================================================================================
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 June 30, 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
---------------------------
PNB FINANCIAL GROUP
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
California 95-3847640
--------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Reorganization)
4665 MacArthur Court
Newport Beach, California 92660
-------------------------------
(Address of Principal Executive Offices)
(714) 851-1033
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares of Registrant's common stock outstanding at August 4, 1997
was 2,214,783.
THIS REPORT INCLUDES A TOTAL OF 20 PAGES
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PNB FINANCIAL GROUP
Index To Form 10-QSB
For the quarter ended June 30, 1997
PART I FINANCIAL INFORMATION PAGE
NUMBER
------
ITEM 1. Financial Statement
Condensed Consolidated Balance Sheets (unaudited) - 3
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income 4
(unaudited) - Six Months ended June 30, 1997 and 1996
Condensed Consolidated Statements of Income 5
(unaudited) - Three Months ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows (unaudited) - Six 6
Months ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 8-18
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 2. Changes in Securities 19
ITEM 3. Defaults upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Securities Holders 19
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-KSB 19
Signatures of Registrants 20
2
PNB FINANCIAL GROUP
Condensed Consolidated Balance Sheets
June 30, 1997
(unaudited)
June 30, 1997 December 31, 1996
-------------- ------------------
Assets
- ------
Cash and due from banks $ 13,406,000 $ 12,700,000
Investment securities 7,216,000 7,381,000
Federal funds sold 8,000,000 6,000,000
Mortgage loans held for sale 63,988,000 62,620,000
Loans 107,359,000 104,226,000
Less allowance for possible loan losses (1,751,000) (1,812,000)
------------ ------------
Net loans 105,608,000 102,414,000
Premises and equipment, net 1,035,000 1,150,000
Other real estate owned 3,184,000 3,483,000
Other assets 2,728,000 2,450,000
------------ ------------
Total assets $205,165,000 $198,198,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $181,019,000 $170,039,000
Short term borrowings 328,000 7,000,000
Other liabilities 2,729,000 2,476,000
------------ ------------
Total liabilities 184,076,000 179,515,000
Shareholders' equity:
Common stock, no par value, 20,000,000
shares authorized; 2,211,783 and 2,170,783
shares issued and outstanding at
June 30, 1997 and December 31, 1996 16,298,000 16,012,000
Retained earnings 4,829,000 2,734,000
Net unrealized loss on investment securities available for sale (38,000) (63,000)
------------ ------------
Total shareholders' equity 21,089,000 18,683,000
------------ ------------
Total liabilities and shareholders' equity $205,165,000 $198,198,000
============ ============
See accompanying notes
3
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income
Six Months Ended June 30, 1997 and 1996
(unaudited)
1997 1996
---------- ----------
Interest income:
Loans, including fees $7,188,000 $6,392,000
Investment securities 209,000 222,000
Federal funds sold 151,000 116,000
---------- ----------
Total interest income 7,548,000 6,730,000
Interest expense 1,833,000 1,915,000
---------- ----------
Net interest income 5,715,000 4,815,000
Provision for possible loan losses 195,000 600,000
---------- ----------
Net interest income after provision for possible loan losses 5,520,000 4,215,000
Other income:
Income from mortgage banking operations 6,658,000 5,397,000
Service charges, fees and other 561,000 405,000
Gain on sale of SBA loans 286,000 321,000
---------- ----------
Total other income 7,505,000 6,123,000
Other expenses:
Mortgage banking operations 4,783,000 3,998,000
Salaries & employee benefits 2,240,000 1,980,000
Occupancy 716,000 802,000
Other 1,709,000 1,581,000
---------- ----------
Total other expense 9,448,000 8,361,000
Income before income taxes 3,577,000 1,977,000
Provision for income taxes 1,483,000 227,000
---------- ----------
Net income $2,094,000 $1,750,000
========== ==========
Earnings per common and common equivalent share
Primary $ .91 $ .76
========== ==========
Fully diluted $ .90 $ .76
========== ==========
Weighted average number of shares for computing per share computation
Primary 2,301,099 2,318,404
Fully diluted 2,326,667 2,318,404
See accompanying notes
4
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income
Three Months Ended June 30, 1997 and 1996
(unaudited)
1997 1996
---------- ----------
Interest income:
Loans, including fees $3,769,000 $3,338,000
Investment securities 106,000 113,000
Federal funds sold 51,000 38,000
