================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the transition period from __________ to ___________
Commission file No. 2-78580
---------------------------
PNB FINANCIAL GROUP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
California 95-3847640
---------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Reorganization)
4665 MacArthur Court
Newport Beach, California 92660
-------------------------------
(Address of Principal Executive Offices)
(949) 851-1033
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares of Registrant's common stock outstanding at August 12,
1998 was 2,774,533
THIS REPORT INCLUDES A TOTAL OF 22 PAGES
PNB FINANCIAL GROUP
Index To Form 10-Q
For the quarter ended June 30, 1998
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Income
and Comprehensive Income (unaudited) Six Months 4
ended June 30, 1998 and 1997
Condensed Consolidated Statements of Income 5
and Comprehensive Income (unaudited) Three Months
ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) 6
Six Months ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 8-19
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings. 20
ITEM 2. Changes in Securities. 20
ITEM 3. Defaults upon Senior Securities. 20
ITEM 4. Submission of Matters to a Vote of Security Holders. 20
ITEM 5. Other Information. 20
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures of Registrants. 22
2
PNB FINANCIAL GROUP
Condensed Consolidated Balance Sheets
(unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
Assets
- ------
Cash and due from banks $ 15,074,000 $ 15,185,000
Investment securities available for sale 12,326,000 6,910,000
Federal funds sold -0- -0-
Mortgage loans held for sale 107,784,000 96,852,000
Loans 126,540,000 118,184,000
Less allowance for loan losses (1,793,000) (1,558,000)
------------ ------------
Net loans 124,747,000 116,626,000
Premises and equipment, net 1,102,000 1,094,000
Other real estate owned 1,093,000 476,000
Other assets 5,282,000 5,731,000
------------ ------------
Total assets $267,408,000 $242,874,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $230,326,000 $211,090,000
Short term borrowings 4,250,000 5,000,000
Other liabilities 3,543,000 2,787,000
------------ ------------
Total liabilities 238,119,000 218,877,000
------------ ------------
Shareholders' equity:
Common stock, no par value, 20,000,000
shares authorized; 2,760,618 and 2,265,280
shares issued and outstanding at
June 30, 1998 and December 31, 1997 25,424,000 16,234,000
Retained earnings 3,851,000 7,754,000
Accumulated other comprehensive income:
Net unrealized gain on investment securities available for sale 14,000 9,000
------------ ------------
Total shareholders' equity 29,289,000 23,997,000
------------ ------------
Total liabilities and shareholders' equity $267,408,000 $242,874,000
============ ============
See accompanying notes
3
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income and Comprehensive Income
Six Months Ended June 30, 1998 and 1997
(unaudited)
1998 1997
------------ ------------
Interest income 9,780,000 7,548,000
Interest expense 2,727,000 1,833,000
----------- ----------
Net interest income 7,053,000 5,715,000
Provision for loan losses 350,000 195,000
----------- ----------
Net interest income after provision for loan losses 6,703,000 5,520,000
----------- ----------
Other income:
Income from mortgage banking operations 10,513,000 6,658,000
Service charges, fees and other 655,000 561,000
Gain on sale of SBA loans 204,000 286,000
----------- ----------
Total other income 11,372,000 7,505,000
----------- ----------
Other expenses:
Mortgage banking operations 7,702,000 4,783,000
Salaries & employee benefits 1,993,000 2,240,000
Occupancy 600,000 716,000
Other 1,727,000 1,709,000
----------- ----------
Total other expense 12,022,000 9,448,000
----------- ----------
Income before income taxes 6,053,000 3,577,000
Provision for income taxes 2,542,000 1,483,000
----------- ----------
Net income $ 3,511,000 $2,094,000
=========== ==========
Other Comprehensive Income, net of tax:
Unrealized gains on securities available for sale 8,000 31,000
----------- ----------
Less: reclassification adjustment for losses
included in net income (3,000) (6,000)
----------- ----------
Other Comprehensive Income 5,000 25,000
----------- ----------
Comprehensive Income $ 3,516,000 $2,119,000
=========== ==========
Earnings per share
Basic $1.31 $.84
=========== ==========
Diluted $1.23 $.79
=========== ==========
Weighted average number of shares for computing
earnings per share:
Basic 2,676,020 2,486,538
----------- ----------
Diluted 2,860,494 2,655,556
----------- ----------
See accompanying notes
4
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Income and Comprehensive Income
Three Months Ended June 30, 1998 and 1997
(unaudited)
1998 1997
---------- ----------
Interest income 5,047,000 3,926,000
Interest expense 1,408,000 919,000
---------- ----------
Net interest income 3,639,000 3,007,000
Provision for loan losses 200,000 120,000
---------- ----------
