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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_______________
Form 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the transition period from __________ to ___________
Commission file No. 2-78580
PNB FINANCIAL GROUP
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(Exact Name of Small Business Issuer as Specified in its Charter)
California 95-3847640
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Reorganization)
4665 MacArthur Court
Newport Beach, California 92660
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(Address of Principal Executive Offices)
(714) 851-1033
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- ------
The number of shares of Registrant's common stock outstanding at May 5,
1995 was 2,187,433.
THIS REPORT INCLUDES A TOTAL OF 15 PAGES
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2
PNB FINANCIAL GROUP
Index To Form 10-QSB
For the quarter ended March 31, 1995
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) - March 31, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations
(unaudited) - Three Months ended March 31, 1995 and 1994 4
Consolidated Statements of Cash Flows (unaudited) - Three
Months ended March 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings. 14
ITEM 2. Changes in Securities. 14
ITEM 3. Defaults upon Senior Securities. 14
ITEM 4. Submission of Matters to a Vote of Security Holders. 14
ITEM 5. Other Information. 14
ITEM 6. Exhibits and Reports on Form 8-KSB 14
Signatures of Registrants. 15
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3
PNB FINANCIAL GROUP
Condensed Consolidated Balance Sheets
(unaudited)
March 31, 1995 December 31, 1994
----------------- -----------------
Assets
- ------
Cash and due from banks $ 7,898,000 $ 9,836,000
Investment securities 16,841,000 19,129,000
Federal funds sold - 3,000,000
Mortgage loans held for sale 13,156,000 12,448,000
Loans 107,927,000 104,926,000
Less allowance for possible loan losses (2,740,000) (2,727,000)
------------ ------------
Net loans 105,187,000 102,199,000
Premises and equipment, net 1,595,000 1,735,000
Other assets 4,422,000 7,238,000
------------ ------------
Total assets $149,099,000 $155,585,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $133,161,000 $142,459,000
Short-term borrowings 2,000,000 -
Other liabilities 1,036,000 869,000
------------ ------------
Total liabilities 136,197,000 143,328,000
Shareholders' equity:
Preferred stock, no par value 10,000,000
shares authorized; none issued - -
Common stock, no par value, 20,000,000
shares authorized; 2,186,933 and 2,186,933
shares issued and outstanding at
March 31, 1995 and December 31, 1994 16,129,000 16,129,000
Accumulated deficit (2,645,000) (2,863,000)
Net unrealized loss on investment securities available for sale (582,000) (1,009,000)
------------ ------------
Total shareholders' equity 12,902,000 12,257,000
------------ ------------
Total liabilities and shareholders' equity $149,099,000 $155,585,000
============ ============
See accompanying notes
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4
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1995 and 1994
(unaudited)
1995 1994
------------ ------------
Interest income:
Loans, including fees $2,736,000 $2,489,000
Investment securities 248,000 149,000
Federal funds sold 40,000 102,000
Deposits with banks - 9,000
---------- ----------
Total interest income 3,024,000 2,749,000
Interest expense 704,000 662,000
---------- ----------
Net interest income 2,320,000 2,087,000
Provision for possible loan losses 228,000 231,000
---------- ----------
Net interest income after provision for possible loan losses 2,092,000 1,856,000
Other income:
Commissions and other revenue from mortgage banking operations 691,000 1,485,000
Service charges, fees and other 182,000 188,000
---------- ----------
Total other income 873,000 1,673,000
Other expenses:
Mortgage banking operations 648,000 1,360,000
Salaries & employee benefits 935,000 914,000
Occupancy 429,000 469,000
Other 834,000 1,046,000
---------- ----------
Total other expense 2,846,000 3,789,000
Income (loss) before income taxes 119,000 (260,000)
Benefit for income taxes (99,000) -
---------- ----------
Net income (loss) $ 218,000 $ (260,000)
========== ==========
Net income (loss) per share $ .10 $ (.12)
========== ==========
Weighted average number of shares used in per share computation 2,186,933 2,189,407
See accompanying notes
4
5
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1995 and 1994
(unaudited)
1995 1994
---------- -----------
Net cash provided by operating activities $ 2,853,000 $16,861,000
Cash flows from investing activities:
Net change in loans (3,175,000) 6,946,000
Net change in investment securities 2,688,000 (9,539,000)
Other (6,000) (119,000)
----------- -----------
Net cash used in investing activities (493,000) (2,712,000)
