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REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
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CALIFORNIA 6712 33-0885320
(State or other jurisdiction (Primary standard (I.R.S. employer
of industrial identification number)
incorporation or organization) classification code number)
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6110 EL TORDO
RANCHO SANTA FE, CALIFORNIA 92067
(858) 756-3023
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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ARNOLD HAHN
CHIEF FINANCIAL OFFICER
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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WITH COPIES TO:
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STANLEY F. FARRAR MELANIE S. CORWIN
SULLIVAN & CROMWELL BROWN, CUMMINS & BROWN CO., L.P.A.
1888 CENTURY PARK EAST, 21ST FLOOR 3500 CAREW TOWER
LOS ANGELES, CALIFORNIA 90067 CINCINNATI, OHIO 45202
(310) 712-6600 (513) 381-2121
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering./ /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering./ /
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box./ /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) REGISTRATION FEE
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Common Stock, no par value.... 787,843 shares N/A $10,474,731 $2,766
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(1) This amount is based on the number of shares of common stock to be issued
upon consummation of the merger contemplated in the Agreement and Plan of
Merger dated as of August 7, 2000 between First Community Bancorp and
Professional Bancorp, Inc.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) and Rule 457(f)(1) of the
Securities Act of 1933, as amended, based on the product of the estimated
maximum number of shares of common stock of First Community Bancorp to be
exchanged for the common stock of Professional Bancorp, Inc.
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FIRST COMMUNITY BANCORP HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL FIRST
COMMUNITY BANCORP SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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PROFESSIONAL BANCORP, INC.
606 BROADWAY
SANTA MONICA, CALIFORNIA 90401
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
Dear Shareholders:
The board of directors of Professional Bancorp, Inc. has called a special
meeting of shareholders for December 12, 2000, at which shareholders will be
asked to consider and to vote upon the approval of the Agreement and Plan of
Merger dated as of August 7, 2000 providing for a merger of Professional Bancorp
into First Community Bancorp. First Community common stock is listed on the
NASDAQ National Market under the symbol "FCBP."
In the merger, each share of Professional Bancorp common stock will be
converted into the right to receive, at the election of each holder thereof (but
subject to the election and allocation procedures set forth in the merger
agreement) (i) $8.00 in cash without interest, or (ii) the number of shares of
First Community common stock equal to the exchange ratio described in the merger
agreement. Based on the price of First Community stock on , 2000,
Professional Bancorp shareholders would receive shares of First Community
for each share of Professional Bancorp if they choose to receive stock. However,
because First Community's common stock prices may change up to the closing, the
value of the stock merger consideration may fluctuate.
We cannot complete the merger unless the merger agreement is approved by a
majority of the votes cast at the special meeting by shareholders represented at
the meeting and entitled to vote.
The board of directors of Professional Bancorp believes that the merger is
in the best interests of Professional Bancorp and its shareholders and strongly
encourages you to vote "FOR" the merger proposal.
Because of the importance of the matters to be considered, whether or not
you plan to attend the special meeting, please take the time to vote by
completing and mailing the enclosed proxy card. If you sign, date and mail your
proxy card without indicating how you want to vote, your proxy will be voted in
favor of the merger agreement.
The enclosed proxy statement/prospectus describes the shareholders' meeting,
the merger and other related matters. Please read the entire document carefully.
Sincerely,
Gene F. Gaines
Chairman of the Board and Chief Executive Officer
Professional Bancorp, Inc.
SEE RISK FACTORS BEGINNING ON PAGE 21 FOR A DISCUSSION OF THE RISKS THAT
SHAREHOLDERS SHOULD CONSIDER WITH RESPECT TO THE MERGER. Neither the Securities
and Exchange Commission nor any state securities commission has approved or
disapproved the First Community common stock to be issued under this proxy
statement/prospectus or determined if this proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
The date of this proxy statement/prospectus is November , 2000, and it is
being mailed or otherwise delivered to shareholders on or about such date.
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PROFESSIONAL BANCORP, INC.
606 BROADWAY
SANTA MONICA, CALIFORNIA 90401
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 12, 2000
------------------------
NOTICE IS HEREBY GIVEN that, pursuant to the call of its board of directors,
a Special Meeting of Shareholders of PROFESSIONAL BANCORP, INC. will be held on
December 12, 2000 at 4:30 p.m., Pacific Time, at First Professional Bank, 606
Broadway, Santa Monica, California, 90401. The purpose of the meeting is to
consider and vote upon the following matters:
1. MERGER. To consider and vote on a proposal to approve the acquisition of
Professional Bancorp by First Community Bancorp and related matters as
provided in the Agreement and Plan of Merger dated as of August 7, 2000.
2. OTHER BUSINESS. The transaction of such other business as may properly
come before the meeting and any adjournment(s) thereof.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS
OF PROFESSIONAL BANCORP AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE PROPOSED MERGER.
Shareholders of record at the close of business on November 2, 2000 are
entitled to notice of, and to vote at, the special meeting and any
adjournment(s) thereof.
In connection with the proposed merger, shareholders may exercise
dissenters' rights under Pennsylvania law. This means that shareholders who do
not vote in favor of the merger may make a written demand to Professional
Bancorp for payment in cash of the "fair value" of their shares. Professional
Bancorp must receive the demand prior to the shareholder vote on the merger. The
procedure for exercising your dissenters' rights is summarized under the heading
"Dissenters' Rights" in the attached proxy statement/prospectus. The relevant
provisions of Pennsylvania law on dissenters' rights are attached to this
document as Annex C.
By Order of the Board of Directors
GENE F. GAINES
CHAIRMAN OF THE BOARD
Dated: November , 2000
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE BY SIGNING AND
DATING THE ENCLOSED PROXY CARD AND MAILING IT PROMPTLY IN THE PREPAID ENVELOPE
PROVIDED.
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SOURCES FOR ADDITIONAL INFORMATION
If you are a shareholder of Professional Bancorp and would like to obtain
additional copies of this document, please address your request to:
Corporate Secretary
Professional Bancorp, Inc.
606 Broadway
Santa Monica, California 90401
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY NOVEMBER [ ],
2000 IN ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
See also "Where You Can Find More Information" on page 135.