Net interest income after provision for loan losses 3,439,000 2,887,000
---------- ----------
Other income:
Income from mortgage banking operations 5,811,000 3,523,000
Service charges, fees and other 446,000 359,000
Gain on sale of SBA loans 56,000 117,000
---------- ----------
Total other income 6,313,000 3,999,000
---------- ----------
Other expenses:
Mortgage banking operations 4,296,000 2,545,000
Salaries & employee benefits 1,036,000 1,129,000
Occupancy 312,000 342,000
Other 943,000 912,000
---------- ----------
Total other expense 6,587,000 4,928,000
---------- ----------
Income before income taxes 3,165,000 1,958,000
Provision for income taxes 1,329,000 803,000
---------- ----------
Net income $1,836,000 $1,155,000
========== ==========
Other Comprehensive Income, net of tax:
Unrealized gains on securities available for sale 6,000 42,000
---------- ----------
Less: reclassification adjustment for losses
included in net income -0- (6,000)
---------- ----------
Other Comprehensive Income 6,000 36,000
---------- ----------
Comprehensive Income $1,842,000 $1,191,000
========== ==========
Earnings per share
Basic $ .67 $ .47
========== ==========
Diluted $ .63 $ .44
========== ==========
Weighted average number of shares for computing
earnings per share:
Basic 2,731,821 2,456,585
---------- ----------
Diluted 2,906,796 2,657,604
---------- ----------
See accompanying notes
5
PNB FINANCIAL GROUP
Condensed Consolidated Statements of Cash Flow
Six Months Ended June 30, 1998 and 1997
(unaudited)
1998 1997
------------- ------------
Net cash provided by (used in) operating activities: $ (4,329,000) $ 1,595,000
------------ -----------
Cash flows from investing activities:
Net change in loans (9,683,000) (5,308,000)
Net change in investment securities (5,732,000) 130,000
Other (646,000) (2,203,000)
------------ -----------
Net cash used in investing activities (14,769,000) (2,975,000)
------------ -----------
Cash flows from financing activities:
Net change in deposits 19,237,000 10,988,000
Net change in short-term borrowings (750,000) (7,023,000)
Net change in common stock 500,000 128,000
------------ -----------
Net cash provided by financing activities 18,987,000 4,085,000
------------ -----------
Net increase (decrease) in cash and cash equivalents (111,000) 2,705,000
Cash and cash equivalents at beginning of period 15,185,000 18,701,000
------------ -----------
Cash and cash equivalents at end of period $ 15,074,000 $21,406,000
============ ===========
See accompanying notes
6
PNB FINANCIAL GROUP
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(unaudited)
1. Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
PNB Financial Group (the "Bank Holding Company") and its wholly-owned
subsidiary, Pacific National Bank (the "Bank"), (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated. The
condensed consolidated financial statements contain all adjustments (consisting
only of normal, recurring accruals) which are, in the opinion of Management,
necessary to present fairly the consolidated financial position of the Company
at June 30, 1998, and the consolidated statements of income and statements of
cash flows for the six and three month periods ended June 30, 1998 and June 30,
1997. Results for the six and three months ended June 30, 1998 are not
necessarily indicative of results which may be expected for any other interim
period, or for the year as a whole. These condensed consolidated financial
statements do not include all disclosures associated with the Company's annual
financial statements and, accordingly, should be read in conjunction with such
statements.
2. Consolidated Statement of Cash Flows
------------------------------------
For purposes of reporting cash flows, the Company defines cash and cash
equivalents as cash on hand, cash due from banks, interest-bearing deposits in
other banks and federal funds sold.
3. 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 - Comprehensive Income
---------------------------------------------------------------------
The FASB has issued a statement number 130 "Reporting Comprehensive
Income" which becomes effective for periods ending December 31, 1998. This
statement requires reporting of all prior period comprehensive income.
Statement number 130 establishes standards for reporting and display of
comprehensive income and its components. It does not address issues of
recognition or measurement for comprehensive income and its components.
7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
Item 2.
- -------
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, which represent the
Company's expectations or beliefs including, but not limited to, statements
regarding the growth of the Company, the future profitability of the Company and
the sufficiency of the Company's liquidity and capital. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
including those described below.
Summary
- -------
The Company reported net income of $3,511,000 for the six months ended June
30, 1998 compared to a net income of $2,094,000 for the same period in 1997.