Cash flows from financing activities:
Net change in deposits (9,299,000) 6,050,000
Net change in short-term borrowings 2,000,000 401,000
Payments for repurchase of common stock - (1,000)
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Net cash provided by (used in) financing activities (7,299,000) 6,450,000
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Net increase (decrease) in cash and cash equivalents (4,939,000) 20,599,000
Cash and cash equivalents at beginning of period 12,836,000 23,630,000
----------- -----------
Cash and cash equivalents at end of period $ 7,897,000 $44,229,000
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See accompanying notes
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PNB FINANCIAL GROUP
Notes to Condensed Consolidated Financial Statements
March 31, 1995
(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
subsidiaries, Pacific National Bank (the "Bank") and Merchant Overseas
Financial Group ("MOFG") (collectively, the "Company"). In June 1993, all
operating activities of MOFG were suspended. 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 March 31,
1995, and the consolidated results of operations and statements of cash flows
for the three month periods ended March 31, 1995 and March 31, 1994. Results
for the three months ended March 31, 1995 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. Reclassifications
Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation.
4. Recent Accounting Development - Accounting for Impairment of a Loan
On January 1, 1995, the Company adopted Financial Accounting Standards
Board Statement No. 114. This statement generally requires impaired loans to
be measured 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 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. There was no material effect
for the quarter ended March 31, 1995 on the provision for possible loan losses
due to the adoption of this Statement.
At March 31, 1995, the Bank has classified $3,178,000 of its loans as
impaired with a specific loss reserve of $982,000 and $3,638,000 of its loans
as impaired with no related loss reserve as determined in accordance with this
Statement. The average recorded investment in impaired loans during the
quarter ended March 31, 1995 was $4,845,000. The Bank generally does not
recognize interest income on impaired loans. In one specific loan, the Bank is
recognizing interest income on a cash basis. The amount of interest income
recognized during the quarter ended March 31, 1995 on loans classified as
impaired was $12,000 which equals the amount of cash payments received.
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PNB FINANCIAL GROUP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
March 31, 1995
Item 2.
Summary
- -------
The Company reported net income of $218,000 for the three months ended
March 31, 1995 compared to a net loss of $260,000 for the same period in 1994.
The increase in earnings was primarily a result of an increase in net interest
margin along with a decrease in non-interest expenses. The increase in net
interest margin was primarily a result of the substantial increase in interest
rates on loans due to the increase of prime from 6.0% to 8.5% during the past
year. Additionally, the first quarter of 1995 saw a return to profitability
of the Bank's residential mortgage department, which was due in part to the
increase in loan pricing. The increase in pricing was due to reduced
competition which was the result of the closures of various mortgage operations
in Southern California.
As of March 31, 1995, the Company had total assets of $149.1 million,
total loans of $107.9 million and total deposits of $133.2 million, as compared
to total assets of $155.6 million, total loans of $104.9 million and total
deposits of $142.4 million as of December 31, 1994. The decrease in total
assets and total deposits is primarily due to a reduced level of deposits from
the Bank's title and escrow customers. The decrease in these deposits is a
result of the general decrease in real estate activity in Southern California
along with the reduction of one large depositor's balances. Average deposits
for the first quarter of 1995 were $138.8 million as compared to an average
deposit level of $147.4 million during the fourth quarter of 1994.
The following section sets forth the Company's condensed consolidated
average balances of each principal category of assets, liabilities, and
shareholders' equity for the three month period ended March 31, 1995 as
compared to the same period in 1994. Average balances are based on daily
averages for the Bank, and monthly averages for the Bank Holding Company, since
the Bank Holding Company does not maintain daily average information.
Management believes that the difference between monthly and daily average data
(where monthly data has been used) is not significant.
