
with SCB, the "Banks") and Venture Partners, Inc. PNB Financial Group
("PNB") served as the holding company for Pacific National Bank. On
December 30, 1998, PNB merged with and into the Company pursuant to an
Agreement and Plan of Merger, dated as of October 6, 1998 (the "Merger
Agreement"), by and between the Company and PNB (the "Merger"). As a
result of the Merger, Pacific National Bank became a wholly-owned
subsidiary of the Company after the Merger.
Pursuant to the Merger Agreement, each issued and outstanding share of
common stock of PNB ("PNB Common Stock") prior to the Merger (other than as
provided in the Merger Agreement) was converted into the right to receive
one share (the "Conversion Number") of common stock of the Company
("Company Common Stock"). In addition, each option to acquire shares of
PNB Common Stock outstanding immediately prior to the Effective Time (as
defined in the Merger Agreement) was converted into an option to acquire a
like number of shares of Company Common Stock. Upon consummation of the
Merger, the Company issued approximately 2,779,733 shares of Company Common
Stock to former holders of PNB Common Stock, and as a result, the former
shareholders of PNB Common Stock own shares of Company Common Stock
representing approximately 13.3% of the outstanding shares of Company
Common Stock.
The description of the Merger Agreement contained herein is qualified
in its entirety by reference to the Merger Agreement which is incorporated
herein as Exhibit 2.1. After giving effect to the Merger, the total assets
of the Company and its subsidiaries increased to approximately $2.6
billion, total deposits increased to approximately $2.1 billion and total
shareholder equity increased to approximately $360 million as of September
30, 1998 on a restated basis, before giving effect to merger costs and
restructuring costs.
A Press Release announcing consummation of the Merger was issued on
December 31, 1998, a copy of which is attached hereto as Exhibit 99.1 and
is incorporated herein in its entirety by this reference.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Financial statements for PNB required by this Item are incorporated
herein in their entirety by this reference to Exhibit 99.2 and Exhibit 99.3
hereto.
(b) PRO FORMA FINANCIAL INFORMATION.
The pro forma financial information required by this Item is
incorporated herein in its entirety by this reference to Exhibit 99.4.
(c) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- ------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 6, 1998, between
Western Bancorp and PNB Financial Group, Inc. (Exhibit 2.2 to Western
Bancorp's current Report on Form 8-K, dated October 21, 1998
incorporated herein by reference)
23.1 Consent of McGladrey & Pullen, LLP.
99.1 Press Release of Western Bancorp dated December 31, 1998
99.2 Audited Balance Sheets of PNB Financial Group as of December 31, 1997
and 1996 and the related Statements of Income, Changes in Stockholders
Equity and Cash Flows for the years then ended.
99.3 Unaudited Balance Sheets as of September 30, 1998 and December 31,
1997 and the related Statements of Income, and Cash Flows for the
three and nine months ended September 1998 and 1997.
99.4 Unaudited Balance Sheets of PNB Financial Group as of September 30,
1998 and the related Statements of Income, and Cash Flows for the nine
months ended September 30, 1998 and 1997.
</TABLE>
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 hereunder duly authorized.
Dated: January 13, 1999
WESTERN BANCORP
By: /s/ Arnold C. Hahn
----------------------------------------
Name: Arnold C. Hahn
Title: Executive Vice President and
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- ------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 6, 1998, between
Western Bancorp and PNB Financial Group, Inc. (Exhibit 2.2 to Western
Bancorp's current Report on Form 8-K, dated October 21, 1998
incorporated herein by reference)
23.1 Consent of McGladrey & Pullen, LLP.
99.1 Press Release of Western Bancorp dated December 31, 1998
99.2 Audited Balance Sheets of PNB Financial Group as of December 31, 1997
and 1996 and the related Statements of Income, Changes in Stockholders
Equity and Cash Flows for the years then ended.
99.3 Unaudited Balance Sheets as of September 30, 1998 and December 31,
1997 and the related Statements of Income, and Cash Flows for the
three and nine months ended September 1998 and 1997.
99.4 Unaudited Balance Sheets of PNB Financial Group as of September 30,
1998 and the related Statements of Income, and Cash Flows for the nine
months ended September 30, 1998 and 1997.
</TABLE>
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated January 29, 1998,
included in this Form 8-K in the previously filed Registration Statements of
Western Bancorp on Form S-8, (No. 333-28635, 333-28633 and 333-44609) Form
S-3 (No. 333-53635) and in the Registration Statements on Form S-8 filed on
or about January 11, 1999.
/s/ McGLADREY & PULLEN, LLP
Anaheim, California
January 12, 1999
<PAGE>
EXHIBIT 99.1
WESTERN BANCORP
PRESS RELEASE
Western Bancorp (NASDAQ: WEBC)
4100 Newport Place, Suite 900
Newport Beach, California 92660
Contacts: Matthew P. Wagner Allen C. Barbieri
President & President &
Chief Executive Officer Chief Executive Officer
Western Bancorp PNB Financial Group
Phone: 310/477-2402 ext. 134 949/851-1033
Fax: 310/231-0321 949/833-9207
FOR IMMEDIATE RELEASE
WESTERN BANCORP ANNOUNCES CLOSING OF
MERGER WITH PNB FINANCIAL GROUP
December 31, 1998
Newport Beach, California ... On December 30, 1998, Western Bancorp ("Western")
consummated its previously announced acquisition of PNB Financial Group ("PNB")
through the merger of PNB with and into Western. The acquisition will be
accounted for as a pooling-of-interests. As a result of this acquisition,
approximately 2,779,733 shares of common stock of Western are being issued to
holders of common stock of PNB.