The Company's diluted earnings per common and common equivalent share was $1.23
for the first two quarters of 1998 a 56% increase over its diluted earnings per
common and common equivalent shares of $ .79 in the second period of 1997. The
earnings per share for 1997 has been adjusted for the 15% stock dividend
recorded on April 15, 1998. The Company's annualized return on average assets
was 2.9% for the first six months of 1998 compared to 2.2% for the same period
in 1997 and its annualized return on average stockholders equity was 25.9% for
the first six months of 1998 compared to 21.0% in 1997. The increase in
earnings was primarily a result of an increase in the net interest margin of the
Company along with an increase in earnings from the Bank's residential mortgage
loan department. The increase in the net interest income was a result of
increases in commercial loans, mortgage loans and deposits, as well as a
significant decrease in nonperforming assets. The Company reduced its
nonperforming assets from $4.5 million or 2.2% of total assets as of June 30,
1997 to $1.7 million or .6% of total assets as of June 30, 1998. The increase
in profits from the residential mortgage loan department was due to a 48%
increase in the volume of mortgage loans funded during the two periods
presented. The Company funded a record $737.5 million of mortgage loans in the
first two quarters of 1998, compared to $484.3 million in the same period in
1997.
As of June 30, 1998, the Company had total assets of $267.4 million, total
loans of $126.5 million, and total deposits of $230.3 million, as compared to
total assets of $242.9 million, total loans of $118.2 million, and total
deposits of $211.1 million as of December 31, 1997. Average assets for the
first two quarters of 1998 were $243.4 million as compared to average assets of
$189.3 million during the first two quarters of 1997. The increase in average
assets of $54.1 million (28.6%) was primarily concentrated in an increase in
mortgage loans held for sale of $36 million (66.3%) and an increase in portfolio
loans of $16.2 million (15.6%). The increase in assets was funded with an
increase in average deposits of $43.7 million (26.5%) and an increase in average
short term borrowings of $3.1 million (262%). The increase in deposits was
partially due to an increase in the utilization of brokered deposits. During the
first six months of 1998, the Bank's brokered deposits averaged $26.3 million
compared to an average of $5.6 million during the first six months 1997. The
Bank utilizes brokered deposits to partially fund its mortgage loans held for
sale.
The following section sets forth the Company's condensed consolidated average
balances of each principal category of assets, liabilities, and shareholders'
equity for the six month period ended June 30, 1998 as compared to the same
period in 1997. Average balances are based on daily averages for the Bank, and
monthly averages for the Bank Holding Company, since the Bank Holding Company
does not maintain daily average information. Management
8
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
believes that the difference between monthly and daily average data (where
monthly data has been used) is not significant.
1998 1997
------------- -------------
Assets
Cash and due from banks $ 12,861,000 $ 12,277,000
Investment securities 7,444,000 7,314,000
Federal funds sold 6,554,000 5,909,000
Mortgage loans held for sale 90,209,000 54,235,000
Loans 120,120,000 103,941,000
Less allowance for loan losses (1,612,000) (1,785,000)
------------ ------------
Net loans 118,508,000 102,156,000
Premises and equipment, net 1,132,000 1,083,000
Other real estate owned 1,163,000 3,896,000
Other assets 5,527,000 2,411,000
------------ ------------
Total assets $243,398,000 $189,281,000
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 83,831,000 $ 68,874,000
Interest-bearing 124,567,000 95,815,000
Short-term borrowings 5,318,000 2,243,000
Other liabilities 2,528,000 2,361,000
------------ ------------
Total liabilities 216,244,000 169,293,000
------------ ------------
Shareholders' equity:
Capital stock 20,868,000 16,086,000
Retained earnings 6,276,000 3,957,000
Net unrealized gain (loss) on investment securities available for sale 10,000 (55,000)
------------ ------------
Total shareholders' equity 27,154,000 19,988,000
------------ ------------
Total liabilities and shareholders' equity $243,398,000 $189,281,000
============ ============
9
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
Capital Resources
- -----------------
The federally-mandated minimum capital requirements and the actual
capitalization of the Company and the Bank as of June 30, 1998 are set forth
below.