(Continued on next page)
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8
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1995
1995 1994
------------ ------------
Assets
- ------
Cash and due from banks $ 9,607,000 $ 14,111,000
Interest-bearing deposits in other banks - 824,000
Investment securities 19,313,000 13,173,000
Federal funds sold 2,923,000 13,268,000
Mortgage loans held for sale 8,600,000 23,508,000
Loans 106,450,000 104,582,000
Less allowance for possible loan losses (2,734,000) (3,268,000)
------------ ------------
Net loans 103,716,000 101,314,000
Premises and equipment, net 1,671,000 2,067,000
Other assets 5,626,000 7,723,000
------------ ------------
Total assets $151,456,000 $175,988,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 50,455,000 $ 68,717,000
Interest-bearing 87,196,000 91,096,000
Short-term borrowings 298,000 229,000
Other liabilities 813,000 1,594,000
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Total liabilities 138,762,000 161,636,000
Shareholders' equity:
Capital stock 16,129,000 16,139,000
Accumulated deficit (2,741,000) (1,674,000)
Net unrealized loss on investment securities available for sale (694,000) (113,000)
------------ ------------
Total shareholders' equity 12,694,000 14,352,000
Total liabilities and shareholders' equity $151,456,000 $175,988,000
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1995
Capital Resources
- -----------------
The federally-mandated minimum capital requirements and the actual
capitalization of the Company and the Bank as of March 31, 1995 are set forth
below.
CAPITAL REQUIREMENTS AS OF MARCH 31, 1995
Pacific PNB
Regulatory National Financial
Requirements Bank Group
------------ -------- ----------
Leverage Capital Ratio 4.0% 7.4% 8.9%
Risk Based Capital:
Tier 1 Capital 4.0% 9.6% 11.5%
Tier 2 Capital 8.0% 10.9% 12.8%
Liquidity
- ---------
Liquidity, as it relates to the Bank Holding Company, represents the
ability to obtain funds to support its investment activities and operating
needs. The Bank Holding Company's principal sources of funds are its cash
balances and short-term loan portfolio as well as its ability to raise capital
by selling additional shares of common stock. During the first quarter of
1995, the Bank Holding Company liquidity position increased due to a decrease
in its loan portfolio. As of March 31, 1995, the Bank Holding Company has cash
balances of approximately $650,000. These liquid assets, along with cash
generated from its loan portfolio, will support its 1995 operating
requirements.
Liquidity, as it relates to banking, represents the ability to obtain
funds to meet loan commitments and to satisfy demand for deposit withdrawals.
The principal sources of funds that provide liquidity to the Bank are its cash
balances, federal funds sold, investment securities and a portion of its
mortgage loans held for sale. During the first quarter of 1995, the Bank's
average liquid assets as a percentage of average assets equaled 20.1% compared
to 25.8% during the first quarter of 1994. The Bank's average loan to deposit
ratio during the first quarter of 1995 was 76.1% compared to a loan to deposit
ratio of 72.5% at December 31, 1994. The change in these liquidity ratios is
the result of a decrease in the average deposit level of the Bank during the
first quarter. A large portion of the Bank's deposits consist of deposits
maintained by title insurance companies and escrow companies. During the first
quarter of 1995, the average deposits from escrow and title companies were
$19.4 million or approximately 14% of total average deposits. This is compared
to total title and escrow deposits of $39.4 million in the first quarter of
1994 or 24.6% of total average deposits. The decrease in these deposits is a
result of the general decrease in real estate activity in Southern California
along with the reduction of one large depositor's balances. Currently, no
title or escrow customer accounts for over 3% of the Bank's total deposits.
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10
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1995
To cushion against unanticipated fluctuations in its liquidity position,
the Bank has secured secondary lines of credit with its correspondent bank and
the Federal Reserve Bank of approximately $12,000,000 as of March 31, 1995.
These lines of credit are collateralized by a portion of the Bank's investment
portfolio and its installment loan portfolio. Additionally, the majority of
the Bank's mortgage loans held for sale, while not considered a primary source
of liquidity, can significantly aid in the Bank's ability to meet its liquidity
requirements.