PNB operates through its subsidiary Pacific National Bank ("Pacific"). As of
September 30, 1998, Pacific had $275 million in assets and three banking
branches in Newport Beach, Orange and Beverly Hills. Pacific is primarily
focused in the areas of commercial banking, including lending to small
businesses, construction lending and making loans guaranteed by the Small
Business Administration. In addition, Pacific has a residential mortgage
origination business with offices in Irvine, Santa Ana, Dublin and San Diego,
California and an office in Phoenix, Arizona. Through 1998, Pacific has funded
approximately $1.5 billion in mortgage loans. Pacific sells substantially all
of its mortgage loans in the secondary market with servicing released. It is
the intention of Western to merge Pacific into Southern California Bank, a
wholly owned subsidiary of Western. The merger of Pacific into Southern
California
5
<PAGE>
Bank and the systems integration is planned for the end of February 1999.
This integration will result in the consolidation of each of Pacific's
banking offices into existing banking offices of Western.
Matthew P. Wagner, President and Chief Executive Officer of Western stated "PNB
enhances our banking franchise both in Orange County and west Los Angeles by
increasing our average branch size and adding new customers and businesses. In
addition, Pacific's mortgage business further expands Western's product line and
is counter cyclical to the low interest rate environment that impacts Western's
regular banking business. This acquisition adds to shareholder value and is
expected to be accretive to both cash and GAAP earnings during 1999."
Pacific's Chief Executive Officer, Allen C. Barbieri, stated "This transaction
greatly benefits PNB shareholders as they will now own a more liquid stock in a
stronger and faster growing banking franchise which is better positioned to take
advantage of the vibrant Southern California economy. Pacific customers will
continue to receive the personal attention expected from a community banking
franchise while enjoying numerous new benefits and services not currently
offered by Pacific." Mr. Barbieri has joined the board of directors of Western
and will continue to run the mortgage business.
On a pro forma basis on September 30, 1998 and after the merger of Pacific into
Southern California Bank, Western will have approximately $2.6 billion in assets
in its two banking subsidiaries: Southern California Bank and Santa Monica Bank.
Southern California Bank serves southern Los Angeles, Orange and San Diego
Counties with fifteen branches and with its specialized escrow services and
asset based lending. Santa Monica Bank serves its clients in Santa Monica,
Westwood, Malibu, Marina del Rey, Beverly Hills, Century City, Encino, Culver
City, West Hollywood, and Glendale with sixteen branches and its specialized
trust and investment management services.
FORWARD-LOOKING STATEMENTS
This press release includes forward-looking statements that involve inherent
risks and uncertainties. Western Bancorp cautions readers that a number of
important factors could cause actual results to differ materially from those in
the forward-looking statements. These factors include economic conditions and
competition in the geographic and business areas in which Western Bancorp and
its subsidiaries operate, inflation or deflation, fluctuations in interest
rates, legislation and governmental regulation and the progress of integrating
Santa Monica Bank, Western Bank, Southern California Bank, the Bank of Los
Angeles and Pacific National Bank.
6
<PAGE>
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.
McGladrey & Pullen, LLP
Anaheim, California January 29, 1998
<PAGE>
PNB FINANCIAL GROUP
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
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.
PNB FINANCIAL GROUP
<PAGE>
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>
<PAGE>
See Notes to Consolidated Financial Statements.
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.
PNB FINANCIAL GROUP
<PAGE>
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
--------------------------------
--------------------------------
</TABLE>
Supplemental Disclosures (Note 13)
<PAGE>
See Notes to Consolidated Financial Statements.
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:
<PAGE>
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.
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:
<PAGE>
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.
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:
<PAGE>
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.
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:
<PAGE>
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.
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:
<PAGE>
<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>
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>
<PAGE>
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.
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:
<PAGE>
<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:
<PAGE>
<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 $ 1,558,000 $ 1,812,000
----------------------------
----------------------------
</TABLE>
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.
<PAGE>
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.
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:
<PAGE>
<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.
<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.
<PAGE>
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.
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:
<PAGE>
<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>
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.
<PAGE>
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.
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.
<PAGE>
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.
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:
<PAGE>
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>
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:
<PAGE>
<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:
<PAGE>
<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.
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:
<PAGE>
<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>
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:
<PAGE>
<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>
<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:
<PAGE>
<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>
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
<PAGE>
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.
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.
<PAGE>
<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.
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Estimated Fair Value of Financial Instruments (Continued)
<PAGE>
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.
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Estimated Fair Value of Financial Instruments (Continued)
Interest rate risk:
<PAGE>
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>
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Condensed Financial Information - Parent Company Only (Continued)
<PAGE>
<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.
PNB FINANCIAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Disclosure of Cash Flow Information
<PAGE>
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.
<PAGE>
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.
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:
<PAGE>
<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>
<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
<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
<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
<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
<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.
<PAGE>
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 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.