CAPITAL REQUIREMENTS AS OF JUNE 30, 1998
Pacific PNB
Regulatory National Financial
Requirements Bank Group
------------- --------- ---------
Leverage Capital Ratio 4.0% 9.5% 11.7%
Risk Based Capital:
Tier 1 Capital 4.0% 13.2% 16.1%
Total Capital 8.0% 14.1% 17.1%
Liquidity
- ---------
Liquidity, as it relates to the Bank Holding Company, represents the
ability to obtain funds to support its investment activities and operating
needs. The Bank Holding Company's principal sources of funds are its cash
balances, short-term loan portfolio, cash dividends from its subsidiary bank, as
well as its ability to raise capital by selling additional shares of common
stock. As of June 30, 1998, the Bank Holding Company has cash balances of
approximately $973,000. These liquid assets, along with cash generated from its
loan portfolio will support its 1998 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, securities available for sale and a portion of
mortgage loans held for sale. The Bank's portfolio loan-to-deposit ratio
(excluding brokered deposits) at June 30, 1998 was 60.0% as compared to 62.6% at
June 30, 1997 and 59% as of December 31, 1997. The Bank's residential mortgage
division utilizes the Bank's funding sources to fund its mortgage loans held for
sale. Management can slow down or speed up the shipping and sale of these
loans, and manages the balance of the mortgage loans held for sale to match its
funds available. In this way, management maximizes the yield on its liquid
assets. Due to the fluctuations in funding and sale of mortgage loans, along
with changes in the deposit balances of the Bank, the matching of liquid assets
and mortgage loans held for sale is not always achieved. At certain times
during the year, the Bank utilizes its back up borrowing relationships along
with brokered deposits, to help fund the mortgage loans held for sale. These
back up sources include unsecured lines of credit with other banks, a line of
credit with the Federal Home Loan Bank and, borrowings against the Bank's
securities available for sale. During the first two quarters of 1998, the
average balance of short term borrowings and brokered deposits was $31.6
million compared to $7.9 million during the first two quarters of 1997.
10
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
A large portion of the Bank's deposits consist of deposits maintained by
escrow companies and, to a lesser degree, title insurance companies. At June
30, 1998, escrow and title insurance companies' deposits totaled approximately
$50.7 million or 24.2% of total nonbrokered deposits. This compared to escrow
and title insurance deposits of approximately $32.5 million or 18.9% and $45.4
million or 22.9% of total nonbrokered deposits as of June 30,1997 and December
31, 1997, respectively. The increase in these deposits is primarily due to the
strong real estate market in Southern California. The Bank monitors the deposit
levels of this group closely. Recently the competition among local banks for
these types of deposits have increased significantly. The Bank believes that it
will maintain its historic level of escrow and title deposits although a
significant reduction below these levels could have material impact on the
Bank's liquidity and cost of funds.
Market and Interest Rate Risk
- -----------------------------
Market risk arises from changes in interest rates, exchange rates, commodity
prices and equity prices. The Company does not engage in trading of financial
instruments, nor does it have exchange rate risk. The Bank has risk management
policies to monitor and limit exposure to market risk arising due to changes in
interest rates and commodity prices. Disclosures about fair value of financial
instruments, which reflect changes in market prices and rates, can be found in
Note 11 of the Company's Annual Consolidated Financial Statements.
The Company uses asset liability management to control the overall interest
rate risk exposure of its balance sheet. The Company's interest rate
sensitivity is measured by dividing the Company's rate sensitive assets by its
rate sensitive liabilities. The interest rate sensitivity ratio ("GAP")
indicates what effect a change in interest rate would have on the net interest
margin of a financial institution. Generally, in a positive GAP environment, an
increase in interest rates would increase the net interest margin, while a
decrease in interest rates would have a negative impact on the net interest
margin. The following table sets forth the Company's interest rate sensitivity
analysis as of June 30, 1998. All dollar amounts are in thousands.