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TABLE OF CONTENTS
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PAGE
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SOURCES FOR ADDITIONAL INFORMATION.......................... i
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... ii
SUMMARY..................................................... 1
Information About the Companies........................... 1
The Merger................................................ 2
What you will receive; Cash or Stock Election............. 2
Election and Allocation................................... 2
The Professional Bancorp Special Meeting.................. 3
Professional Bancorp Shareholder Votes Required........... 3
Revocability of Proxies................................... 3
Professional Bancorp's Board of Directors Unanimously
Recommended Shareholder Approval........................ 3
Professional Bancorp's Financial Advisor Says Merger
Consideration is Fair................................... 3
Completion of the Merger.................................. 3
Conditions to the Merger.................................. 3
Waiver and Amendment...................................... 4
Possible Termination of the Merger........................ 4
Regulatory Approval....................................... 4
Operations and Management After the Merger................ 4
Interests of Certain Persons in the Merger................ 4
Description of First Community Capital Stock and Dividend
Policy.................................................. 4
Certain Tax Consequences.................................. 5
Accounting Treatment of the Merger........................ 5
Professional Bancorp Shareholders Have Dissenters'
Rights.................................................. 5
Summary Historical Financial Data......................... 8
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA....... 13
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 20
RISK FACTORS................................................ 21
INFORMATION ABOUT FIRST COMMUNITY........................... 25
FIRST COMMUNITY'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 26
INFORMATION ABOUT PROFESSIONAL BANCORP...................... 48
PROFESSIONAL BANCORP'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 52
SUPERVISION AND REGULATION.................................. 92
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF PROFESSIONAL BANCORP........................ 95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF FIRST COMMUNITY............................. 97
DIRECTORS AND EXECUTIVE OFFICERS OF FIRST COMMUNITY......... 100
THE SPECIAL MEETING OF PROFESSIONAL BANCORP SHAREHOLDERS.... 103
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PAGE
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THE MERGER.................................................. 106
Background of the Merger.................................. 106
Structure of the Merger................................... 109
Reasons For the Merger.................................... 110
Recommendation of the Professional Bancorp Board of
Directors............................................... 111
Opinion of Professional Bancorp's Financial Advisor....... 112
Certain Federal Income Tax Consequences................... 117
Regulatory Approval....................................... 119
Resale of First Community Common Stock.................... 119
Interests of Certain Persons in the Merger................ 120
Dissenters' Rights........................................ 121
Accounting Treatment of Merger............................ 122
THE MERGER AGREEMENT........................................ 123
The Merger................................................ 123
Cash/Stock Election....................................... 123
Effective Time and Effective Date......................... 124
Exchange of Stock Certificates............................ 124
Dividends................................................. 124
No Fractional Shares...................................... 124
Conduct of Business Prior to Completion of the Merger..... 125
Certain Covenants......................................... 126
Conditions to the Merger.................................. 126
Termination............................................... 127
Expenses.................................................. 127
THE SHAREHOLDER AGREEMENTS.................................. 128
DESCRIPTION OF FIRST COMMUNITY CAPITAL STOCK AND COMPARISON
OF SHAREHOLDER RIGHTS..................................... 129
LEGAL MATTERS............................................... 135
EXPERTS..................................................... 135
WHERE YOU CAN FIND MORE INFORMATION......................... 135
INDEX OF FINANCIAL STATEMENTS............................... F-1
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ANNEX A: AGREEMENT AND PLAN OF MERGER...................... Annex A-1
ANNEX B: OPINION OF ENDICOTT FINANCIAL ADVISORS LLC........ Annex B-1
ANNEX C: DISSENTERS' RIGHTS UNDER SUBCHAPTER D OF CHAPTER
15 OF THE PENNSYLVANIA BUSINESS CORPORATION LAW OF
1988, AS AMENDED.................................. Annex C-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this proxy statement/prospectus, just indicate
on your proxy card how you want your shares to be voted, then sign and mail it
in the enclosed prepaid return envelope marked "Proxy" as soon as possible so
that your shares may be represented and voted at the Professional Bancorp
special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: No. Your broker will vote your shares ONLY if you provide instructions on
how to vote. You should follow the directions provided by your broker.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. There are three ways for you to revoke your proxy and change your vote.
First, you may send a written notice to the corporate secretary of Professional
Bancorp stating that you would like to revoke your proxy. Second, you may
complete and submit a new proxy card. Third, you may vote in person at the
special meeting. If you have instructed a broker to vote your shares, you must
follow directions received from your broker to change your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. You should not send in your stock certificates at this time.
Professional Bancorp shareholders will exchange their certificates representing
Professional Bancorp common stock as a result of the merger and you will receive
instructions for exchanging those certificates after the merger is completed.
Q: HOW DO I ELECT TO RECEIVE CASH OR FIRST COMMUNITY COMMON STOCK FOR MY
PROFESSIONAL BANCORP SHARES?
A: Prior to the time the merger happens, you will receive an election form,
which you may use to indicate your preference to receive First Community common
stock or cash for your shares of Professional Bancorp common stock.
Alternatively, you may decide to make no election, in which case the form of
consideration you receive will be determined by the elections of other
Professional Bancorp shareholders. After the deadline for submitting election
forms has passed, an exchange agent chosen by First Community will allocate the
consideration to comply with the requirement that in the aggregate 50% of the
outstanding shares of Professional Bancorp common stock will be converted into
First Community common stock and the other 50% will be converted into cash.
Q: WHEN DO YOU EXPECT TO MERGE?
A: We are working to complete the merger early in the first quarter of 2001. We
must first obtain the necessary regulatory approval and the approval of
Professional Bancorp's shareholders at the special meeting. We cannot assure you
as to when or if all the conditions to the merger will be met nor can we predict
the exact timing. It is possible we will not complete the merger.
Q: WHOM SHOULD I CONTACT WITH QUESTIONS OR TO OBTAIN ADDITIONAL COPIES OF THIS
PROXY STATEMENT/ PROSPECTUS?
Corporate Secretary
First Community Bancorp
6110 El Tordo
P.O. Box 2388
Rancho Santa Fe, California 92067
(858) 756-7000
Corporate Secretary
Professional Bancorp, Inc.
606 Broadway
Santa Monica, California 90401
(310) 458-1521
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT RELATING TO
THE ACQUISITION OF PROFESSIONAL BANCORP BY FIRST COMMUNITY AND MAY NOT CONTAIN
ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING
OF THE MERGER AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, AS WELL AS THE
ADDITIONAL DOCUMENTS WE REFER YOU TO, INCLUDING THE MERGER AGREEMENT WHICH WE
HAVE ATTACHED AS ANNEX A.
INFORMATION ABOUT THE COMPANIES
FIRST COMMUNITY
6110 El Tordo
P.O. Box 2388
Rancho Santa Fe, California 92067
(858) 756-7000
First Community is a California corporation registered under the Bank
Holding Company Act of 1956, as amended. First Community's principal business is
to serve as a holding company for its banking subsidiaries, Rancho Santa Fe
National Bank and First Community Bank of the Desert. First Community was formed
to operate Rancho Santa Fe, which is a federally chartered commercial bank
organized in 1982. Rancho Santa Fe is a community bank serving the commercial,
industrial, professional, real estate and private banking markets of San Diego
County. In May 2000, First Community acquired both Rancho Santa Fe and First
Community Bank of the Desert. First Community Bank of the Desert is a state
chartered commercial bank organized under the laws of California in 1980. First
Community Bank of the Desert is a community bank that was established to serve
the commercial/ industrial, professional, real estate and private banking
markets of San Bernardino and Riverside Counties. At June 30, 2000, First
Community had total consolidated assets of approximately $341.7 million, total
consolidated net loans of approximately $219.9 million, total consolidated
deposits of approximately $310.3 million and total consolidated shareholders'
equity of approximately $25.3 million. Active full time equivalent employees
totaled 119 at June 30, 2000.
PROFESSIONAL BANCORP
606 Broadway
Santa Monica, California 90401
(310) 458-1521
Professional Bancorp is a bank holding company originally organized as a
corporation under the laws of the State of California in July 1981, and
reincorporated under the laws of the Commonwealth of Pennsylvania in
August 1989. Professional Bancorp commenced operations in August 1982.
Professional Bancorp's principal business is to serve as a holding company for
its wholly owned subsidiary, First Professional Bank, N.A., a federally
chartered commercial bank. First Professional commenced operations in
August 1982. First Professional provides a wide range of commercial banking
products and services primarily directed toward the health care market,
including physicians, independent practice associations, practice management
companies, preferred provider organizations, medical billing management
companies, home health agencies and hospital based practices. First Professional
operates five full-service banking offices in Santa Monica, Beverly Hills,
Tarzana, Pasadena and Redlands. In addition, First Professional has a limited
service facility in Los Angeles and operates an in-house courier service. At
June 30, 2000, Professional Bancorp had total consolidated assets of
approximately $268.4 million, total consolidated net loans of approximately
$121.4 million, total consolidated deposits of approximately $250.7 million and
total consolidated shareholders' equity of approximately $15.0 million. Active
full-time equivalent employees of First Professional totaled 120 at June 30,
2000; Professional Bancorp has no full-time employees.
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THE MERGER
THE MERGER AGREEMENT IS ATTACHED TO THIS DOCUMENT AS ANNEX A AND IS THE
LEGAL DOCUMENT THAT GOVERNS THE MERGER; YOU SHOULD READ IT CAREFULLY. WE ALSO
ENCOURAGE YOU TO READ THE RISK FACTORS BEGINNING ON PAGE [ ].
The merger agreement provides that Professional Bancorp will merge with and
into First Community. First Community will be the surviving corporation. First
Professional, the wholly-owned subsidiary of Professional Bancorp, will become a
wholly-owned subsidiary of First Community.
