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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from __________ to ________
Commission file No. 2-78580
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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
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The number of shares of Registrant's common stock outstanding at May 7,
1997 was 2,192,283.
THIS REPORT INCLUDES A TOTAL OF 15 PAGES
PNB FINANCIAL GROUP
Index To Form 10-QSB
For the quarter ended March 31, 1997
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) - March 31, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of Income
(unaudited) - Three Months ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
(unaudited) - Three Months ended
March 31, 1997 and 1996 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
2
PNB FINANCIAL GROUP
Condensed Consolidated Balance Sheets
(unaudited)
March 31, 1997 December 31, 1996
-------------- -----------------
Assets
- ------
Cash and due from banks $ 17,240,000 $ 12,700,000
Investment securities 7,254,000 7,381,000
Federal funds sold -0- 6,000,000
Mortgage loans held for sale 51,511,000 62,620,000
Loans 104,060,000 104,226,000
Less allowance for loan losses (1,721,000) (1,812,000)
------------ ------------
Net loans 102,339,000 102,414,000
Premises and equipment, net 1,061,000 1,150,000
Other real estate owned 4,590,000 3,483,000
Other assets 2,709,000 2,450,000
------------ ------------
Total assets $186,704,000 $198,198,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $163,907,000 $170,039,000
Short term borrowings -0- 7,000,000
Other liabilities 3,180,000 2,476,000
------------ ------------
Total liabilities 67,087,000 179,515,000
------------ ------------
Shareholders' equity:
Common stock, no par value, 20,000,000
shares authorized; 2,172,283 and 2,170,783
shares issued and outstanding at
March 31, 1997 and December 31, 1996 16,018,000 16,012,000
Retained earnings 3,673,000 2,734,000
Net unrealized loss on investment securities available for sale (74,000) (63,000)
------------ ------------
Total shareholders' equity 19,617,000 18,683,000
------------ ------------
Total liabilities and shareholders' equity $186,704,000 $198,198,000
============ ============
See accompanying notes
3
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996
(unaudited)
1997 1996
---------- ----------
Interest income:
Loans, including fees $3,419,000 $3,054,000
Investment securities 103,000 109,000
Federal funds sold 100,000 78,000
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Total interest income 3,622,000 3,241,000
Interest expense 914,000 923,000
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Net interest income 2,708,000 2,318,000
Provision for loan losses 75,000 300,000
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Net interest income after provision for loan losses 2,633,000 2,018,000
---------- ----------
Other income:
Income from mortgage banking operations 3,135,000 2,330,000
Service charges, fees and other 202,000 159,000
Gain on sale of SBA loans 169,000 92,000
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Total other income 3,506,000 2,581,000
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Other expenses:
Mortgage banking operations 2,238,000 1,724,000
Salaries & employee benefits 1,111,000 954,000
Occupancy 374,000 409,000
Other 797,000 814,000
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Total other expense 4,520,000 3,901,000
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Income before income taxes 1,619,000 698,000
Provision for income taxes 680,000 -0-
---------- ----------
Net income $ 939,000 $ 698,000
========== ==========
Earnings per common and common equivalent share,
primary and fully diluted $ .41 $ .30
========== ==========
Weighted average number of shares for computing
primary and fully diluted earnings per share computation 2,308,671 2,301,192
See accompanying notes
4
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Cash Flow
Three Months Ended March 31, 1997 and 1996
(unaudited)
1997 1996
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Net Cash provided by (used in) operating activities: $ 13,052,000 $ (300,000)
------------ -----------
Cash flows from investing activities:
Net change in loans (1,368,000) 320,000
Net change in investment securities 109,000 2,606,000
Other 224,000 143,000
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Net cash provided by (used in) investing activities (1,035,000) 3,069,000
------------ -----------
Cash flows from financing activities:
Net change in deposits (6,132,000) 3,470,000
Net change in short-term borrowings (7,351,000) -
Net change in common stock 6,000 (143,000)
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Net cash provided by (used in) financing activities (13,477,000) 3,327,000
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Net increase (decrease) in cash and cash equivalents (1,460,000) 6,096,000
Cash and cash equivalents at beginning of period 18,700,000 16,313,000
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Cash and cash equivalents at end of period $ 17,240,000 $22,409,000
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See accompanying notes
5
PNB FINANCIAL GROUP
Notes to Condensed Consolidated Financial Statements
March 31, 1997
(unaudited)
1. Basis of Presentation
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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 March 31, 1997, and the consolidated statements of income and statements of
cash flows for the three month periods ended March 31, 1997 and March 31, 1996.
Results for the three months ended March 31, 1997 are not necessarily indicative
of results which may be expected for any other interim period, or for the year
as a whole. These condensed consolidated financial statements do not include
all disclosures associated with the Company's annual financial statements and,
accordingly, should be read in conjunction with such statements.