11
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
Greater
Less than 3-12 1-5 than
3 Months Months Years 5 Years Total
--------- --------- -------- ------- -------
Rate Sensitive Assets:
Loans $ 88,091 $ 14,569 $13,235 $10,645 $126,540
Interest rate swap (20,000) - 20,000 - -
Mortgage loans held for sale 107,784 - - 107,784
Investment securities 6,670 2,142 3,514 - 12,326
Federal funds sold - - - - -
-------- -------- ------- ------- --------
Total Rate Sensitive Assets 182,545 16,711 36,749 10,645 246,650
Rate Sensitive Liabilities:
Time deposits 46,208 13,945 2,918 127 63,198
Interest bearing demand deposits 62,653 - - - 62,653
Savings deposits 4,094 - - - 4,094
Other demand deposits 40,674 - - - 40,674
Borrowings on line of credit 4,250 - - - 4,250
-------- -------- ------- ------- --------
Total Rate Sensitive Liabilities $157,879 $ 13,945 $ 2,918 $ 127 $174,869
Cumulative GAP $ 24,666 $ 27,432 $61,263 $71,781
======== ======== ======= =======
Cumulative Rate Sensitive Liabilities as 1.16% 1.16% 1.35% 1.41%
a Percentage of Rate Sensitive Assets ======== ======= ======= =======
In order to reduce the impact of a decrease in interest rates on its net
interest margin, the Company entered into an interest rate swap agreement. The
interest rate swap agreement effectively transfers variable rate assets to fixed
rate assets. The agreement is for a total notional principal amount of $20
million and provides that the Company pay a variable interest rate of prime on
the notional amount with the counterparty paying the Company a fixed rate of
9.11%. The agreement terminates on April 3, 2000. The unrealized gain on this
swap as of June 30, 1998 is approximately $204,000.
As the GAP analysis demonstrates, the Company is in a positive one year gap
position of 1.16%. The estimated effect on the Company's net interest income for
a 10% decrease in the prime interest rate (85 basis points) over a one-year
period would be a decrease of approximately $284,000 (2%). Similarly, if there
was a 10% increase in the prime interest rate over a one-year period, the
Company's net interest income would be enhanced by $284,000. The Bank's policy
is to limit the change in the Bank's net interest margin to plus or minus 1.25%
of the Bank's capital based on a 50 basis point immediate change in the prime
rate.
12
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
While the gap analysis is a useful asset/liability management tool, it does
not fully assess interest rate risk. Gap analysis does not address the effects
of customer options (such as early withdrawal of time deposits and options to
prepay loans) and the Bank strategies, (such as delaying increases in interest
paid on interest bearing deposit accounts) on the Company's net interest income.
It also estimates the relationship between movements in the prime interest rate
and the movement in other asset and liability interest rates used in the gap
model. Therefore, a gap analysis is only one tool with which to analyze
interest rate risk and must be reviewed in conjunction with other information
and in conjunction with the likely changes in the yield curve.
In addition, the Bank has available for sale securities recorded at their
fair market value of $12,326,000 as of June 30, 1998. The value of these
securities is subject to fluctuations based upon the current interest rate yield
curve. Should short-term interest rates immediately increase 10% (55 basis
points), the market value of the investment portion would decrease by $31,000.
Conversely, should the short-term interest rates immediately decrease by 55
basis points, the market value of the investment portfolio would increase by
$24,000.
The Bank also has interest rate risk associated with the lending activity of
the Bank's residential mortgage loan department. Unfunded rate-locked loans,
together with the portion of mortgage loans held for sale that are not allocated
to an existing purchase commitment, create interest rate exposure. The Bank
monitors this exposure daily and limits the potential exposure by the purchase
of mandatory forward commitments to sell whole loans. Management estimates the
amount of unfunded rate-locked loans that will actually fund and purchases
mandatory forward commitments based upon this estimate and based upon the
general interest rate environment. Management does not speculate on interest
rate movement and uses mandatory forward commitments purely as a hedge against
interest rate swings which could effect the value of its unfunded pipeline of
rate-locked loans and unallocated loans held for sale. The estimates which
management uses can differ from actual loan fundings and, therefore, interest
rate risk does exist. The Bank does not hedge against interest rate risk on its
subprime residential mortgage loan volume. A 10% change in mortgage interest
rates should not have a material impact on the market value of these loans. As
of June 30, 1998, the Bank had $4.8 million of rate-locked unfunded sub-prime
and closed sub-prime loans.
As of June 30, 1998, the Bank had $64.5 million of mandatory forward
commitments to sell whole loans. This represented 95.8% coverage of the
estimated rate-locked loans which will fund and unallocated mortgage loans held
for sale. The Bank's policy is to limit the change in the economic value of the
mandatory forward commitments together with the rate-locked loans and
unallocated loans held for sale to plus or minus 2% of the Bank's capital based
on a 50 basis point immediate change in residential mortgage interest rates. As
of June 30, 1998, the Bank will incur a decrease in the economic value of its
residential mortgage on and off balance sheet assets of approximately $56,000
for an immediate increase of 50 basis points in residential mortgage interest
rates, while the economic value would increase approximately $56,000 for an
immediate decrease of 50 basis points.