WHAT YOU WILL RECEIVE; CASH OR STOCK ELECTION
PROFESSIONAL BANCORP SHAREHOLDERS MAY ELECT TO RECEIVE EITHER 0.55 SHARES OF
FIRST COMMUNITY COMMON STOCK OR $8.00 CASH FOR EACH SHARE OF PROFESSIONAL
BANCORP COMMON STOCK. THIS ELECTION IS SUBJECT TO POSSIBLE PRORATION. IN
ADDITION, THE EXCHANGE RATIO FOR PROFESSIONAL BANCORP COMMON STOCK IS SUBJECT TO
ADJUSTMENT IF THE AVERAGE MARKET PRICE OF FIRST COMMUNITY STOCK FALLS OUTSIDE A
PREDETERMINED PRICE RANGE DURING A PRESCRIBED PERIOD SHORTLY BEFORE THE MERGER.
On [ ], 2000 the price of a share of First Community common stock was
$[ ] and the price of a share of Professional Bancorp common stock was
$[ ]. Because shareholders of Professional Bancorp electing to receive
stock consideration will receive 0.55 shares of First Community common stock for
each share of Professional Bancorp common stock, based on the stock prices on
[ ] 2000, Professional Bancorp shareholders would receive the equivalent of
$[ ] for each share of Professional Bancorp common stock.
Each Professional Bancorp shareholder's election may be subject to proration
depending on the elections of other Professional Bancorp shareholders. The
proration provisions are designed to ensure that 50% of the outstanding
Professional Bancorp shares are exchanged for First Community common stock.
Proration may be necessary so that First Community's tax counsel can deliver its
opinion that the merger will be treated as a reorganization under the Internal
Revenue Code. Delivery of this opinion is required to complete the merger. If
too many Professional Bancorp shareholders elect to receive stock, those holders
will receive cash for some of their Professional Bancorp shares notwithstanding
their election. If too many Professional Bancorp shareholders elect to receive
cash, those holders will receive shares of First Community common stock for some
of their Professional Bancorp shares notwithstanding their election.
In addition, the exchange ratio for Professional Bancorp common stock is
subject to reduction if the average market price of First Community common stock
is greater than $16.67 during a prescribed measurement period shortly before the
merger. If the average market price during the measurement period is greater
than $16.67, the exchange ratio will be reduced so that the value of the per
share stock consideration received by Professional Bancorp shareholders based on
the average market price of First Community common stock is no greater than
$9.17.
If the average market price of First Community common stock during the
measurement period is less than $12.32, Professional Bancorp will have the
option to terminate the merger unless First Community agrees to increase the
exchange ratio so that the value of the per share stock consideration received
by Professional Bancorp shareholders based on the average market price of First
Community common stock is no less than $6.78.
The average market price of First Community common stock will be determined
based on the volume weighted average sales price of First Community common stock
on the NASDAQ National Market for a 15-day period ending on the 5th business day
prior to completion of the merger.
First Community will not issue fractional shares. Instead, Professional
Bancorp shareholders will receive an amount of cash based on the closing price
of First Community common stock on the NASDAQ National Market on the day prior
to the merger. First Community will not pay interest on any cash received in
lieu of fractional shares.
ELECTION AND ALLOCATION
Prior to the time of the merger, Professional Bancorp shareholders will
receive an election form to use to indicate their preference to receive First
Community common stock or cash for their shares of Professional Bancorp common
stock. Alternatively, Professional Bancorp shareholders may
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decide to make no election, in which case the form of consideration received
will be determined by the elections of other Professional Bancorp shareholders.
After the deadline for submitting election forms has passed, an exchange agent
chosen by First Community will allocate the consideration to comply with the
requirement that in the aggregate 50% of the outstanding shares of Professional
Bancorp common stock will be converted into First Community common stock and the
other 50% will be converted into cash.
THE PROFESSIONAL BANCORP SPECIAL MEETING
Professional Bancorp will hold a special meeting of its shareholders to
consider and vote upon the merger proposal. The meeting will be held on
December 12, 2000 at 4:30 p.m., Pacific Time, at First Professional Bank, 606
Broadway, Santa Monica, California.
PROFESSIONAL BANCORP SHAREHOLDER VOTES REQUIRED
Approval of a majority of the votes cast at the meeting by Professional
Bancorp shareholders represented at the meeting and entitled to vote is required
to approve the merger. Directors and executive officers of Professional Bancorp
and their affiliates own approximately 5.86% of the outstanding shares of
Professional Bancorp and intend to vote their shares in favor of the merger.
REVOCABILITY OF PROXIES
Professional Bancorp shareholders may revoke their proxies at anytime before
the special meeting by written notice to the corporate secretary of Professional
Bancorp or submission of a duly executed proxy bearing a later date.
Professional Bancorp shareholders may also revoke their proxy by voting in
person at the special meeting.
PROFESSIONAL BANCORP'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDED SHAREHOLDER
APPROVAL
The board of directors of Professional Bancorp has unanimously approved and
adopted the merger agreement, and recommends a vote "FOR" approval of the merger
agreement and the transactions contemplated thereby. A discussion of the factors
that the Professional Bancorp board considered in determining whether to approve
and adopt the merger agreement can be found under "THE MERGER--Recommendation of
the Professional Bancorp Board of Directors".
PROFESSIONAL BANCORP'S FINANCIAL ADVISOR SAYS MERGER CONSIDERATION IS FAIR
Endicott Financial Advisors, L.L.C., financial advisor to Professional
Bancorp rendered an oral fairness opinion to the board of directors of
Professional Bancorp on July 25, 2000, stating that as of such date the merger
consideration to be paid was fair to Professional Bancorp shareholders from a
financial point of view. Endicott later delivered to the board of directors its
written opinion, dated as of August 7, 2000, which reaffirmed its earlier oral
opinion about the consideration to be received by Professional Bancorp
shareholders. A copy of the written fairness opinion setting forth the
information reviewed, assumptions made and matters considered by Endicott is
attached to this document as Annex B. Professional Bancorp shareholders should
read the fairness opinion in its entirety.
Professional Bancorp has paid fees of approximately $100,000 to Endicott
and, upon completion of the merger, will pay an additional $25,000.
COMPLETION OF THE MERGER
The merger will become effective when we file an agreement of merger with
the California Secretary of State and articles of merger with the Department of
State of the Commonwealth of Pennsylvania. We expect to make these filings and
complete the merger early in the first quarter of 2001.
CONDITIONS TO THE MERGER
The completion of the merger depends upon the satisfaction of a number of
conditions, including:
- approval of the merger agreement by the shareholders of Professional
Bancorp;
- receipt of all necessary governmental consents and approvals;
- satisfaction by Professional Bancorp of certain capitalization and asset
quality requirements; and
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- satisfaction of other conditions customary for a merger transaction of
this type.
WAIVER AND AMENDMENT
Except as otherwise required by law, the merger agreement may be modified or
amended by action of the boards of directors of First Community and Professional
Bancorp, without action by their respective shareholders. In addition, if
permitted by law, either First Community or Professional Bancorp could elect to
waive any condition that has not been satisfied and complete the merger anyway.
POSSIBLE TERMINATION OF THE MERGER
Either Professional Bancorp or First Community may call off the merger under
certain circumstances, including if:
- we both consent;
- the merger is not completed before April 1, 2001;
- we are not able to obtain required governmental approval;
- the Professional Bancorp shareholders do not approve the merger agreement;
- the other party breaches in a material manner any of the representations
or warranties or any covenant or agreement it has made under the merger
agreement; or
- any condition to such party's obligations under the merger agreement has
not been met or waived.
In addition, First Community may call off the merger if the Professional
Bancorp board of directors fails to recommend shareholder approval of the merger
prior to the special meeting.
Finally, Professional Bancorp may terminate the merger if the average market
price of First Community common stock is below $12.32 during the prescribed
measurement period and First Community does not agree to increase the exchange
ratio as provided in the merger agreement.
REGULATORY APPROVAL
We cannot complete the merger unless it is approved by the Board of
Governors of the Federal Reserve. First Community has filed an application with
the Board of Governors of the Federal Reserve seeking its approval.
Although we do not know of any reason why we cannot obtain regulatory
approval in a timely manner, we cannot be certain when or if we will obtain
approval or if terms and conditions will be imposed.