---------- ----------
Total interest income 3,926,000 3,489,000
Interest expense 919,000 992,000
---------- ----------
Net interest income 3,007,000 2,497,000
Provision for possible loan losses 120,000 300,000
---------- ----------
Net interest income after provision for possible loan losses 2,887,000 2,197,000
Other income:
Income from mortgage banking operations 3,523,000 3,067,000
Service charges, fees and other 359,000 281,000
Gain on sale of SBA loans 117,000 194,000
---------- ----------
Total other income 3,999,000 3,542,000
Other expenses:
Mortgage banking operations 2,545,000 2,274,000
Salaries & employee benefits 1,129,000 1,026,000
Occupancy 342,000 393,000
Other 912,000 767,000
---------- ----------
Total other expense 4,928,000 4,460,000
Income before income taxes 1,958,000 1,279,000
Provision for income taxes 803,000 227,000
---------- ----------
Net income $1,155,000 $1,052,000
========== ==========
Earnings per common and common equivalent share
Primary $ .50 $ .46
========== ==========
Fully diluted $ .49 $ .46
========== ==========
Weighted average number of shares for computing per share computation
Primary 2,322,812 2,311,006
Fully diluted 2,362,335 2,311,006
See accompanying notes
5
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
(unaudited)
1997 1996
----------- -----------
Net cash provided by (used in) operating activities $ 1,595,000 $(8,387,000)
----------- -----------
Cash flows from investing activities:
Net change in loans (5,308,000) 1,439,000
Net change in investment securities 130,000 1,952,000
Other (2,203,000) 464,000
----------- -----------
Net cash provided by (used in) investing activities (2,975,000) 3,855,000
----------- -----------
Cash flows from financing activities:
Net change in deposits 10,988,000 16,581,000
Net change in short term borrowings (7,023,000) 795,000
Net change in common stock 128,000 (144,000)
----------- -----------
Net cash provided by financing activities 4,085,000 17,232,000
----------- -----------
Net increase in cash and cash equivalents 2,705,000 12,700,000
Cash and cash equivalents at beginning of period 18,701,000 16,313,000
----------- -----------
Cash and cash equivalents at end of period $21,406,000 $29,013,000
=========== ===========
See accompanying notes
6
PNB FINANCIAL GROUP
Notes to Condensed Consolidated Financial Statements
June 30, 1997
(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 June 30, 1997, and the consolidated results of
operations and statements of cash flows for the six and three month periods
ended June 30, 1997 and June 30, 1996. Results for the six and three months
ended June 30, 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
-------------------------------------------------------------------
The FAST 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 fact 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 APB Opinion 15. The Company's proforma basic and
diluted EPS for the six and three month period ending June 30, 1997 is $.96
and $.90, and $.53 and $.49, respectively.
7
PNB FINANCIAL GROUP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1997
Item 2.
-------
Summary
-------
The Company reported net income of $2,094,000 or $ .90 per fully diluted
share, for the six months ended June 30, 1997 compared to a net income of
$1,750,000 or $ .76 per fully diluted share, for the same period in 1996. The
increase in earnings was a result of several items including 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. As a result of these items, the Company reported a $1,600,000 (81%)
increase in income before income taxes. This increase was substantially
offset with an increase in the provision for income taxes. The increase in
the provision for income taxes was the result of the utilization of a net
deferred tax asset during the six months ended June 30, 1996. This
utilization reduced the Company's provision for income taxes to 11.5% of
pretax income during the six months ended June 30, 1996, compared to 41%
during the same period in 1997.
As of June 30, 1997, the Company had total assets of $205.2 million, total
loans of $107.4 million, and total deposits of $181.0 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 six months of 1997 were $168.2 million as compared to an average
deposit level of $153.9 million during the first six months 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 June 30, 1997, the Bank had $9.5 million of brokered deposits which it
is utilizing in place of more expensive borrowings to partially fund its
mortgage loans held for sale.
The following section sets forth the Company's condensed consolidated
average balances of each principal category of assets, liabilities, and
shareholders' equity for the six month period ended June 30, 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.