13
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
Results of Operations for the Six Months
Ended June 30, 1998 and June 30, 1997
-------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $2,232,000 (29.6%) between the
periods presented primarily due to the significant increase in the average
balance of mortgage loans held for sale and, to a lesser degree, its' portfolio
loans. The increase in the average balance of mortgage loans held for sale is
due to the increased activity in the Bank's residential mortgage loan
department. The increase in the Bank's portfolio loans was due to the Bank's
continual marketing effort along with a strong economic environment in the
Bank's primary lending area.
Over the periods presented, the Bank also experienced an increase in the
yield on its portfolio loans and a decrease in the yield on its mortgage loans
held for sale. The increase in the yield on portfolio loans was primarily due
to the reduction in nonperforming loans. The decrease in the yield on mortgage
loans held for sale is due to the lower long term interest rate environment
which, in part, has fueled the increase in mortgage loan volume.
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the six months ended June 30, 1998 as compared to
the six months ended June 30, 1997.
Change in interest income due to:
Volume Rate Total
---------- --------- ----------
Loans $ 766,000 $ 222,000 $ 988,000
Mortgage loans held for sale 1,374,000 (141,000) 1,233,000
Investment securities 4,000 -0- 4,000
Federal funds sold 17,000 2,000 19,000
---------- --------- ----------
Total $2,161,000 $ 83,000 $2,244,000
========== ========= ----------
Change in loan fees (12,000)
----------
Total change in interest and loan fee income $2,232,000
==========
Total interest expense
- ----------------------
Total interest expense increased $894,000 (48.8%) between the periods
presented primarily due to an increase in the volume of time deposits, interest
bearing demand deposits, and short term borrowings. Primarily all of the
increased volume of time deposits is a result of the increased utilization of
brokered deposits. The increased volume of short-term borrowings and brokered
deposits were used to fund the growth of mortgage loans held for sale. For the
first six months of 1998, the average cost of brokered deposits was 44 basis
points above the average cost of the Bank's time deposits. The following table
sets forth the Company's rate and volume analysis for interest-bearing
liabilities for the six months ended June 30, 1998 as compared to the
corresponding period ended June 30, 1997.
14
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
Change in interest expense due to:
Volume Rate Total
----------- ----------- ---------
Interest-bearing demand deposit $ 99,000 $ 38,000 $137,000
Time deposits 612,000 86,000 698,000
Savings deposits (15,000) (4,000) (19,000)
Short-term borrowings 88,000 (10,000) 78,000
---------- ---------- --------
Total $ 784,000 $ 110,000 $894,000
========== ========== ========
Allowance for loan losses
- -------------------------
An analysis of the allowance for loan losses is summarized as follows:
Six Months Ended June 30
------------------------
1998 1997
---------- ----------
Balance at beginning of period $1,558,000 $1,812,000
---------- ----------
Charge-offs (196,000) (467,000)
Recoveries 81,000 211,000
---------- ----------
Net charge-offs (115,000) (256,000)
---------- ----------
Contribution to allowance for loan losses 350,000 195,000
---------- ----------
Balance at end of period $1,793,000 $1,751,000
========== ==========
Allowance as a percentage of total loans 1.4% 1.6%
15
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
The following table sets forth the total amount of nonaccrual loans,
accruing loans past due 90 days or more, troubled debt restructurings,
classified loans and other real estate owned as of June 30, 1998 and 1997 as
well as December 31, 1997.
June 30, 1998 Dec. 31, 1997 June 30, 1997
------------- ------------- -------------
Loans accounted for on a nonaccrual basis $ 561,000 $1,237,000 $1,313,000
Accruing loans contractually past due 90 days or more 693,000 160,000 455,000
Total classified loans 4,660,000 5,433,000 5,885,000
Other real estate owned 1,093,000 476,000 3,184,000
Troubled debt restructurings 1,048,000 4,102,000 4,123,000
The Company's contribution to the provision for loan losses was $350,000 for
the first six months of 1998 compared to $195,000 during the same period in
1997. The increased provision is a result of an increase in the amount of
portfolio loans. The loan loss reserve as a percent of loans decreased from
1.6% as of June 30 1997 to 1.4% as of June 30, 1998. The reduction of
nonaccrual and classified loans between the periods presented along with a
strong southern California economy is the primary reason for the reduction in
the allowance for loan loss as a percent of portfolio loans. 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 $3,867,000 (51.5%) 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 1998, gross
revenue from the mortgage operation was $10,513,000 compared to $6,658,000 in
the corresponding period in 1997. The increase in the mortgage divisions gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $2,811,000 during the first two quarters of 1998, compared to
$1,875,000 during the same period in 1997. The increase in net income of this
department is primarily due to the higher volume of loans funded and sold. The
increase in loan volume was attributed to the lower mortgage interest rate
environment which has fueled an increase in mortgage loan refinancings. During
the six months ended June 30, 1998, 50% of the mortgage loan volume was from
refinancings compared to 30% in the same period in 1997. When the low interest
rate environment changes, the mortgage loan volume might significantly decrease.