First Community and Professional Bancorp are not required to complete the
merger unless we satisfy the regulatory conditions for the merger.
OPERATIONS AND MANAGEMENT AFTER THE MERGER
The executive officers and directors of First Community before the merger
will continue to be the executive officers and directors of First Community
after the merger. In addition, upon completion of the merger, Gene F. Gaines,
the chairman and CEO of Professional Bancorp will be appointed to the First
Community board of directors. First Community will also create an advisory board
for First Professional and appoint the current members of the Professional
Bancorp board of directors to the advisory board. First Professional will
operate as a wholly-owned subsidiary of First Community after the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
First Community has agreed to appoint Gene F. Gaines, who currently serves
as Chairman and CEO of Professional Bancorp, to the First Community board of
directors upon completion of the merger. Certain non-officer directors of
Professional Bancorp have entered into one-year non-compete agreements with
First Community for Los Angeles County.
DESCRIPTION OF FIRST COMMUNITY CAPITAL STOCK AND DIVIDEND POLICY
First Community is a California corporation and subject to the provisions of
the California General Corporation Law. The authorized capital stock of First
Community consists of 15,000,000 shares of common stock of which approximately
3,958,416 are outstanding as of September 30, 2000 and 5,000,000 shares of
preferred stock none of which is
4
<PAGE>
outstanding. Each share of First Community common stock has the same relative
rights, and is identical to all respects with, each other share of First
Community common stock. Holders of First Community common stock will be entitled
to one vote per share on all matters requiring shareholder action, including,
but not limited to, the election of, and any other matters relating to,
directors. Holders of First Community common stock will be entitled to cumulate
their votes for the election of directors.
Holders of First Community common stock will be entitled to receive
dividends when, as and if declared by the board of directors. The timing and
amount of future dividends are at the discretion of the board of directors and
will depend upon the consolidated earnings, financial condition, liquidity and
capital requirements of First Community and its subsidiaries, applicable
government regulations and policies and other factors considered relevant by the
board of directors.
CERTAIN TAX CONSEQUENCES
We expect, that for U.S. federal income tax purposes no gain or loss will be
recognized by Professional Bancorp shareholders upon exchange of their shares of
Professional Bancorp common stock for shares of First Community common stock. To
the extent Professional Bancorp shareholders receive cash for their shares of
Professional Bancorp common stock, U.S. Federal income tax will apply to such
cash received. U.S. Federal income tax will also apply to cash received by
Professional Bancorp shareholders for fractional shares or as the result of the
exercise of dissenters' rights.
For a discussion of the tax treatment of the merger, see "THE
MERGER--Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for using the purchase method of accounting.
First Community will be deemed the acquiror for accounting purposes.
PROFESSIONAL BANCORP SHAREHOLDERS HAVE DISSENTERS' RIGHTS
Shareholders of Professional Bancorp will have dissenters' rights under
Pennsylvania law. This means that Professional Bancorp shareholders who do not
vote in favor of the merger may make a written demand to Professional Bancorp
for payment in cash of the "fair value" of their shares. Professional Bancorp
must receive the demand prior to the shareholder vote on the merger at the
special meeting. The procedure for exercising your dissenters' rights is
summarized under "THE MERGER--Dissenters' Rights" below. The relevant provisions
of Pennsylvania law on dissenters' rights are attached to this document as Annex
C.
5
<PAGE>
MARKETS AND MARKET PRICES
COMPARATIVE MARKET PRICE INFORMATION. The following table presents the
market value for First Community common stock on the NASDAQ National Market and
Professional Bancorp common stock on the American Stock Exchange on August 4,
2000 and [ ]. August 4, 2000 was the last day prior to our announcement of
the signing of the merger agreement. [ ] was the last practicable trading
day for which information was available prior to the date of this document.
<TABLE>
<CAPTION>
FIRST COMMUNITY PROFESSIONAL BANCORP
COMMON STOCK COMMON STOCK
(DOLLARS PER SHARE) (DOLLARS PER SHARE)
------------------------------ ------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Price on August 4, 2000........................ $14.69 $14.69 $14.69 $3.88 $3.13 $3.81
Price on [ , 2000]................... $ $ $ $ $ $
</TABLE>
Also set forth below for each of the market values of common stock on
August 4, 2000 and [ ] is the equivalent pro forma market value of
Professional Bancorp common stock, which we determined by multiplying the
applicable market value of First Community common stock by the assumed exchange
ratio of 0.55 of First Community common stock we are issuing for each share of
Professional Bancorp common stock.
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP EQUIVALENT PRO FORMA
-----------------------------------------
<S> <C>
Closing price on August 4, 2000........................... $ 8.08
Closing price on [ , 2000]...................... $[ ]
</TABLE>
We urge you to obtain current market quotations for First Community common
stock and Professional Bancorp common stock. We expect that the market prices of
First Community common stock and Professional Bancorp common stock will
fluctuate between the date of this document and the date on which the merger is
completed and thereafter. Because the market prices of First Community common
stock and Professional Bancorp common stock are subject to fluctuation, the
value of the shares of First Community common stock that Professional Bancorp
shareholders will receive in the merger may increase or decrease prior to and
after the merger.
6
<PAGE>
HISTORICAL MARKET PRICES AND DIVIDEND INFORMATION
FIRST COMMUNITY. First Community common stock is listed on the NASDAQ
National Market under the symbol "FCBP." On the record date there were 577
holders of record of First Community common stock. The following table sets
forth for the calendar quarter indicated the high and low prices per share of
First Community common stock as reported on the NASDAQ National Market. First
Community has declared a quarterly dividend since the first quarter of 1998. The
trading market for First Community common stock is relatively small. The total
trading volume for First Community common stock for the third quarter of 2000
was 166,000 shares.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDEND
------------- -------- -------- --------
<S> <C> <C> <C>
1998:
First quarter............................................. $16.50 $14.00 $0.06
Second quarter............................................ $19.50 $16.00 $0.06
Third quarter............................................. $17.00 $13.50 $0.06
Fourth quarter............................................ $15.00 $11.00 $0.06
1999:
First quarter............................................. $13.75 $11.75 $0.06
Second quarter............................................ $14.38 $11.00 $0.06
Third quarter............................................. $14.88 $13.13 $0.09
Fourth quarter............................................ $15.50 $13.50 $0.09
2000
First quarter............................................. $15.50 $13.75 $0.09
Second quarter............................................ $14.25 $13.00 $0.09
Third quarter............................................. $15.44 $13.88 $0.09
Fourth quarter through [ ].......................