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data
combines the restated consolidated condensed financial statements of Western
Bancorp ("Western") and the consolidated financial statements of PNB
Financial Group ("PNB"), giving effect to the merger of PNB with and into
Western (the "Merger") as if it had been effective on September 30, 1998 and
December 31, 1997, with respect to the Pro Forma Combined Condensed Balance
Sheets, and as of the beginning of the years indicated and carried through
the interim periods, with respect to the Pro Forma Combined Condensed
Statements of Income. This information is presented under
pooling-of-interests accounting. The unaudited pro forma combined condensed
financial data also combines the historical condensed statements of income of
Santa Monica Bank acquired by Western on January 27, 1998, in a merger
accounted for under the purchase method of accounting, for the year ended
December 31, 1997 and the nine months ended September 30, 1998 and 1997, as
if the Santa Monica Bank acquisition occurred at the beginning of such
periods. The information for the nine months ended September 30, 1998 and
1997 is derived from the unaudited restated financial statements of Western,
unaudited financial statements of Santa Monica Bank and PNB which include, in
the opinion of the respective managements of Western, Santa Monica Bank and
PNB, all adjustments (consisting only of normal accruals) necessary to
present fairly the data for such periods. This information should be read in
conjunction with the restated and historical consolidated financial
statements of Western, Santa Monica Bank and PNB including their respective
notes thereto. The effect of estimated merger and reorganization costs
expected to be incurred in connection with the acquisitions of PNB and Bank
of Los Angeles have been reflected in the Unaudited Pro Forma Combined
Condensed Balance Sheets; however, since the estimated costs are
nonrecurring, they have not been reflected in the Unaudited Pro Forma
Combined Condensed Statements of Income. The unaudited pro forma combined
condensed financial data does not give effect to any anticipated operating
efficiencies which may occur in conjunction with the PNB acquisition. The
Unaudited Pro Forma Combined Condensed Balance Sheets are not necessarily
indicative of the actual financial position that would have existed had the
Merger been completed on September 30, 1998 or December 31, 1997, or that may
exist in the future. The Unaudited Pro Forma Combined Condensed Statements of
Income are not necessarily indicative of the results that would have occurred
had the Merger been consummated on the dates indicated or that may be
achieved in the future. The actual financial position and results of
operations could differ, perhaps significantly, from the pro forma amounts
reflected herein because of a variety of factors, including changes in value
and changes in operating results between the dates of the unaudited pro forma
financial data and the date on which the Merger took place.
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
WESTERN AND
PRO FORMA PNB PRO
WESTERN PNB(1) ADJUSTMENTS(2) FORMA
------------ ---------- -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks.................................. $ 140,135 $ 29,191 $ -- $ 169,326
Federal funds sold....................................... 153,664 2,500 -- 156,164
------------ ---------- -------------- ------------
TOTAL CASH AND CASH EQUIVALENTS...................... 293,799 31,691 -- 325,490
Federal Reserve Bank and Federal Home Loan Bank stock, at
cost................................................... 8,016 1,629 -- 9,645
Securities held to maturity.............................. 93,088 -- -- 93,088
Securities available for sale............................ 209,707 4,464 -- 214,171
------------ ---------- -------------- ------------
TOTAL SECURITIES..................................... 310,811 6,093 -- 316,904
Mortgage loans held for sale............................. -- 95,137 -- 95,137
Net loans................................................ 1,443,569 135,081 -- 1,578,650
Property, plant and equipment............................ 35,129 1,074 -- 36,203
Other real estate owned.................................. 5,251 759 -- 6,010
Goodwill................................................. 148,307 -- -- 148,307
Other assets............................................. 36,161 5,182 6,368 47,708
------------ ---------- -------------- ------------
TOTAL ASSETS......................................... $ 2,273,027 $ 275,017 $ 6,368 $ 2,554,409
------------ ---------- -------------- ------------
------------ ---------- -------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits............................ $ 696,532 $ 91,323 $ -- $ 787,855
Interest bearing deposits................................ 1,200,334 124,133 -- 1,324,467
------------ ---------- -------------- ------------
Total deposits......................................... 1,896,866 215,456 -- 2,112,322
Borrowed funds........................................... 32,892 22,855 -- 55,747
Accrued interest payable and other liabilities........... 14,658 5,200 21,500 41,398
------------ ---------- -------------- ------------
TOTAL LIABILITIES.................................... 1,944,416 243,511 21,500 2,209,427
SHAREHOLDERS' EQUITY:
Common stock............................................. 294,575 25,593 -- 320,168
Retained earnings........................................ 33,561 5,876 (15,132) 24,305
Accumulated other comprehensive income................... 475 37 -- 512
------------ ---------- -------------- ------------
TOTAL SHAREHOLDERS' EQUITY........................... 328,611 31,506 (15,132) 344,985
------------ ---------- -------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $ 2,273,027 $ 275,017 $ 6,368 $ 2,554,409
------------ ---------- -------------- ------------
------------ ---------- -------------- ------------
Number of common shares outstanding(1)................... 17,784.6 2,779.7 20,564.3
Common shareholders' equity per share(1)................. $ 18.48 $ 11.33 $ 16.78
Tangible common shareholders' equity per share(1)........ $ 10.14 $ 11.33 $ 9.56
</TABLE>
See "NOTES TO WESTERN--PNB UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA."