This could have a material impact on the profitability of this department. To
reduce this possible impact, the Bank in conjunction with Alta Residential
Mortgage Trust ("Alta"), has developed adjustable rate mortgage loans which the
Bank is offering to its customers for sale to Alta. It is anticipated that this
product will be the choice of preference to consumers when the mortgage loan
fixed interest rates environment materially increases. Historically, the Bank
has not secured an investor willing to purchase these adjustable rate types of
loans and therefore has not offered them.
16
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
The gain on the sales of SBA loans declined $82,000 (28.7%) between the
periods presented. During the second quarter of 1998, management changed its
policy with regard to the sale of the guaranteed portion of the SBA loans which
it generates. Rather than sell the guaranteed portion of the SBA loan, as has
been its practice, the Bank is looking to portfolio the guaranteed portion.
This change will increase the Bank's balance sheet and the long term
profitability of the Bank. By holding these loans, the Bank will earn the
interest spread between the interest earned on the loan and the Bank's cost of
funds. If the loan pays off before its expected life, the Bank could lose some
of the benefit of holding the loan. Therefore, in order to maximize the profit
of the Bank and to reduce its risk from loan prepayments, the Bank may, from
time to time, decide to sell some of its SBA loans.
Other Expenses
- --------------
Other expenses increased $2,574,000 (27.2%) between the periods presented.
The Company's other expenses decreased $345,000 (7.4%) while the Bank's
residential mortgage division's expenses increased $2,919,000 (61.0%). 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 decrease in the Company's other expenses
of $345,000 was primarily due to an decrease in salaries and employee benefits
of $274,000 (11%), REO Expenses of 315,000 (88%) and occupancy expenses of
$116,000 (16.2%). Salaries, employee benefits, and occupancy expenses were
reduced as a result of the consolidation of the Irvine Spectrum branch into the
Bank's Newport Beach and Orange branches. The reduction of REO expenses is a
direct result of the reduction of REO properties. These decreases were
partially offset with increases in other deposit expenses of $253,000 (41.4%),
which was attributable to the increase in escrow and title insurance deposit
balances.
Provision for Income Taxes
- --------------------------
The Company recognized a provision for income tax of $2,512,000 during the
first two quarters of 1998 compared to a provision for income taxes of
$1,483,000 during the same period in 1997. These tax provisions represent a
full income tax provision of 42% of pretax income.
Cash and Cash Equivalents
- -------------------------
As of June 30, 1998, cash and cash equivalents decreased only $111,000 from
December 31, 1997 balances. The small change was due to increases in portfolio
loans of $9.7 million and investment securities of $5.7, which was primarily
offset with an increase in deposits of $19.2 million.
Results of Operations for the Three Months
Ended June 30, 1998 and June 30, 1997
-------------------------------------
Total interest and loan fee income
- ----------------------------------
Total interest and loan fee income increased $1,121,000 (28.6%) between the
periods presented primarily due to the significant increase in the average
balance of mortgage loans held for sale and portfolio loans.
17
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
The table below sets forth the Company's rate and volume analysis for
interest-earning assets for the three months ended June 30, 1998 as compared to
the three months ended June 30, 1997.
Change in interest income due to:
Volume Rate Total
---------- ---------- -----------
Loans $ 434,000 $129,000 $ 563,000
Mortgage loans held for sale 589,000 (84,000) 505,000
Investment securities 3,000 (2,000) 1,000
Federal funds sold 98,000 -0- 98,000
---------- -------- ----------
Total $1,124,000 $ 43,000 $1,167,000
========== ======== ==========
Change in loan fees (46,000)
Total change in interest and loan fee income $1,119,000
==========
Total interest expense
- ----------------------
Total interest expense increased $489,000 (53.2%) between the periods
presented primarily due to an increase in the volume of interest bearing demand
and time deposits. The following table sets forth the Company's rate and volume
analysis for interest-bearing liabilities for the three months ended June 30,
1998 as compared to the corresponding period ended June 30, 1997.