8
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
1997 1996
------------- -------------
Assets
- ------
Cash and due from banks $ 12,277,000 $ 11,239,000
Investment securities 7,314,000 8,392,000
Federal funds sold 5,909,000 4,569,000
Mortgage loans held for sale 54,235,000 44,121,000
Loans 103,941,000 101,109,000
Less allowance for loan losses (1,785,000) (2,480,000)
------------ ------------
Net loans 102,156,000 98,629,000
Premises and equipment, net 1,083,000 1,279,000
Other real estate owned 3,896,000 2,643,000
Other assets 2,411,000 2,169,000
------------ ------------
Total assets $189,281,000 $173,041,000
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 68,874,000 $ 55,814,000
Interest-bearing 95,815,000 98,111,000
Short-term borrowings 2,243,000 974,000
Other liabilities 2,361,000 2,127,000
------------ ------------
Total liabilities 169,293,000 157,026,000
------------ ------------
Shareholders' equity:
Capital stock 16,086,000 16,013,000
Retained earnings 3,957,000 133,000
Net unrealized loss on investment securities available for sale (55,000) (131,000)
------------ ------------
Total shareholders' equity 19,988,000 16,015,000
------------ ------------
Total liabilities and shareholders' equity $189,281,000 $173,041,000
============ ============
9
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
Capital Resources
- -----------------
The federally-mandated minimum capital requirements and the actual
capitalization of the Company and the Bank as of June 30, 1997 are set forth
below.
CAPITAL REQUIREMENTS AS OF JUNE 30, 1997
Pacific PNB
Regulatory National Financial
Requirements Bank Group
------------- --------- ----------
Leverage Capital Ratio 4.0% 9.6% 10.9%
Risk Based Capital:
Tier 1 Capital 4.0% 13.6% 15.3%
Total Capital 8.0% 14.8% 16.5%
As of June 30, 1997, the Company and the Bank are categorized as well
capitalized under the regulatory framework for prompt corrective action, as
well as under the FDIC's deposit insurance assessment risk ratings.
Accordingly, the Company's Board of Directors believes the Company has excess
capital which could be better utilized to increase earnings and shareholder
value.
The Board has investigated numerous strategic opportunities to deploy this
excess capital and, on July 31, 1997, the Board authorized the Company to
invest a maximum of $2.5 million, up to a maximum 5% of the outstanding
voting shares, in a newly formed company called Westlake Mortgage, Inc.
("Westlake"). The Board believes that this investment will increase the
Company's earnings and shareholder value and that the benefits of the
investment outweighs the inherent risks associated with a start-up business.
Westlake will be a corporation which will elect to be subject to income
tax as a real estate investment trust ("REIT"). A REIT is allowed to pass
through its earnings to its shareholders without those earnings being subject
to corporate income taxes. This REIT will specialize in the purchase and
management of mortgage loans and mortgage-backed securities on single family
and multifamily real estate properties throughout the United States.
Westlake will be structured to generate earnings from net interest margin,
the spread between the interest rate it receives on its assets, and the
interest rate it pays on its liabilities. Westlake wishes to raise between
forty and fifty million dollars of equity capital before year end 1997. The
capital will be used along with borrowings (primarily under reverse
repurchase agreements) to purchase adjustable rate mortgage assets. To
minimize its interest rate risk, Westlake will utilize various hedging
techniques to match the interest rate structure of its liabilities to that of
its assets.
The Company and two other individuals have been involved in Westlake's
formation. These two individuals have significant experience and expertise
in the purchase and management of mortgage loans and will become executive
officers of Westlake. Due to his expertise, Mr. Barbieri, the CEO and
President of the Company and the Bank, will be an officer and board member of
Westlake. In addition, two members of the Board of Directors of the Company
will also be on the Board of Directors of Westlake. The Company believes
that this affiliation is necessary to oversee its investment in the new
company. In addition, it is
10
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
anticipated that the Bank will initially perform and be compensated for
certain services, such as accounting and data processing for Westlake.
The Bank and Westlake will also work together to design new mortgage
products with terms and pricing that meet the needs of Westlake's portfolio,
and can be offered by the Bank through its extensive network of mortgage
brokers as "portfolio products". The Bank does not currently offer any
portfolio products and management believes that this could greatly enhance
the mortgage division's product line.