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
WESTERN AND
PRO FORMA PNB PRO
WESTERN PNB(1) ADJUSTMENTS(2) FORMA
------------ ---------- -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks.................................. $ 120,102 $ 15,185 $ -- $ 135,287
Federal funds sold....................................... 168,257 -- -- 168,257
------------ ---------- -------------- ------------
TOTAL CASH AND CASH EQUIVALENTS...................... 288,359 15,185 -- 303,544
Federal Reserve Bank and Federal Home Loan Bank stock, at
cost................................................... 6,411 1,285 -- 7,696
Securities held to maturity.............................. 48,138 -- -- 48,138
Securities available for sale............................ 213,398 5,625 -- 219,023
------------ ---------- -------------- ------------
TOTAL SECURITIES..................................... 267,947 6,910 -- 274,857
Mortgage loans held for sale............................. -- 96,852 -- 96,852
Net loans................................................ 1,004,654 116,626 -- 1,121,280
Property, plant and equipment............................ 16,335 1,094 -- 17,429
Other real estate owned.................................. 7,736 476 -- 8,212
Goodwill................................................. 36,369 -- -- 36,369
Other assets............................................. 34,143 5,731 6,368 46,242
------------ ---------- -------------- ------------
TOTAL ASSETS......................................... $ 1,655,543 $ 242,874 $ 6,368 $ 1,904,785
------------ ---------- -------------- ------------
------------ ---------- -------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits............................ $ 542,725 $ 101,343 $ -- $ 644,068
Interest bearing deposits................................ 922,080 109,747 -- 1,031,827
------------ ---------- -------------- ------------
Total deposits......................................... 1,464,805 211,090 -- 1,675,895
Borrowed funds........................................... 14,600 5,000 -- 19,600
Accrued interest payable and other liabilities........... 15,429 2,787 21,500 39,716
------------ ---------- -------------- ------------
TOTAL LIABILITIES.................................... 1,494,834 218,877 21,500 1,735,211
SHAREHOLDERS' EQUITY:
Common stock............................................. 143,577 16,234 -- 159,811
Retained earnings........................................ 17,274 7,754 (15,132) 9,896
Accumulated other comprehensive income (loss)............ (142) 9 -- (133)
------------ ---------- -------------- ------------
TOTAL SHAREHOLDERS' EQUITY........................... 160,709 23,997 (15,132) 169,574
------------ ---------- -------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $ 1,655,543 $ 242,874 $ 6,368 $ 1,904,785
------------ ---------- -------------- ------------
------------ ---------- -------------- ------------
Number of common shares outstanding(1)................... 12,655.4 2,605.1 15,260.5
Common shareholders' equity per share(1)................. $ 12.70 $ 9.21 $ 11.11
Tangible common shareholders' equity per share(1)........ $ 9.83 $ 9.21 $ 8.73
</TABLE>
See "NOTES TO WESTERN--PNB UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA."
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SANTA WESTERN
MONICA PRO FORMA WESTERN PRO AND PNB
WESTERN JANUARY(3) ADJUSTMENTS(3) FORMA PNB(1) PRO FORMA
--------- ----------- ----------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and
leases............................... $ 98,484 $ 3,185 $ 101,669 $ 14,361 $ 116,030
Interest on interest bearing deposits
in other banks....................... 54 -- 54 -- 54
Interest on investment securities...... 13,591 616 14,207 360 14,567
Interest on federal funds sold......... 8,771 365 (235) 8,901 293 9,194
--------- ----------- ----- ----------- ----------- -----------
TOTAL INTEREST INCOME................ 120,900 4,166 (235) 124,831 15,014 139,845
INTEREST EXPENSE:
Interest expense on deposits........... 30,978 1,180 32,158 3,853 36,011
Interest expense on borrowings......... 1,374 16 1,390 258 1,648
--------- ----------- ----- ----------- ----------- -----------
TOTAL INTEREST EXPENSE............... 32,352 1,196 -- 33,548 4,111 37,659
--------- ----------- ----- ----------- ----------- -----------
NET INTEREST INCOME:..................... 88,548 2,970 (235) 91,283 10,903 102,186
Less: provision for loan and lease
losses............................... 450 80 530 575 1,105
--------- ----------- ----- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES.................. 88,098 2,890 (235) 90,753 10,328 101,081
NON-INTEREST INCOME:
Service charges, commissions and
fees................................. 12,652 595 13,247 5,331 18,578
Gain on sale of loans.................. -- -- -- 12,267 12,267
Securities gains....................... 481 -- 481 (5) 476
Other income........................... 877 19 896 244 1,140
--------- ----------- ----- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME............ 14,010 614 -- 14,624 17,837 32,461
NON-INTEREST EXPENSE:
Salaries and benefits.................. 29,917 1,123 (11) 31,029 11,123 42,152
Occupancy, furniture and equipment..... 9,588 347 23 9,958 1,594 11,552
Advertising and business development... 798 58 856 349 1,205
Other real estate owned................ (335) 9 (326) 149 (177)
Professional services.................. 3,052 73 3,125 1,112 4,237
Telephone, stationery and supplies..... 2,604 55 2,659 608 3,267
Goodwill amortization.................. 7,520 -- 665 8,185 -- 8,185
Data processing........................ 1,736 9 1,745 -- 1,745
Customer services cost................. 1,248 8 1,256 1,284 2,540
Provision for losses on loans sold..... -- -- -- -- 1,200 1,200
Merger costs........................... 139 429 568 -- 568
Other.................................. 4,985 239 5,224 1,203 6,427
--------- ----------- ----- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE........... 61,252 2,350 677 64,279 18,622 82,901
--------- ----------- ----- ----------- ----------- -----------
Income before income taxes............... 40,856 1,154 (912) 41,098 9,543 50,641
Income taxes............................. 19,723 463 (102) 20,084 4,007 24,091
--------- ----------- ----- ----------- ----------- -----------
NET INCOME........................... $ 21,133 $ 691 $ (810) $ 21,014 $ 5,536 $ 26,550
--------- ----------- ----- ----------- ----------- -----------
--------- ----------- ----- ----------- ----------- -----------
PER SHARE INFORMATION(1):
Number of shares (weighted average)
Basic................................ 17,155.3 7,084.2 17,720.9 2,708.2 20,429.1
Diluted.............................. 17,594.4 7,084.2 18,160.0 2,875.5 21,035.5
Income per share
Basic................................ $ 1.23 $ 0.10 $ 1.19 $ 2.04 $ 1.30
Diluted.............................. $ 1.20 $ 0.10 $ 1.16 $ 1.93 $ 1.26
</TABLE>
See "NOTES TO WESTERN--PNB UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA."