2. Consolidated Statement of Cash Flows
------------------------------------
For purposes of reporting cash flows, the Company defines cash and cash
equivalents as cash on hand, cash due from banks, interest-bearing deposits in
other banks and federal funds sold.
3. Preferred Stock
---------------
The Company has authorized 10,000,000 shares, no par value, preferred stock.
No shares of preferred stock have been issued.
4. Impact of Recently Issued Accounting Standards - Earnings Per Share
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The FASB has issued a statement No. 128 "Earnings Per Share" ("EPS") which
becomes effective for periods ending after December 15,1997. This statement
requires restatement of all prior period EPS data presented. This statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15 and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with the presentation of basic EPS. It
also requires dual presentation of and diluted EPS on the face of the income
statement for all entities with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant
to Opinion 15. The Company's proforma basic and diluted EPS for the three month
period ending March 31, 1997 is $ .43 and $ .41, respectively.
6
PNB FINANCIAL GROUP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
March 31, 1997
Item 2.
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Summary
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The Company reported net income of $939,000 or $ .41 per share for the three
months ended March 31, 1997 compared to a net income of $698,000 or $ .30 per
share for the same period in 1996. The increase in earnings was primarily a
result of a significant decrease in nonperforming assets which resulted in an
increase in the net interest margin and a decrease in the provision for loan
losses. In addition, the Bank's residential mortgage division reported improved
earnings due to an increase in the volume of residential mortgage loans funded
and sold. The increase in pretax earnings were partially offset with an
increase in the provision for income taxes.
As of March 31, 1997, the Company had total assets of $186.7 million, total
loans of $104.1 million, and total deposits of $163.9 million, as compared to
total assets of $198.2 million, total loans of $104.2 million, and total
deposits of $170.0 million as of December 31, 1996. Average deposits for the
first quarter of 1997 were $161.2 million as compared to an average deposit
level of $147.2 million during the first quarter of 1996. The increase in
deposits was primarily due to an increase in the deposits of the Bank's escrow
and title customers and the utilization of brokered deposits. As of March 31,
1997, the Bank had $5.1 million of brokered deposits which it is utilizing in
place of more expensive borrowings to partially fund its mortgage loans held for
sale. The reduction of total assets as of March 31, 1997 compared to December
31, 1996 was a result of reduced mortgage loans held for sale, which was due to
the unusually large amount of mortgage loan fundings at year-end.
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, 1997 as compared to the same
period in 1996. Average balances are based on daily averages for the Bank, and
monthly averages for the Bank Holding Company, since the Bank Holding Company
does not maintain daily average information. Management believes that the
difference between monthly and daily average data (where monthly data has been
used) is not significant.
7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1997
Unaudited
1997 1996
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Cash and due from banks $ 11,749,000 $ 11,190,000
Investment securities 7,350,000 8,392,000
Federal funds sold 7,928,000 6,093,000
Mortgage loans held for sale 48,963,000 35,689,000
Loans 103,212,000 100,864,000
Less allowance for loan losses (1,850,000) (2,723,000)
------------- ------------
Net loans 101,362,000 98,141,000
Premises and equipment, net 1,102,000 1,302,000
Other real estate owned 3,997,000 2,497,000
Other assets 2,372,000 2,066,000
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Total assets $ 184,823,000 $165,370,000
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Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 65,054,000 $ 53,691,000
Interest-bearing 96,165,000 93,551,000
Short-term borrowings 1,919,000 475,000
Other liabilities 2,314,000 2,048,000
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Total liabilities 165,452,000 149,765,000
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Shareholders' equity:
Capital stock 16,019,000 15,988,000
Retained earnings (deficit) 3,413,000 (302,000)
Net unrealized loss on investment securities
available for sale (61,000) (81,000)
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Total shareholders' equity 19,371,000 15,605,000
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Total liabilities and shareholders' equity $ 184,823,000 $165,370,000
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8
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1997
Capital Resources
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The federally-mandated minimum capital requirements and the actual
capitalization of the Company and the Bank as of March 31, 1997 are set forth
below.
CAPITAL REQUIREMENTS AS OF March 31, 1997
Pacific PNB
Regulatory National Financial
Requirements Bank Group
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Leverage Capital Ratio 4.0% 9.5% 10.7%
Risk Based Capital:
Tier 1 Capital 4.0% 13.4% 15.1%
Total Capital 8.0% 14.6% 16.3%
Liquidity
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Liquidity, as it relates to the Bank Holding Company, represents the ability
to obtain funds to support its investment activities and operating needs. The
Bank Holding Company's principal sources of funds are its cash balances, short-
term loan portfolio, cash dividends from its subsidiary bank, as well as its
ability to raise capital by selling additional shares of common stock. During
the first quarter of 1997, in order to fund a new loan, the Bank Holding Company
received a $500,000 cash dividend from its subsidiary bank. As of March 31,
1997, the Bank Holding Company has cash balances of approximately $450,000.