Results of Operations for the Three Months
Ended March 31, 1995 and March 31, 1994
------------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $275,000 (10%) between the
periods presented primarily due to the increase in interest rates for loans and
other interest earning assets which was partially offset by a decreased volume
of mortgage loans and federal funds sold. The increase in the yield on loans
is due to the increase in the prime rate from 6.0% to 8.5% during the past
year. A significant portion of the Bank's loans are based on a variable
interest rate tied to prime. The decrease in the volume of mortgage loans is
due to the decreased refinancing activity in the mortgage business which was
caused by the increase in interest rates.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the three months ended March 31, 1995 as compared
to the three months ended March 31, 1994.
Change in interest income due to:
Volume Rate Total
--------- ---------- ----------
Loans $ 47,000 $ 418,000 $ 465,000
Mortgage loans held for sale (288,000) 55,000 (233,000)
Investment securities 71,000 28,000 99,000
Deposits in other banks (4,000) (4,000) (8,000)
Federal funds sold (111,000) 49,000 (62,000)
--------- ---------- ---------
Total $(285,000) $ 546,000 $ 261,000
========= ========== ---------
Change in loan fees 14,000
----------
Total change in interest and loan fee income $ 275,000
=========
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1995
Total interest expense
- ----------------------
Total interest expense increased $42,000 (6.3%) between the periods
presented due to an increase in the interest rates of interest- bearing
deposits which was partially offset by reduced volume of interest bearing
deposits. The decrease in deposit volume was primarily due to a decrease of
higher costing time deposits. The following table sets forth the Company's
rate and volume analysis for interest-bearing liabilities for the three months
ended March 31, 1995 as compared to the corresponding period ended March 31,
1994.
Change in interest expense due to:
Volume Rate Total
-------- -------- --------
Short-term borrowings $ - $ 4,000 $ 4,000
Savings deposits 5,000 (3,000) 2,000
Time deposits (45,000) 60,000 15,000
Interest-bearing demand deposits 2,000 19,000 21,000
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Total $(38,000) $ 80,000 $ 42,000
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Allowance for possible loan losses
- ----------------------------------
An analysis of the allowance for possible loan losses is summarized as
follows:
Three Months Ended March 31
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1995 1994
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Balance at beginning of period $2,727,000 $3,473,000
Charge-offs (224,000) (784,000)
Recoveries 9,000 231,000
---------- ----------
Net charge-offs (215,000) (553,000)
Contribution to allowance for possible loan losses 228,000 231,000
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Balance at end of period $2,740,000 $3,151,000
========== ==========
Allowance as a percentage of total loans 2.5% 3.1%
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1995
The following table sets forth the total amount of nonaccrual loans,
accruing loans past due 90 days or more, troubled debt restructurings,
classified loans and other real estate owned as of March 31, 1995 and 1994 as
well as December 31, 1994.
March 31, 1995 Dec. 31, 1994 March 31, 1994
-------------- ------------- --------------
Loans accounted for on a nonaccrual basis $5,610,000 $3,136,000 $6,564,000
Accruing loans contractually past due 90 days or more 768,000 826,000 2,872,000
Total classified loans 15,053,000 18,973,000 27,493,000
Other real estate owned 1,833,000 4,522,000 4,592,000
Troubled debt restructurings 2,316,000 - -
The Company's contribution to the provision for possible loan losses was
$228,000 for the first three months of 1995 compared to $231,000 during the
same period in 1994. This contribution resulted in an allowance of 2.5% of
total outstanding loans at March 31, 1995, compared to 3.1% at March 31, 1994.
The allowance is a result of Management's analysis of the estimated inherent
losses in the Bank's loan portfolio. This analysis takes into consideration
the level and trend of loan losses, loan delinquencies, classified loan volumes
and Management's analysis of current market conditions. Management believes
that the allowance at March 31, 1995 is adequate to absorb the inherent risks
in the Company's loan portfolio.