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
WESTERN
SANTA PRO FORMA WESTERN AND PNB
WESTERN MONICA(3) ADJUSTMENTS(3) PRO FORMA PNB(1) PRO FORMA
--------- ----------- --------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases... $ 67,716 $ 27,433 $ 95,149 $ 11,304 $ 106,453
Interest on interest bearing deposits in
other banks........................... 1 -- 1 -- 1
Interest on investment securities....... 14,282 6,415 20,697 316 21,013
Interest on federal funds sold.......... 3,463 2,708 (2,112) 4,059 204 4,263
--------- ----------- ------- ----------- ----------- -----------
TOTAL INTEREST INCOME................. 85,462 36,556 (2,112) 119,906 11,824 131,730
INTEREST EXPENSE:
Interest expense on deposits............ 23,549 10,848 34,397 2,809 37,206
Interest expense on borrowings.......... 1,048 147 1,195 106 1,301
--------- ----------- ------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE................ 24,597 10,995 -- 35,592 2,915 38,507
--------- ----------- ------- ----------- ----------- -----------
NET INTEREST INCOME....................... 60,865 25,561 (2,112) 84,314 8,909 93,223
Less: provision for loan and lease
losses................................ 2,535 -- 2,535 765 3,300
--------- ----------- ------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES................... 58,330 25,561 (2,112) 81,779 8,144 89,923
NON-INTEREST INCOME:
Service charges and fees................ 6,768 5,158 11,926 3,860 15,786
Gain on sale of loans................... 78 -- 78 7,485 7,563
Securities gains (losses)............... 342 -- 342 (11) 331
Other income............................ 1,263 172 1,435 481 1,916
--------- ----------- ------- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME............. 8,451 5,330 -- 13,781 11,815 25,596
NON-INTEREST EXPENSE:
Salaries and benefits................... 22,720 10,707 (98) 33,329 8,694 42,023
Occupancy, furniture and equipment...... 7,048 2,980 206 10,234 1,510 11,744
Advertising and business development.... 1,070 675 1,745 260 2,005
Other real estate owned................. 363 (556) (193) 474 281
Professional services................... 3,101 1,189 4,290 780 5,070
Telephone, stationery and supplies...... 2,326 474 2,800 525 3,325
Goodwill amortization................... 2,081 -- 5,983 8,064 -- 8,064
Data processing......................... 1,202 88 1,290 -- 1,290
Customer services cost.................. 867 105 972 993 1,965
Provision for losses on loans sold...... -- -- -- 176 176
Merger costs............................ 3,470 841 4,311 -- 4,311
Other................................... 4,942 2,028 6,970 877 7,847
--------- ----------- ------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE............ 49,190 18,531 6,091 73,812 14,289 88,101
--------- ----------- ------- ----------- ----------- -----------
Income before income taxes................ 17,591 12,360 (8,203) 21,748 5,670 27,418
Income taxes.............................. 8,022 4,338 (921) 11,439 2,341 13,780
--------- ----------- ------- ----------- ----------- -----------
NET INCOME............................ $ 9,569 $ 8,022 $ (7,282) $ 10,309 $ 3,329 $ 13,638
--------- ----------- ------- ----------- ----------- -----------
--------- ----------- ------- ----------- ----------- -----------
PER SHARE INFORMATION(1):
Number of shares (weighted average)
Basic................................. 11,805.3 7,084.2 16,785.9 2,522.1 19,308.0
Diluted............................... 12,294.9 7,084.2 17,275.5 2,699.6 19,975.1
Income per share
Basic................................. $ 0.81 $ 1.13 $ 0.61 $ 1.32 $ 0.71
Diluted............................... $ 0.78 $ 1.13 $ 0.60 $ 1.23 $ 0.68
</TABLE>
See "NOTES TO WESTERN--PNB UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA."