</TABLE>
PROFESSIONAL BANCORP. Professional Bancorp common stock is traded on the
American Stock Exchange under the symbol "MDB." On the Professional Bancorp
record date, there were [ ] holders of record of Professional Bancorp common
stock. The following table sets forth for the calendar quarter indicated the
high and low prices per share of Professional Bancorp common stock as reported
on the American Stock Exchange and the dividends per share of Professional
Bancorp common stock. The trading market for Professional Bancorp common stock
is relatively small. The total trading volume for Professional Bancorp common
stock for the third quarter of 2000 was 682,100 shares.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDEND
------------- -------- -------- --------
<S> <C> <C> <C>
1998:
First quarter............................................. $19.38 $14.38 --
Second quarter............................................ $21.69 $17.88 $0.05
Third quarter............................................. $20.13 $13.81 --
Fourth quarter............................................ $17.75 $13.63 $0.05
1999:
First quarter............................................. $18.63 $16.63 --
Second quarter............................................ $19.38 $16.33 $0.05
Third quarter............................................. $21.63 $11.50 --
Fourth quarter............................................ $12.37 $ 7.25 --
2000
First quarter............................................. $ 7.44 $ 4.50 --
Second quarter............................................ $ 5.13 $ 3.25 --
Third quarter............................................. $ 7.75 $ 3.38 --
Fourth quarter through [ ]....................... [ ] [ ] --
</TABLE>
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
FIRST COMMUNITY. The following summary historical financial data for the six
months ended June 30, 2000 and 1999 are derived from unaudited consolidated
financial statements of First Community and include, in the opinion of
management of First Community, all adjustments (consisting only of normal
accruals) necessary to present fairly the data for such periods. The results for
the six-month period ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full fiscal year. The following summary
historical financial data for the five years ended December 31, 1999 are derived
from the audited supplemental consolidated financial statements of First
Community. The data should be read in conjunction with the supplemental
consolidated financial statements, related notes and other financial information
included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
AT OR FOR
THE 6 MONTHS AT OR FOR THE
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest Income................... $ 13,835 $ 11,328 $ 23,405 $ 20,258 $ 16,707 $ 13,752 $ 11,705
Interest Expense.................. 3,548 2,798 5,688 5,390 4,564 3,942 3,565
-------- -------- -------- -------- -------- -------- --------
NET INTEREST INCOME................. 10,287 8,530 17,717 14,868 12,143 9,810 8,140
Provision for loan losses......... -- 240 518 941 310 360 361
-------- -------- -------- -------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES................... 10,287 8,290 17,199 13,927 11,833 9,450 7,779
Non-interest income............... 1,273 1,158 2,304 2,692 2,426 3,229 2,978
Non-interest expense.............. 10,634 6,071 12,073 10,897 9,544 9,987 11,550
-------- -------- -------- -------- -------- -------- --------
EARNINGS (LOSS) BEFORE INCOME
TAXES............................. 926 3,377 7,430 5,722 4,715 2,692 (793)
Income tax (benefit).............. 1,125 1,439 3,166 2,140 1,878 (479) (1,090)
-------- -------- -------- -------- -------- -------- --------
NET EARNINGS (LOSS)................. $ (199) $ 1,938 $ 4,264 $ 3,582 $ 2,837 $ 3,171 $ 297
======== ======== ======== ======== ======== ======== ========
ENDING BALANCE SHEET DATA:
Assets............................ $341,678 $299,035 $304,362 $277,613 $214,846 $175,663 $155,954
Time deposits in financial
institutions.................. 3,948 6,424 7,502 5,440 4,160 -- --
Securities...................... 45,736 46,695 50,563 38,380 28,136 22,646 23,518
Loans, net of deferred fees..... 223,840 187,541 206,102 170,980 151,064 125,247 102,989
Allowance for loan losses....... 3,987 3,658 4,025 3,785 3,382 3,194 2,948
Deposits........................ 310,343 271,492 274,232 251,421 191,940 156,481 139,947
Borrowed funds.................. 2,472 1,605 1,657 470 -- -- 75
Common shareholders' equity..... 25,291 24,119 25,855 22,833 19,680 16,769 13,681
PER SHARE DATA AND OTHER SELECTED
RATIOS:
Earnings (loss) per common share:
Basic........................... $ (0.05) $ 0.50 $ 1.10 $ 0.93 $ 0.74 $ 0.83 $ 0.20
Diluted......................... (0.05)(a) 0.48 1.05 0.88 0.71 0.83 0.20
Dividends declared per share...... 0.18 0.12 0.30 0.24 -- -- --
Book value per share.............. 6.50 6.25 6.67 5.92 5.15 4.39 9.20
Shareholders' equity to assets at
period end...................... 7.40% 8.07% 8.49% 8.22% 9.16% 9.55% 8.77%
Return on average assets.......... (0.12%) 1.35% 1.44% 1.48% 1.45% 1.94% 0.20%
Return on average equity.......... (1.43%) 16.33% 17.46% 16.87% 15.62% 21.16% 3.84%
Average equity/average assets..... 8.48% 8.26% 8.27% 8.77% 9.30% 9.16% 5.32%
Net interest margin............... 6.96% 6.52% 6.60% 6.79% 6.85% 6.82% 6.54%
</TABLE>
------------------------------
(a) Effect is anti-dilutive
8
<PAGE>
PROFESSIONAL BANCORP. The following summary historical financial data for
the six months ended June 30, 2000 and 1999 are derived from unaudited financial
statements of Professional Bancorp and include, in the opinion of management of
Professional Bancorp, all adjustments (consisting only of normal accruals)
necessary to present fairly the data for such periods. The results for the
six-month period ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full fiscal year. The following summary
historical financial data for the five years ended December 31, 1999 are derived
from the audited financial statements of Professional Bancorp. The data should
be read in conjunction with the consolidated financial statements, related notes
and other financial information included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
AT OR FOR
THE 6 MONTHS AT OR FOR THE YEARS
ENDED JUNE 30, ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest Income........................ $ 9,763 $ 8,740 $ 18,295 $ 16,949 $ 16,709 $ 17,650 $ 20,903
Interest Expense....................... 1,870 1,600 3,413 3,630 3,826 4,850 6,539
-------- -------- -------- -------- -------- -------- --------
NET INTEREST INCOME...................... 7,893 7,140 14,882 13,319 12,883 12,800 14,364
Provision for loan losses.............. 1,743 1,172 13,993 406 180 4,136 1,539
-------- -------- -------- -------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................ 6,150 5,968 889 12,913 12,703 8,664 12,825
Other non-interest income.............. 926 924 1,812 1,741 1,793 1,515 1,435
Net gain (loss) on sale of securities
available for sale................... -- 40 40 (6) -- (71) 1,018
Non-interest expense................... 7,111 6,899 14,300 12,226 12,125 15,545 12,090
-------- -------- -------- -------- -------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES...... (35) 33 (11,559) 2,422 2,371 (5,437) 3,188
Income tax (benefit)................... -- (43) (3,199) 990 892 (1,712) 1,182
-------- -------- -------- -------- -------- -------- --------
NET EARNINGS (LOSS)...................... $ (35) $ 76 $ (8,360) $ 1,432 $ 1,479 $ (3,725) $ 2,006
======== ======== ======== ======== ======== ======== ========
ENDING BALANCE SHEET DATA:
Assets................................. $268,403 $253,783 $273,490 $259,701 $253,828 $264,287 $322,165
Time deposits in financial
institutions......................... 405 380 380 190 95 95 --
Securities............................. 62,137 68,745 63,725 104,972 87,796 96,340 130,037
Loans, net of deferred fees............ 128,627 143,719 162,357 117,719 105,702 93,012 100,014
Allowance for loan losses.............. 7,276 1,813 5,873 2,200 1,802 2,253 1,070
Deposits............................... 250,703 226,332 256,028 230,581 229,464 241,277 297,466
Convertible notes...................... 679 868 679 1,116 5,437 4,869 4,767
Common shareholders' equity............ 14,976 24,493 14,868 25,321 15,863 14,042 17,508
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common share:
Basic................................ $ (0.02) $ 0.04 $ (4.15) $ 0.81 $ 1.10 $ (2.78) $ 1.57
Diluted.............................. (0.02)(a) 0.04 (4.15)(a) 0.74 0.97 (2.78)(a) 1.28
Dividends declared per share........... -- -- -- -- -- -- --
Book value per share................... 7.37 12.15 7.32 12.68 11.69 10.47 13.69
Shareholders' equity to assets at
period end........................... 5.58% 9.65% 5.44% 9.75% 6.25% 5.31% 5.43%
Return on average assets............... (0.02%) 0.06% (3.13%) 0.57% 0.61% (1.38%) 0.64%
Return on average equity............... (0.47%) 0.59% (33.63%) 6.41% 9.48% (23.89%) 12.40%
Average equity/average assets.......... 5.33% 10.08% 9.30% 8.93% 6.45% 5.78% 5.14%
Net interest margin.................... 6.26% 6.34% 6.27% 6.02% 6.04% 5.38% 5.07%
</TABLE>
------------------------------
(a) Effect is anti-dilutive
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA AND SELECTED HISTORICAL DATA
The following table sets forth certain unaudited pro forma combined
condensed financial data for First Community and Professional Bancorp, as if the
merger had occurred at the beginning of each of the periods presented. This
information should be read in conjunction with the historical and supplemental
consolidated financial statements of First Community and Professional Bancorp
including the notes thereto, included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
RESULTS OF OPERATIONS:
Interest Income........................................... $ 23,598 $41,700
Interest Expense.......................................... 5,838 9,941
-------- -------
NET INTEREST INCOME......................................... 17,760 31,759
Provision for loan losses................................. 1,743 14,511
-------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 16,017 17,248
Non-interest income....................................... 2,199 4,154
Non-interest expense...................................... 17,889 26,659