Change in interest expense due to:
Volume Rate Total
--------- --------- ---------
Interest-bearing demand deposit $ 55,000 $ 10,000 $ 65,000
Time deposits 414,000 43,000 457,000
Savings deposits (10,000) (1,000) (11,000)
Short-term borrowings (9,000) (13,000) (22,000)
-------- -------- --------
Total $450,000 $ 39,000 $489,000
======== ======== ========
18
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June 30, 1998
Allowance for loan losses
- -------------------------
An analysis of the allowance for loan losses is summarized as follows:
Three months ended June 30
---------------------------
1998 1997
---------- ----------
Balance at beginning of period $1,611,000 $1,721,000
---------- ----------
Charge-offs (64,000) (199,000)
Recoveries 46,000 109,000
---------- ----------
Net charge-offs (18,000) (90,000)
---------- ----------
Contribution to allowance for loan losses 200,000 120,000
---------- ----------
Balance at end of period $1,793,000 $1,751,000
========== ==========
Allowance as a percentage of total loans 1.4% 1.6%
Other Income
- ------------
Other income increased $2,314,000 (57.9%) between the periods presented. The
increase was primarily due to higher revenue generated from the Bank's
residential mortgage operation. During the three ended June 30, 1998, gross
revenue from the mortgage division was $4,296,000 compared to $2,545,000 in the
corresponding period in 1997. The increase in the mortgage division's gross
revenue resulted in the division posting a pretax income, before administration
allocation, of $1,650,000 during the three months ended June 30, 1998, compared
to $980,000 during the same period in 1997. The increase in net income of this
department is primarily due to the higher volume of loans funded.
Other Expenses
- --------------
Other expenses increased $1,659,000 (33.7%) between the periods presented.
The Company's other expenses decreased $92,000 (3.9%) while the Bank's
residential mortgage division's expenses increased $1,751,000 (68.8%). 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,
employee benefits and commissions. The decrease in the Company's other expenses
of $92,000 was primarily due to an decrease in salaries, employee benefits and
REO expenses which were partially offset with an increase in other deposit
expenses.
Provision for Income Taxes
- --------------------------
The Company recognized a provision for income taxes of 41.5% and 42% of
pretax income for the three months ended June 30, 1997 and 1998, respectively.
19
Part II - Other Information
---------------------------
June 30, 1998
Item 1. Legal Proceedings.
- ------- ------------------
There are no pending legal proceedings to which the Company or the Bank is a
party or to which any of their respective subsidiaries are subject, other than
ordinary routine litigation incidental to the Bank's business.
Item 2. Changes in Securities.
- ------- ----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- ------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
On June 17, 1998, the annual meeting of shareholders was held to elect five
directors and to ratify the selection of McGladrey & Pullen, LLP as the
Company's independent auditors for the 1998 fiscal year. Of the 2,728,993
shares outstanding 2,383,893 or 87.35% voted. The following is a breakdown of
the results:
Election of Directors:
Name For Against Abstain
- ---- --------- ------- -------
Allen Barbieri 2,382,881 0 1,012
Martin Hart 2,382,881 0 1,012
Jon Salquist 2,382,881 0 1,012
Bernard Schneider 2,382,881 0 1,012
Barney Whitesell 2,382,881 0 1,012
Appointment of McGladrey 2,380,616 1,150 2,127
& Pullen, LLP
Item 5. Other Information.
- ------- ------------------
Effective June 24, 1998, the Company's stock began trading on the Nasdaq
Automatic Quotation National Market under the symbol "PNBF". Up until June 24,
1998, the Company's stock was traded in the Nasdaq over the counter or
electronic bulletin board market. In connection with the stocks listing on
Nasdaq, the Company registered its stock under Section 12(g) of the Securities
Act of 1933 by filing a registration statement pursuant to Section 8(a) of the
Securities Act of 1933, which become effective on June 29, 1998.
Shareholders wishing to bring a proposal before the registrant's 1999 Annual
Meeting of Shareholders (but not wishing to include such proposal in the
registrant's Proxy Statement) must send written notice of such proposal to be
received by the Secretary of the Registrant at its principal executive offices
in Newport Beach, CA, by no later than April 1, 1999.
20
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits Filed - none required.
--------------
(b) Reports on Form 8-K. During the second quarter of 1998, the Company did
-------------------
not file a report on Form 8-K.
21
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: August 15, 1998 By: /s/ Allen C. Barbieri
--------------- -------------------------
Allen C. Barbieri
President and C.E.O.
Date: August 15, 1998 By: /s/ Doug L. Heller
--------------- -----------------------
Doug L. Heller
Chief Financial Officer
22