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
WESTERN
SANTA PRO FORMA WESTERN AND PNB
WESTERN MONICA(3) ADJUSTMENTS(3) PRO FORMA PNB(1) PRO FORMA
--------- ----------- --------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases... $ 91,868 $ 36,794 $ 128,662 $ 15,771 $ 144,433
Interest on interest bearing deposits in
other banks........................... 1 -- 1 -- 1
Interest on investment securities....... 18,445 8,922 27,367 422 27,789
Interest on federal funds sold.......... 5,574 3,652 (2,816) 6,410 228 6,638
--------- ----------- ------- ----------- ----------- -----------
TOTAL INTEREST INCOME................. 115,888 49,368 (2,816) 162,440 16,421 178,861
INTEREST EXPENSE:
Interest expense on deposits............ 31,949 14,575 46,524 3,852 50,376
Interest expense on borrowings.......... 1,340 196 1,536 192 1,728
--------- ----------- ------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE................ 33,289 14,771 -- 48,060 4,044 52,104
--------- ----------- ------- ----------- ----------- -----------
NET INTEREST INCOME:...................... 82,599 34,597 (2,816) 114,380 12,377 126,757
Less: provision for loan and lease
losses................................ 3,210 -- 3,210 870 4,080
--------- ----------- ------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES................... 79,389 34,597 (2,816) 111,170 11,507 122,677
NON-INTEREST INCOME:
Service charges, commissions and fees... 8,806 7,032 15,838 5,482 21,320
Gain on sale of loans................... 78 -- 78 10,814 10,892
Securities gains (losses)............... 342 13 355 (11) 344
Other income............................ 1,848 229 2,077 533 2,610
--------- ----------- ------- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME............. 11,074 7,274 -- 18,348 16,818 35,166
NON-INTEREST EXPENSE:
Salaries and benefits................... 29,825 14,661 (131) 44,355 11,967 56,322
Occupancy, furniture and equipment...... 9,621 4,151 274 14,046 2,048 16,094
Advertising and business development.... 1,380 844 2,224 380 2,604
Other real estate owned................. 271 (547) (276) 524 248
Professional services................... 4,088 1,444 5,532 1,107 6,639
Telephone, stationery and supplies...... 3,082 632 3,714 715 4,429
Goodwill amortization................... 2,784 -- 7,977 10,761 -- 10,761
Data processing......................... 1,667 116 1,783 -- 1,783
Customer services cost.................. 1,263 265 1,528 1,424 2,952
Provision for losses on loans sold...... -- -- -- 276 276
Merger related costs.................... 14,201 1,052 15,253 -- 15,253
Other................................... 6,117 2,441 8,558 1,303 9,861
--------- ----------- ------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE............ 74,299 25,059 8,120 107,478 19,744 127,222
--------- ----------- ------- ----------- ----------- -----------
Income before income taxes................ 16,164 16,812 (10,936) 22,040 8,581 30,621
Income taxes.............................. 9,271 5,905 (1,228) 13,948 3,561 17,509
--------- ----------- ------- ----------- ----------- -----------
NET INCOME............................ $ 6,893 $ 10,907 $ (9,708) $ 8,092 $ 5,020 $ 13,112
--------- ----------- ------- ----------- ----------- -----------
--------- ----------- ------- ----------- ----------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic................................. 11,886.6 7,084.2 16,860.1 2,544.4 19,404.5
Diluted............................... 12,315.5 7,084.2 17,289.0 2,721.2 20,010.2
Income per share
Basic................................. $ 0.58 $ 1.54 $ 0.48 $ 1.97 $ 0.68
Diluted............................... $ 0.56 $ 1.54 $ 0.47 $ 1.84 $ 0.66
</TABLE>
See "NOTES TO WESTERN--PNB UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA."
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
WESTERN
AND PNB
WESTERN PNB(1) PRO FORMA
----------- ----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases........................................... $ 66,076 $ 13,015 $ 79,091
Interest on interest bearing deposits in other banks............................ 15 32 47
Interest on investment securities............................................... 14,870 438 15,308
Interest on federal funds sold.................................................. 3,837 493 4,330
----------- ----------- -----------
TOTAL INTEREST INCOME......................................................... 84,798 13,978 98,776
INTEREST EXPENSE:
Interest expense on deposits.................................................... 24,212 3,855 28,067
Interest expense on borrowings.................................................. 1,186 33 1,219
----------- ----------- -----------
TOTAL INTEREST EXPENSE........................................................ 25,398 3,888 29,286
----------- ----------- -----------
NET INTEREST INCOME:.............................................................. 59,400 10,090 69,490
Less: provision for loan and lease losses....................................... 1,768 903 2,671
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES..................... 57,632 9,187 66,819
NON-INTEREST INCOME:
Service charges, commissions and fees........................................... 8,451 4,504 12,955
Gain on sale of loans and other assets.......................................... 665 8,011 8,676
Securities gains (losses)....................................................... 276 -- 276
Other income.................................................................... 1,520 312 1,832
----------- ----------- -----------
TOTAL NON-INTEREST INCOME..................................................... 10,912 12,827 23,739
NON-INTEREST EXPENSE:
Salaries and benefits........................................................... 26,424 9,467 35,891
Occupancy, furniture and equipment.............................................. 8,955 1,914 10,869
Advertising and business development............................................ 1,479 198 1,677
Other real estate owned......................................................... (66) 474 408
Professional services........................................................... 6,526 883 7,409
Telephone, stationery and supplies.............................................. 2,547 754 3,301
Goodwill amortization........................................................... 1,123 -- 1,123
Data processing................................................................. 1,064 -- 1,064
Customer services cost.......................................................... 510 1,039 1,549
Provision for losses on loans sold.............................................. -- 1,080 1,080
Other........................................................................... 6,336 1,704 8,040
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE.................................................... 54,898 17,513 72,411
----------- ----------- -----------
Income before income taxes........................................................ 13,646 4,501 18,147
Income taxes...................................................................... 3,656 945 4,601
----------- ----------- -----------
NET INCOME.................................................................... $ 9,990 $ 3,556 $ 13,546
----------- ----------- -----------
----------- ----------- -----------
Number of shares (weighted average)
Basic......................................................................... 9,022.9 2,494.7 11,517.6
Diluted....................................................................... 9,294.2 2,605.3 11,899.5
Income per share
Basic......................................................................... $ 1.11 $ 1.43 $ 1.18
Diluted....................................................................... $ 1.07 $ 1.36 $ 1.14
</TABLE>
See "NOTES TO WESTERN--PNB UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA."