The Company's investment in Westlake will be partially funded with a
dividend of approximately $1.5 million from the Bank to the Bank Holding
Company. The Bank's proforma capital ratios as of June 30, 1997, after this
proposed dividend would be as follows:
Pro-Forma
June 30, 1997 Capital Ratios
----------------------------
Leverage Capital 8.9%
Risk Based Capital:
Tier 1 Capital 12.5%
Total Capital 13.7%
With the proforma capital ratios as of June 30, 1997, the Bank would still
be considered well capitalized under the regulatory framework for prompt
corrective action as well as the FDIC's deposit insurance assessment ratings.
Liquidity
---------
Liquidity, as it relates to the Bank Holding Company, represents the
ability to obtain funds to support its investment activities and operating
needs. The Bank Holding Company's principal sources of funds are its cash
balances, short-term loan portfolio, cash dividends from its subsidiary bank,
as well as its ability to raise capital by selling additional shares of
common stock. 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 June 30, 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
11
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
for sale. The Bank's portfolio loan-to-deposit ratio (excluding residential
mortgage loans held for sale) at June 30, 1997 was 59.3% as compared to 61.2%
at June 30, 1996 and 60.0% 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, the Bank utilizes its borrowing
relationships to help fund the mortgage loans held for sale. These borrowing
sources include an unsecured line of credit with one of its correspondent
banks, a line of credit secured by a portion of its real estate loans with
the Federal Home Loan Bank, borrowings against the Bank's securities, 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 June
30, 1997 and December 31, 1996, escrow and title insurance companies'
deposits totaled approximately $32.5 million or 17.9% of total deposits and
$28.2 million or 16.6% of total deposits, respectively. This compared to
escrow and title insurance deposits of approximately $27.4 million or 16.4%
of total deposits at June 30, 1996. The increase in these types of deposits
are a result of the Bank's continual marketing effort along with an increase
in real estate activity in Southern California. Management expects these
deposits, along with others, to continue to increase in the third and fourth
quarters of 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 single escrow or title
insurance customer accounted for over 3% of the Bank's total deposits.
Results of Operations for the Six Months
Ended June 30, 1997 and June 30, 1996
-------------------------------------
Total interest and loan fee income
----------------------------------
Total interest and loan fee income increased $818,000 (12.2%) 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, the increase
in the average balance of 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 six months of 1997, the Bank funded $485 million of mortgage
loans, compared to the first six months of 1996, during which the Bank funded
mortgage loans totaling $390 million. The increase in total interest income
was also due in part to the significant decrease in nonaccrual loans. This
is reflected in the loan rate component of the table below. During the first
six months ended June 30, 1997, nonaccrual loans averaged $2.5 million
compared to average nonaccrual loans of $10.1 million during the same period
in 1996. Although not as significant, the increase in interest income was
also the result of a quarter of a point increase in the prime lending rate
which occurred in March of 1997.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the six months ended June 30, 1997 as compared to
the six months ended June 30, 1996.
12
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
Change in interest income due to:
Volume Rate Total
---------- --------- ----------
Loans $128,000 $202,000 $330,000
Mortgage loans held for sale 392,000 41,000 433,000
Investment securities (29,000) 17,000 (12,000)
Federal funds sold 34,000 1,000 35,000
-------- -------- --------
Total $525,000 $261,000 $786,000
======== ======== --------
Change in loan fees 32,000
--------
Total change in interest and loan fee income $818,000
========
Total interest expense
----------------------
Total interest expense decreased $82,000 (4.5%) 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 short term borrowings.
The Bank has reduced its interest rates paid on time deposits and has used
its short-term borrowings to fund its mortgage loans held for sale more often
during the first six months of 1997 than the first six months of 1996. In
order to attract new depositors and overall business relationships, the Bank
is offering, for a limited period, a high rate personal money market account
which should increase the interest bearing demand deposit interest expense
during the third quarter of 1997. Management expects to attract $5.0 to
$10.0 million of deposits under this promotion. The following table sets
forth the Company's rate and volume analysis for interest-bearing liabilities
for the six months ended June 30, 1997 as compared to the corresponding
period ended June 30, 1996.