-------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES......................... 327 (5,257)
Income tax (benefit)...................................... 949 (386)
-------- -------
NET EARNINGS (LOSS)......................................... $ (622) $(4,871)
======== =======
ENDING BALANCE SHEET DATA:
Assets.................................................... $615,331
Time deposits in financial institutions................... 4,353
Securities................................................ 107,873
Loans, net of deferred fees............................... 352,467
Allowance for loan losses................................. 11,263
Goodwill.................................................. 4,296
Deposits.................................................. 561,046
Borrowed funds and convertible notes...................... 3,151
Trust preferred........................................... 8,000
Common shareholders' equity............................... 33,414
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common share:
Basic................................................... $ (0.14) $ (1.10)
Diluted................................................. (0.14)(a) (1.10)(a)
Dividends declared per share.............................. 0.18 0.30
Book value per share...................................... 7.51 7.63
Tangible book value per share............................. 6.54 6.67
Shareholders' equity to assets at period end.............. 5.43% 5.89%
Tangible shareholders' equity to tangible assets at period
end..................................................... 4.77% 5.18%
Return on average assets.................................. (0.20%) (0.89%)
Return on average equity.................................. (3.47%) (11.38%)
Average equity/average assets............................. 5.85% 7.78%
Net interest margin....................................... 6.49% 6.49%
</TABLE>
------------------------
(a) Effect is anti-dilutive
10
<PAGE>
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth for First Community common stock and
Professional Bancorp common stock certain selected historical and unaudited pro
forma per share data at June 30, 2000 and for the six months ended June 30,
2000, and at the end of and for the year ended December 31, 1999, giving effect
to the merger using the purchase method of accounting. The information is
derived from the unaudited pro forma combined condensed financial data of First
Community and the historical financial statements of Professional Bancorp
including the related notes thereto, and the pro forma combined financial
information giving effect to the merger including the related notes thereto,
appearing elsewhere herein. The information below should be read in conjunction
with the historical, supplemental and pro forma combined financial information
of First Community and Professional Bancorp including the notes thereto,
appearing elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED ENDED
JUNE 30, 2000 DECEMBER 31,1999
------------------ ----------------
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE (1):
First Community........................................... $(0.05) $ 1.10
Professional Bancorp...................................... (0.02) (4.15)
First Community combined pro forma........................ (0.14) (1.10)
Professional Bancorp pro forma............................ (0.08) (0.61)
DILUTED (LOSS) EARNINGS PER SHARE (2):
First Community........................................... (0.05) 1.05
Professional Bancorp...................................... (0.02)(a) (4.15)(a)
First Community combined pro forma........................ (0.14) (1.10)
Professional Bancorp pro forma............................ (0.08) (0.61)
CASH DIVIDENDS PER SHARE (3):
First Community........................................... 0.18 0.30
Professional Bancorp...................................... -- --
First Community combined pro forma........................ 0.18 0.30
Professional Bancorp pro forma............................ 0.10 0.17
</TABLE>
------------------------
(a) Effect is anti-dilutive
<TABLE>
<CAPTION>
AT AT
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
BOOK VALUE PER SHARE (4):
First Community........................................... $ 6.50 $ 6.67
Professional Bancorp...................................... 7.37 7.32
First Community combined pro forma........................ 7.51 7.63
Professional Bancorp pro forma............................ 4.13 4.20
</TABLE>
------------------------
(1) The First Community combined pro forma basic earnings (loss) per share were
calculated by using aggregate historical income information for First
Community and Professional Bancorp divided by the pro forma basic shares
outstanding of the combined entity. The basic pro forma shares of the
combined entity were calculated by combining the First Community historical
basic shares, the historical basic shares of Professional Bancorp as
adjusted by the conversion number of 0.55 for 50% of the outstanding shares
of Professional Bancorp. The Professional Bancorp equivalent pro forma per
share amounts were computed by multiplying the First Community combined pro
forma amounts by the conversion number of 0.55.
11
<PAGE>
(2) The First Community combined pro forma diluted earnings (loss) per share
were calculated by using aggregate historical income information for First
Community and Professional Bancorp divided by the pro forma diluted shares
outstanding of the combined entity. The diluted pro forma shares of the
combined entity were calculated by combining the First Community historical
diluted shares and the historical diluted shares of Professional Bancorp as
adjusted by the conversion number of 0.55 for 50% of the outstanding shares
of Professional Bancorp. The Professional Bancorp equivalent pro forma per
share amounts were computed by multiplying the First Community combined pro
forma amounts by the conversion number of 0.55.
(3) First Community combined pro forma cash dividends per share contemplates
that the $0.18 dividend paid by First Community in the six month period
ended June 30, 2000 and $0.30 dividend per share paid by First Community in
the year ended December 31, 1999 would have been paid on all outstanding
shares of First Community common stock assuming that the merger had been
consummated and that shares of First Community common stock had been issued
to the holders of 50% of the shares of Professional Bancorp common stock in
the merger. Professional Bancorp equivalent pro forma cash dividends per
share is calculated by multiplying the $0.18 and $0.12 dividend reflected in
the First Community combined pro forma cash dividends per share by the
conversion number of 0.55. Although First Community instituted a quarterly
dividend in January 1998 because First Community must comply with California
General Corporation Law and banking regulations when paying dividends, there
can be no assurance that First Community will continue to pay dividends at
this level, if at all.
(4) The First Community combined pro forma book value per share is based on the
aggregate pro forma common shareholders' equity of First Community and
Professional Bancorp divided by the total pro forma common shares of the
combined entity based on the conversion number of 0.55 applied to 50% of the
Professional Bancorp common shares outstanding. The Professional Bancorp
equivalent pro forma book value per share at period end represents the First
Community pro forma amounts multiplied by the conversion number of 0.55.
12
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data combines
the historical supplemental consolidated condensed financial statements of First
Community, which have been restated to reflect the effect of the First Community
Bank of the Desert merger accounted for on a pooling-of-interests basis and the
historical condensed financial statements of Professional Bancorp, giving effect
to the merger as if such transaction had been effective on June 30, 2000, with
respect to the Unaudited Pro Forma Combined Condensed Balance Sheets, and as of
the beginning of the periods indicated, with respect to the Unaudited Pro Forma
Combined Condensed Statements of Operations. The information with respect to the
merger is presented under the purchase method of accounting. The information for
the six months ended June 30, 2000 is derived from the unaudited consolidated
financial statements of First Community and Professional Bancorp, which include,
in the opinion of the managements of First Community and Professional Bancorp,
respectively, all adjustments (consisting only of normal accruals) necessary to
present fairly the data for such periods. This information should be read in
conjunction with the historical and supplemental consolidated financial
statements of First Community and Professional Bancorp including the respective
notes thereto, which are included in this proxy statement/prospectus, and in
conjunction with the combined condensed historical selected financial data and
other unaudited pro forma combined financial information including the notes
thereto, appearing elsewhere in this proxy statement/prospectus. The unaudited
pro forma combined condensed financial data does not give effect to any
operating efficiencies anticipated in conjunction with the merger.
The Unaudited Pro Forma Combined Condensed Balance Sheet is not necessarily
indicative of the actual financial position that would have existed had the
merger been consummated on June 30, 2000, or that may exist in the future. The
Unaudited Pro Forma Combined Condensed Statements of Operations are not
necessarily indicative of the results that would have occurred had the merger
been consummated on the dates indicated or that may be achieved in the future.
Assuming the consummation of the merger, the actual consolidated financial
position and results of operations will differ, perhaps significantly, from the
pro forma amounts reflected herein because (1) assumptions used in preparing
such pro forma data may be revised in the future due to changes in values of
assets and changes in operating results between the dates of the unaudited pro
forma financial data and the date on which the merger takes place,
(2) adjustments may need to be made to the unaudited historical financial data
upon which such pro forma data are based, or (3) a variety of other factors.