<PAGE>
WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
WESTERN
AND PNB
WESTERN PNB(1) PRO FORMA
----------- ----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases........................................... $ 53,822 $ 12,016 $ 65,838
Interest on interest bearing deposits in other banks............................ 45 -- 45
Interest on investment securities............................................... 12,301 762 13,063
Interest on federal funds sold.................................................. 3,280 128 3,408
----------- ----------- -----------
TOTAL INTEREST INCOME......................................................... 69,448 12,906 82,354
INTEREST EXPENSE:
Interest expense on deposits.................................................... 20,709 3,355 24,064
Interest expense on borrowings.................................................. 947 49 996
----------- ----------- -----------
TOTAL INTEREST EXPENSE........................................................ 21,656 3,404 25,060
----------- ----------- -----------
NET INTEREST INCOME:.............................................................. 47,792 9,502 57,294
Less: provision for loan and lease losses....................................... 8,253 1,503 9,756
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES..................... 39,539 7,999 47,538
NON-INTEREST INCOME:
Service charges, commissions and fees........................................... 7,308 2,203 9,511
Gain on sale of loans and other assets.......................................... 263 4,310 4,573
Securities (losses)............................................................. (738) (50) (788)
Other income.................................................................... 1,871 76 1,947
----------- ----------- -----------
TOTAL NON-INTEREST INCOME..................................................... 8,704 6,539 15,243
NON-INTEREST EXPENSE:
Salaries and benefits........................................................... 22,373 6,377 28,750
Occupancy, furniture and equipment.............................................. 8,819 1,856 10,675
Advertising and business development............................................ 1,327 201 1,528
Other real estate owned......................................................... 3,104 262 3,366
Professional services........................................................... 3,723 659 4,382
Telephone, stationery and supplies.............................................. 2,591 501 3,092
Goodwill amortization........................................................... 841 -- 841
Lower of cost or market adjustment on loans available for sale.................. 756 -- 756
Data processing................................................................. 822 -- 822
Provision for losses on loans sold.............................................. -- 385 385
Customer services cost.......................................................... 184 944 1,128
Other........................................................................... 6,579 1,410 7,989
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE.................................................... 51,119 12,595 63,714
----------- ----------- -----------
Income (loss) before income taxes................................................. (2,876) 1,943 (933)
Income taxes (benefits)........................................................... (1,733) (98) (1,831)
----------- ----------- -----------
NET INCOME (LOSS)............................................................. $ (1,143) $ 2,041 $ 898
----------- ----------- -----------
----------- ----------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic......................................................................... 6,916.7 2,508.8 9,425.5
Diluted....................................................................... 7,134.4 2,540.4 9,674.8
Income (loss) per share
Basic......................................................................... $ (0.17) $ 0.81 $ 0.10
Diluted....................................................................... $ (0.17) $ 0.80 $ 0.09
</TABLE>
See "NOTES TO WESTERN--PNB UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA."
<PAGE>
NOTES TO WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
NOTE 1: BASIS OF PRESENTATION
PNB ACQUISITION
Certain historical data of PNB have been reclassified on a pro forma basis
to conform to Western's classifications. Transactions between Western and PNB
are not material in relation to the unaudited pro forma combined financial
statements, and have not been eliminated from the pro forma combined amounts.
The unaudited pro forma number of common shares outstanding, common
shareholders' equity per share, number of shares (basic and diluted) and income
(loss) per share (basic and diluted) are based on the share amounts for Western
multiplied by the PNB exchange rate of 1.0. The number of PNB shares and
earnings per share for the periods presented have been given retroactive effect
to the 15% stock dividend paid by PNB on April 15, 1998.
BANK OF LOS ANGELES ACQUISITION
On October 23, 1998, Western acquired Bank of Los Angeles pursuant to an
Agreement and Plan of Merger, dated as of April 16, 1998, and amended and
restated as of June 24, 1998 and July 16, 1998. Pursuant to that merger
agreement, Bank of Los Angeles merged with and into Santa Monica Bank, with
Santa Monica Bank being the surviving corporation.