Change in interest expense due to:
Volume Rate Total
--------- ---------- ---------
Interest-bearing demand deposit $(25,000) $ (9,000) $(34,000)
Time deposits 8,000 (101,000) (93,000)
Savings deposits 4,000 - 4,000
Short-term borrowings 36,000 5,000 41,000
-------- --------- --------
Total $ 23,000 $(105,000) $(82,000)
======== ========= ========
13
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
Allowance for loan losses
-------------------------
An analysis of the allowance for loan losses is summarized as follows:
Six Months Ended June 30
-------------------------
1997 1996
---------- -----------
Balance at beginning of period $1,812,000 $ 2,658,000
---------- -----------
Charge-offs (467,000) (1,119,000)
Recoveries 211,000 36,000
---------- -----------
Net charge-offs (256,000) (1,083,000)
---------- -----------
Contribution to allowance for loan losses 195,000 600,000
---------- -----------
Balance at end of period $1,751,000 $ 2,175,000
========== ===========
Allowance as a percentage of total loans 1.6% 2.2%
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 June 30,1997 and 1996
as well as December 31, 1996.
June 30, 1997 Dec. 31, 1996 June 30, 1996
------------- ------------- -------------
Loans accounted for on a nonaccrual basis $1,313,000 $3,220,000 $10,423,000
Accruing loans contractually past due 90 days or more 455,000 277,000 226,000
Total classified loans 5,885,000 6,087,000 14,848,000
Other real estate owned 3,184,000 3,483,000 2,372,000
Troubled debt restructurings 4,123,000 4,108,000 3,238,000
14
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
The Company's contribution to the provision for loan losses was $195,000
for the first six months of 1997 compared to $600,000 during the same period
in 1996. The reduced provision is a result of the significant reduction of
classified and nonaccrual loans. Classified loans decreased $9.0 million
(60%) from June 30, 1996 to June 30, 1997, while non accrual loans have
decreased $9.1 million (87%) over the same period. In addition, the net
charge off for the period was $256,000, or a 76% reduction from the net
charge off during the same period in 1996. These reductions, along with a
very strong outlook for the local economy have been the basis for a reduction
of the loan loss reserve from 2.2% of total loans as of June 30, 1996 to 1.6%
of total loans as of June 30, 1997. The allowance is a result of
Management's analysis of the estimated inherent losses in the Bank's loan
portfolio. This analysis takes into consideration the level and trend of
loan losses, loan delinquencies, classified loan volumes and Management's
analysis of current market conditions.
Other Income
------------
Other income increased $1,382,000 (22.6%) between the periods presented.
The increase was primarily due to higher revenue generated from the Bank's
residential mortgage operation. During the first six months of 1997, gross
revenue from the mortgage operation was $6,658,000 compared to $5,397,000 in
the corresponding period in 1996. The increase in the mortgage division's
gross revenue resulted in the division posting a pretax income, before
administration allocation, of $1,865,000 during the first six months of
1997, compared to $1,393,000 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 service charges, fees and other, is primarily due to the gain
on a sale of REO. The SBA Department posted lower revenue due to the timing
of the sale of these loans. Management expects an increase in SBA loan sales
during the third and fourth quarters.
Other Expenses
--------------
Other expenses increased $1,087,000 (13%) between the periods presented.
The Company's other expenses increased $302,000 (6.9%) while the Bank's
residential mortgage division's expenses increased $785,000 (19.6%). The
increase in the mortgage division's expenses was due to the increased level
of activity and was substantially associated with the increase in salaries,
employee benefits and commissions. The increase in the Company's other
expenses of $302,000 was primarily due to an increase in salaries, 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 six months of 1996, the Company recorded a provision for
income tax of 11.5% of pretax income. This amount was 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 41% from
15
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
December 31, 1996 forward. Accordingly, during the first six months of 1997,
the Company recorded a provision of approximately 41%.
Cash and Cash Equivalents
-------------------------
As of June 30, 1997, cash and cash equivalents increased $2.7 million from
December 31, 1996 balances primarily due to an increase in deposits, which
was partially offset by a decrease in short term borrowings and an increase
in loans.
Results of Operations for the Three Months
Ended June 30, 1997 and June 30, 1996
-------------------------------------
Total interest and loan fee income
----------------------------------
Total interest and loan fee income increased $437,000 (12.5%) between the
periods presented primarily due to the significant decrease in the average
balance of nonaccrual loans for the three months ended June 30 1997, compared
to the same period in 1996 along with an increase in the average balance of
mortgage loans held for sale and, to a lesser degree, its portfolio loans.
During the three months ended June 30, 1997, nonaccrual loans averaged $2.1
million compared to an average balance of $11.9 million during the
corresponding period in 1996. 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.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the three months ended June 30, 1997 as compared
to the three months ended June 30, 1996.