13
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
FIRST FIRST
COMMUNITY PROFESSIONAL COMMUNITY
BANCORP BANCORP PRO FORMA BANCORP
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks........................... $ 28,899 $ 28,571 $ (370)(a) $ 57,100
Federal funds sold................................ 30,093 47,450 -- 77,543
-------- -------- --------- --------
Total cash and cash equivalents................. 58,992 76,021 (370) 134,643
Time deposits in financial institutions........... 3,948 405 -- 4,353
Federal Reserve Bank and Federal Home Loan Bank
stock, at cost.................................. 1,076 405 -- 1,481
Securities held to maturity....................... 12,866 16,192 -- 29,058
Securities available-for-sale..................... 31,794 45,540 -- 77,334
-------- -------- --------- --------
Total securities................................ 45,736 62,137 -- 107,873
Net loans......................................... 219,853 121,351 -- 341,204
Premises and equipment............................ 5,184 1,027 -- 6,211
Goodwill.......................................... -- -- 4,296 (b) 4,296
Other real estate owned........................... 1,315 -- -- 1,315
Other assets...................................... 6,650 7,462 1,324 (c) 15,436
-------- -------- --------- --------
Total assets.................................... $341,678 $268,403 $ 5,250 $615,331
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES:
Non-interest bearing deposits..................... $106,061 $116,322 -- $222,383
Interest bearing deposits......................... 204,282 134,381 -- 338,663
-------- -------- --------- --------
Total deposits.................................. 310,343 250,703 -- 561,046
Borrowed funds.................................... 2,472 -- -- 2,472
Convertible notes................................. -- 679 -- 679
Accrued interest payable and other liabilities.... 3,572 2,045 4,103 (d) 9,720
-------- -------- --------- --------
Total liabilities............................... 316,387 253,427 4,103 573,917
Trust preferred................................... -- -- 8,000 (e) 8,000
SHAREHOLDERS' EQUITY:
Common stock...................................... 19,849 17 8,106 (f) 27,972
Additional paid-in-capital........................ -- 21,271 (21,271)(g) --
Treasury stock.................................... -- (537) 537 (h) --
Retained earnings (deficit)....................... 6,038 (3,256) 3,256 (i) 6,038
Unrealized net gains (losses) on securities
available-for-sale, net......................... (596) (2,519) 2,519 (j) (596)
-------- -------- --------- --------
Total Shareholders' Equity...................... 25,291 14,976 (6,853) 33,414
-------- -------- --------- --------
Total Liabilities & Shareholders' Equity........ $341,678 $268,403 $ 5,250 $615,331
======== ======== ========= ========
Number of common shares outstanding............... 3,891.6 2,030.8 4,450.1
Common shareholders' equity per share............. $ 6.50 $ 7.37 $ 7.51
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED DATA."
14
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
FIRST
FIRST COMMUNITY PROFESSIONAL COMMUNITY
BANCORP BANCORP PRO FORMA BANCORP
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
--------------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................. $11,553 $ 6,565 $ -- $18,118
Interest on interest-bearing deposits in
financial institutions................. 167 16 -- 183
Interest on investment securities........ 1,439 2,013 -- 3,452
Interest on federal funds sold........... 676 1,169 -- 1,845
------- --------- ------ -------
Total interest income.................. 13,835 9,763 -- 23,598
Interest expense:
Interest expense on deposits............... 3,495 1,845 -- 5,340
Interest expense on borrowings, convertible
debt and trust preferred................. 53 25 420 (k) 498
------- --------- ------ -------
Total interest expense................. 3,548 1,870 420 5,838
------- --------- ------ -------
Net interest income:....................... 10,287 7,893 (420) 17,760
Less: provision for loan losses............ -- 1,743 -- 1,743
------- --------- ------ -------
Net interest income after provision for
loan losses............................ 10,287 6,150 (420) 16,017
Non interest income:
Service charges, commissions and fees...... 958 633 -- 1,591
Other income............................... 315 293 -- 608
------- --------- ------ -------
Total non-interest income................ 1,273 926 -- 2,199
Non interest expense:
Salaries and employee benefits............. 3,329 3,791 -- 7,120
Occupancy, furniture and equipment......... 1,251 1,104 -- 2,355
Professional and other services............ 1,072 1,179 -- 2,251
Stationery, supplies and printing.......... 135 323 -- 458
FDIC assessment............................ 32 59 -- 91
Cost of other real estate owned............ 33 -- -- 33
Advertising................................ 196 126 -- 322
Insurance.................................. 63 67 -- 130
Loss on sale of securities................. 11 -- -- 11
Merger costs............................... 3,561 -- -- 3,561
Goodwill amortization...................... -- -- 144 (l) 144
Other...................................... 951 462 -- 1,413
------- --------- ------ -------
Total non-interest expense............... 10,634 7,111 144 17,889
------- --------- ------ -------
Income (loss) before income taxes............ 926 (35) (564) 327
Income taxes (benefits)...................... 1,125 -- (176)(m) 949
------- --------- ------ -------
Net income (loss)...................... $ (199) $ (35) $ (388) $ (622)
======= ========= ====== =======
Per share information:
Number of shares (weighted average):
Basic.................................... 3,880.9 2,030.8 4,439.4
Diluted.................................. 4,093.5 2,030.8 4,652.0
Income (loss) per share:
Basic.................................... $ (0.05) $ (0.02) $ (0.14)
Diluted.................................. $ (0.05)(*) $ (0.02)(*) $ (0.14)(*)
</TABLE>
------------------------
(*) Effect is anti-dilutive
15
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
FIRST
FIRST COMMUNITY PROFESSIONAL COMMUNITY
BANCORP BANCORP PRO FORMA BANCORP
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
--------------- ------------ ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans............... $19,056 $ 12,762 $ -- $31,818
Interest on interest-bearing deposits
in financial institutions............ 355 49 -- 404
Interest on investment securities...... 2,614 4,375 -- 6,989
Interest on federal funds sold......... 1,380 1,109 -- 2,489
------- --------- -------- -------
Total interest income................ 23,405 18,295 -- 41,700
Interest expense:
Interest expense on deposits........... 5,648 3,259 -- 8,907
Interest expense on borrowings,
convertible notes and trust
preferred............................ 40 154 840 (k) 1,034
------- --------- -------- -------
Total interest expense............... 5,688 3,413 840 9,941
------- --------- -------- -------
Net interest income:..................... 17,717 14,882 (840) 31,759
Less: provision for loan losses........ 518 13,993 -- 14,511
------- --------- -------- -------
Net interest income after provision
for loan losses.................... 17,199 889 (840) 17,248
Non-interest income:
Service charges, commissions and
fees................................. 1,511 1,265 -- 2,776
Net gain (loss) on sale of securities
available-for-sale................... (2) 40 -- 38
Other income........................... 793 547 -- 1,340
------- --------- -------- -------
Total non-interest income............ 2,302 1,852 -- 4,154
Non-interest expense:
Salaries and employee benefits......... 5,853 6,545 -- 12,398
Occupancy, furniture and equipment..... 2,168 2,326 -- 4,494
Professional and other services........ 1,695 2,407 -- 4,102
Stationery, supplies and printing...... 378 668 -- 1,046
FDIC assessment........................ 55 56 -- 111
Cost of other real estate owned........ 182 -- -- 182
Advertising............................ 339 522 -- 861
Insurance.............................. 120 133 -- 253
Goodwill amortization.................. -- -- 288 (l) 288
Other.................................. 1,281 1,643 -- 2,924
------- --------- -------- -------
Total non-interest expense........... 12,071 14,300 288 26,659
------- --------- -------- -------
Income (loss) before income taxes...... 7,430 (11,559) (1,128) (5,257)
Income taxes........................... 3,166 (3,199) (353)(m) (386)
------- --------- -------- -------
Net income (loss)...................... $ 4,264 (8,360) $ (775) $(4,871)
======= ========= ======== =======
Per share information:
Number of shares (weighted average):
Basic................................ 3,863.1 2,015.2 4,417.3
Diluted.............................. 4,076.5 2,015.2 4,630.7
Income (loss) per share:
Basic................................ $ 1.10 (4.15) $ (1.10)
Diluted.............................. $ 1.05 (4.15)(*) $ (1.10)(*)
</TABLE>
------------------------
(*) Effect is anti-dilutive
16
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
NOTE 1: BASIS OF PRESENTATION
Certain historical data of Professional Bancorp have been reclassified on a
pro forma basis to conform to First Community's classifications.