These liquid assets, along with cash generated from its loan portfolio, as well
as any additional cash dividend from the Bank, will support its 1997 operating
requirements. In April 1997, the Board of Directors ("Board") authorized
management to purchase back up to $1.0 million of the Company's common stock at
a maximum price established by the Board. The Board believes that the Company's
stock is a good investment that should benefit all shareholders. Due to the
limited supply of the Company's stock, management does not anticipate the full
utilization of the $1.0 million.
Liquidity, as it relates to banking, represents the ability to obtain funds
to meet loan commitments and to satisfy demand for deposit withdrawals. The
principal sources of funds that provide liquidity to the Bank are its cash
balances, federal funds sold, securities available for sale and a portion of
mortgage loans held for sale. The Bank's portfolio loan-to-deposit ratio at
March 31, 1997 was 62.1% as compared to 61.7% at March 31, 1996 and 60% as of
December 31, 1996. The Bank's residential mortgage division utilizes the Bank's
funding sources to fund its mortgage loans held for sale. Management can slow
down or speed up the shipping and sale of these loans, and manages the balance
of the mortgage loans held for sale to match its funds available. In this way,
management maximizes the yield on its liquid assets. Due to the fluctuations in
funding and sale of mortgage loans, along with changes in the deposit balances
of the Bank, the matching of liquid assets and mortgage loans held for sale is
not always achieved. At certain times during the year,
9
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1997
the Bank utilizes its back up borrowing relationships to help fund the mortgage
loans held for sale. This situation occurred at December 31, 1996. These back
up sources include an unsecured line of credit with one of its' correspondent
bank, a line of credit with the Federal Home Loan Bank, borrowings against the
Bank's securities available for sale, and the use of brokered deposits.
A large portion of the Bank's deposits consist of deposits maintained by
escrow companies and, to a lesser degree, title insurance companies. At March
31, 1996 and December 31,1996, escrow and title insurance companies' deposits
totaled approximately $26.0 million or 16.1% of total deposits and $28.2
million or 16.6% of total deposits, respectively. This compared to escrow and
title insurance deposits of approximately $30.5 million or 18.5% of total
deposits at March 31, 1997. The Bank's policy is to maintain these deposits at
a level not to exceed 25% of total deposits. The Bank monitors the deposit
levels of this group closely. During the past two years, no escrow or title
insurance customers accounts for over 3% of the Bank's total deposits.
Results of Operations for the Three Months
Ended March 31, 1997 and March 31, 1996
---------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $381,000 (11.8%) between the
periods presented primarily due to the significant increase in the average
balance of mortgage loans held for sale and, to a lesser degree, its' portfolio
loans. The increase in the average balance of mortgage loans held for sale is
due to the increased activity in the Bank's residential mortgage loan department
and to management's efforts to increase profitability by increasing the holding
period of these loans. During the first quarter of 1997, the Bank funded $219
million of mortgage loans compared to the first quarter of 1996 during which the
Bank funded mortgage loans totaling $169 million.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the three months ended March 31, 1997 as compared to
the three months ended March 31, 1996.
Change in interest income due to:
Volume Rate Total
---------- ---------- ----------
Loans $ 54,000 $(17,000) $ 37,000
Mortgage loans held for sale 252,000 36,000 288,000
Investment securities (14,000) 8,000 (6,000)
Federal funds sold 23,000 - 23,000
-------- -------- --------
Total $315,000 $ 27,000 $342,000
======== ======== --------
Change in loan fees 39,000
--------
Total change in interest and loan fee income $381,000
========
10
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1997
Total interest expense
- ----------------------
Total interest expense decreased $9,000 (1.0%) between the periods presented
primarily due to a decrease in the rate of time deposits which was partially
offset with an increase in the volume of all interest bearing deposits. The
following table sets forth the Company's rate and volume analysis for interest-
bearing liabilities for the three months ended March 31, 1997 as compared to the
corresponding period ended March 31, 1996.
Change in interest expense due to:
Volume Rate Total
----------- ----------- ---------
Interest-bearing demand deposit $ 2,000 $ - $ 2,000
Time deposits 11,000 (49,000) (38,000)
Savings deposits 10,000 (5,000) 5,000
Short-term borrowings 14,000 8,000 22,000
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Total $ 37,000 $ (46,000) $ (9,000)
========== ========== ========
Allowance for loan losses
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An analysis of the allowance for loan losses is summarized as follows:
Three Months Ended March 31
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1997 1996
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Balance at beginning of period $1,812,000 $2,658,000
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Charge-offs (268,000) (813,000)
Recoveries 102,000 31,000
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Net charge-offs (166,000) (782,000)
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Contribution to allowance for loan losses 75,000 300,000
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Balance at end of period $1,721,000 $2,176,000
========== ==========
Allowance as a percentage of total loans 1.7% 2.2%
11
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1997
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, 1997 and 1996 as well as December
31, 1996.