The decline in the allowance for possible loan losses is due to improving
trends in asset quality. Classified loans are those that have some identified
weaknesses as determined by Management that may jeopardize the orderly
collection of the debt in the future. Classified loans fell from $27.5 million
or 26.3% of total loans at March 31, 1994 to $15.1 million or 14.1% of total
loans at March 31, 1995. Nonperforming assets (nonaccrual loans and other real
estate owned) fell from $11.2 million or 6.3% of total assets at March 31,
1994, to $7.4 million or 4.9% of total assets at March 31, 1995.
Other Income
- ------------
Other income decreased $800,000 (47.8%) between the periods presented.
The reduction was primarily due to reduced revenue generated from the Bank's
residential mortgage operation. The reduced revenue from the mortgage
operation was due to the increased interest rate environment and the resulting
downsizing of the operation. During the first three months of 1995, gross
revenue from the mortgage operation was $691,000 compared to $1,485,000 in the
corresponding period in 1994. The decrease in the mortgage division's gross
revenue was offset by decreased expenses of this division, which resulted in
the division posting a pretax income, before administration allocation, of
$70,000 during the first quarter of 1995, compared to $132,000 during the same
period in 1994. The 1995 first quarter profit for the mortgage department was
the first profitable quarter since the first quarter of 1994. Management
believes that the
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1995
mortgage division should remain profitable throughout the remainder of 1995.
During the first three months of 1995, the sale of SBA loans generated $78,000
of recognized sales premiums compared to $72,000 during the same period in
1994.
Other Expenses
- --------------
Other expenses decreased $943,000 (24.9%) between the periods presented.
The Company's other expenses decreased $231,000 while the Bank's residential
mortgage division's expenses decreased $712,000 (52.3%). The decrease in the
mortgage division's expenses was due to the decreased level of activity and was
substantially associated with the decrease in salaries and benefits and
commissions. The decrease in the Company's other expenses of $231,000 (9.5%)
was due to decreases in all areas of operations which resulted from the
implementation of various cost containment policies which were installed during
1994.
Provision for Income Taxes
- --------------------------
During the first quarter of 1995, the Company recognized an income tax
benefit of $99,000 due to alternative minimum tax credits realized. As of
December 31, 1994, the Company has federal and state net operating loss
carryforwards of $2,483,000 and $1,928,000, respectively. These net operating
loss carryforwards were used during the first quarter of 1995 to offset any
federal and state taxable income that were created by the Company's first
quarter profits. Although Management anticipates future earnings, the future
tax benefit of net operating losses are not assured of realization and
therefore are not recorded by the Company.
Cash and Cash Equivalents
- -------------------------
As of March 31, 1995, cash and cash equivalents decreased $4.9 million
from December 31, 1994 balances primarily due to a decrease of deposits of $9.3
million and an increase of loans of $3.2 million. These elements were
partially offset by a decrease of investment securities and an increase in
short term borrowings.
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Part II - Other Information
---------------------------
March 31, 1995
Item 1. Legal Proceedings.
There are no pending legal proceedings to which the Company or the Bank
is a party or to which any of their respective subsidiaries are subject, other
than ordinary routine litigation incidental to the Bank's business. While
claims of a substantial dollar amount have been asserted against the Bank in
one judicial foreclosure proceeding currently set for trial in May 1995, the
Bank does not believe the claims are meritorious or the damages, if any, will
be material. Accordingly, the outcome of litigation brought against the Bank
is not expected to be material to the Company or its operations or properties.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-KSB.
(a) Exhibits Filed.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-KSB. During the first quarter of 1995, the
Company filed a report on form 8-KSB in response to Item 1, Change
in Control of Registrant. This report was filed on February 21,
1995 and discussed a sale of common stock and options to purchase
additional common stock by the Company's majority shareholder to a
group of six individuals including the Bank's President.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
PNB Financial Group
Date: May 2, 1995 By: /s/ Bernard E. Schneider
---------------------- -------------------------------------
Bernard E. Schneider
President and Chief Executive Officer
Date: May 5, 1995 By: /s/ Doug L. Heller
---------------------- -------------------------------------
Doug L. Heller
Chief Financial Officer
15