Pursuant to the merger agreement, each issued and outstanding share of
common stock of Bank of Los Angeles prior to the acquisition (other than as
provided in the merger agreement) was converted into the right to receive 0.4224
shares of Western common stock. In addition, each option to acquire shares of
common stock outstanding immediately prior to the completion of the Bank of Los
Angeles acquisition was converted into the right to receive that number of
shares of Western common stock equal to the quotient obtained by dividing the
Spread (as defined in the merger agreement) by $42.61. Each warrant to acquire
Bank of Los Angeles common stock outstanding prior to completion of the Bank of
Los Angeles acquisition was converted into an equivalent warrant to acquire
shares of Western common stock. As a result, at October 23, 1998 there were
outstanding warrants, expiring December 1, 1998, to acquire approximately
156,117 shares of Western common stock at an exercise price of $8.88 per share.
Upon completion of the Bank of Los Angeles acquisition, Western issued
approximately 2,214,300 shares of Western common stock (prior to adjustment for
fractional shares) to former holders of Bank of Los Angeles common stock, and as
a result, the former shareholders of Bank of Los Angeles common stock own shares
of Western common stock representing approximately 12.4 percent of the presently
outstanding Western common stock.
NOTE 2: MERGER COSTS
The unaudited pro forma combined condensed financial data reflect Western
management's current estimate, for purposes of pro forma presentation, of the
aggregate estimated merger costs of $21,500,000 ($15,132,000 net of taxes,
computed using the combined federal and state tax rate of 42.0%) expected to
be incurred in connection with the Bank of Los Angeles and PNB acquisitions.
In accordance with pooling-of-interests accounting, these costs were
recognized upon the closing of the transaction. While a portion of these
costs may be required to be recognized over time, the current estimate of
these costs has been recorded in the
<PAGE>
NOTES TO WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
NOTE 2: MERGER COSTS (CONTINUED)
pro forma combined balance sheets in order to disclose the aggregate effect of
these activities on Western's pro forma combined financial position. The
estimated aggregate costs include the following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-----------
<S> <C>
Employee costs.................................................................... $ 3,150
Conversion and other costs........................................................ 12,000
-----------
15,150
Tax effects....................................................................... (6,368)
-----------
8,782
Investment banking and other professional fees.................................... 6,350
-----------
TOTAL ESTIMATED AGGREGATE COSTS................................................. $ 15,132
-----------
-----------
</TABLE>
Western management's cost estimates are forward-looking. While the costs
represent Western management's current estimate of merger costs that will be
incurred, the ultimate level and timing of recognition of such costs will be
based on the final merger and integration plans, which are being developed by
various of Western's Bank of Los Angeles; and PNB's task forces and
integration committees. Readers are cautioned that the completion of the
merger and integration plans and the resulting management plans detailing
actions to be undertaken to effect the Merger and resultant integration of
operations will impact these estimates; the type and amount of actual
<PAGE>
NOTES TO WESTERN--PNB
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
NOTE 2: MERGER COSTS (CONTINUED)
costs incurred could vary materially from these estimates if future developments
differ from the underlying assumptions used by management in determining the
current estimate of these costs.
NOTE 3: PRO FORMA ADJUSTMENTS RELATED TO THE SANTA MONICA BANK ACQUISITION
The Santa Monica Bank acquisition was accounted for as a purchase effective
on January 27, 1998. Accordingly, Western's balance sheet as of September 30,
1998, reflects such acquisition. Under this method of accounting, assets and
liabilities of Santa Monica Bank were adjusted to their estimated fair values
and combined with the recorded book values of the assets and liabilities of
Western. Applicable income tax effects of such adjustments are included as a
component of Western's net deferred tax asset with a corresponding offset to
goodwill.
The unaudited pro forma combined condensed statements of income for the
nine-month periods ending September 30, 1998 and September 30, 1997 and for the
year ended December 31, 1997 are presented as if the acquisition was consummated
at the beginning of each period. The pro forma combined statements of income for
these periods combine the individual pro forma results of operations of Western,
Bank of Los Angeles and Santa Monica Bank for each period after giving effect to
the amortization of purchase accounting adjustments, the additional equity which
was raised by Western and the reduced interest income resulting from the cash
payments made as part of the Santa Monica Bank acquisition. The pro forma
purchase accounting adjustments for each period represent the amortization that
would have taken place from the beginning of the period.
For the purposes of the unaudited pro forma combined condensed statement of
income, it is estimated that Western would have earned 5.50% on the $51.2
million cash portion of the Santa Monica Bank acquisition purchase price during
each period, resulting in approximately $235,000 less interest income for the
nine-month period ended September 30, 1998, $2,112,000 less interest income for
the nine-month period ended September 30, 1997 and $2.8 million less interest
income for 1997.
Salaries and benefits expense is estimated to be reduced by approximately
$11,000, $98,000 and $131,000 for the nine-month period ended September 30,
1998, the nine-month period ended September 30, 1997 and for the year ended
December 31, 1997, respectively, as a result of the write-off of the
unrecognized transition obligation related to post-retirement health care
benefits.
For the year ended December 31, 1997, occupancy, furniture and equipment
expense increased by an estimated $194,000 of depreciation expense related to
the fair market value adjustment of Santa Monica Bank's property, plant and
equipment and by approximately $80,000 related to the amortization of favorable
lease assets, resulting in an approximately $274,000 additional expense. For the
nine-month periods ended September 30, 1998 and September 30, 1997, this
additional expense is $23,000 and $206,000, respectively.
Goodwill of approximately $119.7 million is amortized on a straight line
basis over 15 years.
Income taxes are estimated to be at a rate of 41.5% of pretax income before
goodwill amortization.