March 31, 1997 Dec. 31, 1996 March 31, 1996
-------------- ------------- --------------
Loans accounted for on a nonaccrual basis $2,386,000 $3,220,000 $ 9,173,000
Accruing loans contractually past due 90 days or more 410,000 277,000 1,059,000
Total classified loans 5,535,000 6,087,000 15,200,000
Other real estate owned 4,590,000 3,483,000 3,213,000
Troubled debt restructurings and classified loans) 4,114,000 4,108,000 3,532,000
The Company's contribution to the provision for loan losses was $75,000 for
the first three months of 1997 compared to $300,000 during the same period in
1996. The reduced provision is a result of the significant reduction of
classified and nonaccrual loans. Classified loans decreased $9.7 million (64%)
from March 31, 1996 to March 31, 1997, while non accrual loans have decreased
$6.8 million (74%) over the same period. The allowance is a result of
Management's analysis of the estimated inherent losses in the Bank's loan
portfolio. This analysis takes into consideration the level and trend of loan
losses, loan delinquencies, classified loan volumes and Management's analysis of
current market conditions.
Other Income
- ------------
Other income increased $925,000 (36%) between the periods presented. The
increase was primarily due to higher revenue generated from the Bank's
residential mortgage operation. During the first three months of 1997, gross
revenue from the mortgage operation was $3,135,000 compared to $2,330,000 in the
corresponding period in 1996. The increase in the mortgage divisions gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $891,000 during the first quarter of 1997, compared to $603,000
during the same period in 1996. The increase in net income of this department
is primarily due to the higher volume of loans funded and sold along with a
lower provision for indemnification reserve. The increase in other income was
partially due to an increase in the gain on sale of SBA loans which was due to a
higher volume of loan sales.
12
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
March 31, 1997
Other Expenses
- --------------
Other expenses increased $619,000 (15.9%) between the periods presented. The
Company's other expenses increased $105,000 (4.8%) while the Bank's residential
mortgage division's expenses increased $514,000 (29.8%). The increase in the
mortgage division's expenses was due to the increased level of activity and was
substantially associated with the increase in salaries and benefits and
commissions. The increase in the Company's other expenses of $105,000 was
primarily due to an increase in salaries and employee benefits and REO expenses.
These increases were partially offset with decreases in occupancy expenses,
insurance, legal and other professional services.
Provision for Income Taxes
- --------------------------
During the first quarter of 1996, the Company did not record any income tax
expense based upon the utilization of a portion of its available net deferred
tax assets which had not been recognized in previous periods. These deferred
tax assets included Federal and State net operating loss carryforwards. As all
of the available deferred tax assets were recorded by the Company through
December 31, 1996, the Company will be recording tax expense of approximately
42% from this date forward, Accordingly, during the first quarter of 1997, the
Company recorded a provision of 42%.
Cash and Cash Equivalents
- -------------------------
As of March 31, 1997, cash and cash equivalents decreased $1.5 million from
December 31, 1996 balances primarily due to a decrease in deposits and short-
term borrowing of credit of $6.1 million and $7.4 million, respectively, which
was mostly offset by a decrease in mortgage loans held for sale of $11.1
million.
13
Part II - Other Information
---------------------------
March 31, 1997
Item 1. Legal Proceedings.
- ------- ------------------
There are no pending legal proceedings to which the Company or the Bank is a
party or to which any of their respective subsidiaries are subject, other than
ordinary routine litigation incidental to the Bank's business.
Item 2. Changes in Securities.
- ------- ----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- ------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
On April 15, 1997, by Written Action of Less than Unanimous Consent of the
Shareholders, a majority of the shareholders of PNB Financial Group voted to
increase the number of option shares available under the Company's 1995
Incentive Stock Option Plan from 50,000 shares of common stock no par value, to
200,000 shares of common stock. The purpose of this action was to enhance the
ability of the Company and its subsidiary, Pacific National Bank to attract and
retain officers and other key employees and to provide such personnel with
additional incentives to advance the interest of the Company and its
shareholders.
Item 5. Other Information.
- ------- ------------------
Item 6. Exhibits and Reports on Form 8-KSB.
- ------- ----------------------------------
(a) Exhibits Filed - none required.
--------------
(b) Reports on Form 8-KSB. During the first quarter of 1997, the Company did
---------------------
not file a report on Form 8-KSB.
14
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, 1997 By: /s/ ALLEN C. BARBIERI
------------ ----------------------------------
Allen C. Barbieri
President and Chief Executive Officer
Date: May 5, 1997 By: /s/ DOUG L. HELLER
------------ ---------------------------------
Doug L. Heller
Chief Financial Officer
15