Change in interest income due to:
Volume Rate Total
-------------- --------- ----------
Loans $ 75,000 $219,000 $294,000
Mortgage loans held for sale 135,000 11,000 146,000
Investment securities ( 16,000) 9,000 (7,000)
Federal funds sold 11,000 2,000 13,000
--------- -------- --------
Total $ 205,000 $241,000 $446,000
========= ========
Change in loan fees (9,000)
--------
Total change in interest and loan fee income $437,000
========
16
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
Total interest expense
- ----------------------
Total interest expense decreased $73,000 (1.0%) between the periods
presented due to a decrease in the volume of interest bearing demand and time
deposits along with a decrease in the rate of time deposits. These were
partially offset with an increase in the volume of short term borrowings. The
following table sets forth the Company's rate and volume analysis for interest-
bearing liabilities for the three months ended June 30, 1997 as compared to the
corresponding period ended June 30, 1997.
Change in interest expense due to:
Volume Rate Total
----------- ----------- ----------
Interest-bearing demand deposits $ (34,000) $ (4,000) $(38,000)
Time deposits (29,000) (27,000) (56,000)
Savings deposits 3,000 - 3,000
Short-term borrowings 21,000 (3,000) 18,000
---------- ---------- --------
Total $ (39,000) $ (34,000) $(73,000)
========== ========== ========
Allowance for possible loan losses
- -----------------------------------
An analysis of the allowance for possible loan losses is summarized as
follows:
Three Months Ended June 30
--------------------------
1997 1996
---------- ----------
Balance at beginning of period $1,721,000 $2,176,000
---------- ----------
Charge-offs (199,000) (305,000)
Recoveries 109,000 4,000
---------- ----------
Net charge-offs (90,000) (301,000)
---------- ----------
Contribution to allowance for possible loan losses 120,000 300,000
---------- ----------
Balance at end of period $1,751,000 $2,175,000
========== ==========
Allowance as a percentage of total loans 1.6% 2.2%
17
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Continued)
June 30, 1997
Other Income
------------
Other income increased $457,000 (12.9%) between the periods presented.
The increase was primarily due to higher revenue generated from the Bank's
residential mortgage division. During the three months ended June 30,1997,
gross revenue from the mortgage division was $3,523,000 compared to
$3,067,000 in the corresponding period in 1996. The increase in the mortgage
division's gross revenue resulted in the division posting a pretax income,
before administration allocation, of $974,000 during the three months ended
June 30, 1997, compared to $790,000 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.
Other Expenses
--------------
Other expenses increased $468,000 (10.5%) between the periods presented.
The Company's other expenses increased $197,000 (9%) while the Bank's
residential mortgage division's expenses increased $271,000 (11.9%). The
increase in the mortgage division's expenses was due to the increased level
of activity and was substantially associated with the increase in salaries,
employee benefits and commissions. The increase in the Company's other
expenses of $197,000 was primarily due to an increase in salaries, 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 three months ended June 30, 1996, the Company recorded a
provision for income tax of 17.7% of pretax income. This amount was 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 41% from
December 31, 1996 forward. Accordingly, during the three months ended June
30, 1997, the Company recorded a provision of approximately 41%.
18
Part II - Other Information
---------------------------
June 30, 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.
------- ----------------------------------------------------
Not applicable.
Item 5. Other Information.
------- ------------------
On November 30, 1997, the Bank's lease on its branch at 15615 Alton
Parkway, Suite 100, Irvine expires. This branch had total loans of $4.4
million and total deposits of $11.2 million as of June 30, 1997. Management
believes these customers can be serviced through its two other branches in
Orange County and has elected not to renew its lease. The Company does not
expect any material cost resulting from the branch closure and expects to
save approximately $180,000 per annum in reduced occupancy and employee
costs.
Item 6. Exhibits and Reports on Form 8-KSB.
------- ----------------------------------
(a) Exhibits Filed - none required.
--------------
(b) Reports on Form 8-KSB. During the second quarter of 1997, the
---------------------
Company did not file a report on Form 8-KSB.
19
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: By: /s/ ALLEN C. BARBIERI
------------ ----------------------------------
Allen C. Barbieri
President and C.E.O.
Date: By: /s/ DOUG L. HELLER
------------ ---------------------------------
Doug L. Heller
Chief Financial Officer
20