NOTE 2: PURCHASE PRICE AND FUNDING
The purchase price is based on $8 per share, subject to adjustment, for
Professional Bancorp shareholders choosing the cash consideration and an
exchange ratio of 0.55 First Community shares for each Professional Bancorp
share for Professional Bancorp shareholders choosing the stock consideration.
Based on the $14.50 closing price of First Community on the day prior to the
announcement of the merger, those Professional Bancorp shareholders choosing the
stock consideration would receive a value of $7.98 per share.
The total consideration to be paid in connection with the merger is
calculated as follows (in thousands, except per share amounts):
<TABLE>
<S> <C>
Shares of Professional Bancorp common stock outstanding at
June 30, 2000............................................. 2,030.8
Price per share............................................. $ 8.00
--------
Total purchase price...................................... $ 16,246
========
</TABLE>
For purposes of this pro forma combined condensed financial data, it is
assumed that the cash portion of the purchase price ($8,123,000) will be
financed through a combination of the issuance of $8 million of trust preferred
securities which occurred in September and dividends from First Community's
subsidiary banks. Trust preferred securities count as Tier 1 capital for
regulatory purposes.
Professional Bancorp shareholders will have the option to elect cash of $8
or 0.55 shares of First Community common stock for each share of Professional
Bancorp common stock owned. Based upon the merger agreement these elections will
be prorated such that 50% of the Professional Bancorp common stock will be
converted into shares of First Community common stock and 50% will be converted
into cash.
Cash has been reduced on a pro forma basis by $370,000 at June 30, 2000 as
follows:
<TABLE>
<S> <C>
Cash paid to Professional Bancorp shareholders.............. $(8,123)
Cash raised through the issuance of trust preferred......... 7,753
-------
$ (370)
=======
</TABLE>
As a result, historical interest expense on the accompanying pro forma
combined condensed statements of operations for the six months ended June 30,
2000, and the year ended December 31, 1999, has been increased by $420,000 and
$840,000, respectively, representing the interest expense on the trust
preferred.
17
<PAGE>
NOTE 3: ALLOCATION OF PURCHASE PRICE
The purchase price of Professional Bancorp has been allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 76,021
Time deposits in financial institutions..................... 405
Securities.................................................. 62,137
Net loans................................................... 121,351
Goodwill.................................................... 4,296
Premises and equipment...................................... 1,027
Other assets................................................ 8,539
Deposits.................................................... (250,703)
Borrowed funds.............................................. (679)
Other liabilities........................................... (6,148)
--------
Total purchase price...................................... $ 16,246
========
</TABLE>
In allocating the purchase price, the following adjustments were made to
Professional Bancorp's historical amounts. Other liabilities were increased by
$4,103,000, representing the estimated merger costs. Other assets were increased
by $1,077,000, representing the tax effects of the estimated merger costs.
Substantially all of other assets and liabilities are either variable rate or
short-term in nature and fair market value adjustments were considered to be
immaterial to the financial presentation. Goodwill is amortized on a straight
line basis over fifteen years.
NOTE 4: MERGER COSTS
The table below reflects First Community's current estimate, for purposes of
pro forma presentation, of the aggregate estimated merger costs of $4,103,000
($3,026,000 net of taxes, computed using the combined federal and state tax rate
of 42.0%) expected to be incurred in connection with the merger. While a portion
of these costs may be required to be recognized over time, the current estimate
of these costs has been recorded in the pro forma combined balance sheet in
order to disclose the aggregate effect of these activities on First Community's
pro forma combined financial position. The estimated aggregate costs, primarily
comprised of anticipated cash charges, include the following:
<TABLE>
<S> <C>
Employee costs (mostly severance and retention costs)....... $1,995,000
Conversion costs............................................ 400,000
Other costs................................................. 170,000
----------
2,565,000
Tax benefits................................................ 1,077,000
----------
1,488,000
Investment banking and other professional fees.............. 1,538,000
----------
$3,026,000
==========
</TABLE>
First Community management's cost estimates are forward-looking. While the
costs represent First Community management's current estimate of merger costs
associated with the merger that will be incurred, the ultimate level and timing
of recognition of such costs will be based on the final integration in
connection with consummation of the merger. Readers are cautioned that the
completion of this integration and other actions that may be taken in connection
with the merger will impact these estimates. The type and amount of actual costs
incurred could vary materially from these estimates if future developments
18
<PAGE>
NOTE 4: MERGER COSTS (CONTINUED)
differ from the underlying assumptions used by management in determining the
current estimate of these costs. See "RISK FACTORS--If we are unable to
integrate our businesses successfully, our business and earnings may be
negatively effected."
NOTE 5: KEY TO PRO FORMA ADJUSTMENTS
Summarized below are the pro forma adjustments necessary to reflect the
acquisition of Professional Bancorp based on the purchase method of accounting:
(a) Use cash as part of the cash portion of the purchase price. See note 2.
(b) Reflect goodwill resulting from the purchase method of accounting. See
note 3.
(c) Reflect the deferred tax asset related to the deductible merger costs. See
note 4.
(d) Adjust liabilities for accrued merger costs. See note 4.
(e) Reflect issuance of trust preferred in September 2000.
(f) Reflect issuance of common stock to Professional Bancorp shareholders.
(g) Eliminate Professional Bancorp additional paid-in-capital.
(h) Eliminate Professional Bancorp treasury stock.
(i) Eliminate Professional Bancorp retained losses.
(j) Eliminate Professional Bancorp unrealized losses on securities
available-for-sale.
(k) Interest expense related to the issuance of trust preferred.
(l) Amortization of goodwill on a straight-line basis over fifteen years.
(m) Tax benefits associated with the additional interest expense.
19
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains certain forward-looking statements
with respect to the financial condition, results of operations and business of
each of First Community and Professional Bancorp. These statements may include
statements regarding the projected performance of Professional Bancorp and First
Community for the period following the completion of the merger. You can find
many of these statements by looking for words such as "believes", "expects",
"anticipates", "estimates", "intends", "will", "plans" or similar words or
expressions. These forward-looking statements involve substantial risks and
uncertainties. Some of the factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
but are not limited to, the following possibilities:
- combining the businesses of First Community and Professional Bancorp may
cost more than we expect;
- the timing of the completion of the proposed merger and new operations may
be delayed or prohibited;
- there may be increases in competitive pressure among financial
institutions;
- general economic conditions, either nationally or locally in areas in
which Professional Bancorp and First Community conduct their operations,
or conditions in securities markets may be less favorable than we
currently anticipate;
- expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
- legislation or regulatory changes may adversely affect the ability of the
combined company to conduct, or the accounting for, business combinations
and new operations;
- integrating the businesses of Professional Bancorp and First Community and
retaining key personnel may be more difficult than we expect;
- our revenues after the merger may be lower than we expect;
- we may lose more business or customers after the merger than we expect, or
our operating costs may be higher than we expect; or
- changes in the interest rate environment may reduce interest margins.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. Professional Bancorp shareholders are cautioned not to place undue
reliance on such statements, which speak only as of the date of this proxy
statement/ prospectus. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. The future
results and shareholder values of First Community following completion of the
merger may differ materially from those expressed in these forward-looking
statements. Many of the factors that will determine these results and values are
beyond First Community's and Professional Bancorp's ability to control or
predict. For those statements, First Community and Professional Bancorp claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
All subsequent written and oral forward-looking statements attributable to
First Community or Professional Bancorp or any person acting on their behalf are
expressly qualified in their entirety by the cautionary statements contained or
referred to in this section. Neither First Community nor Professional Bancorp
undertakes any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date of
this proxy statement/prospectus or to reflect the occurrence of unanticipated
events.
20
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS DOCUMENT, INCLUDING
THE MATTERS ADDRESSED IN "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS," YOU SHOULD CONSIDER THE MATTERS DESCRIBED BELOW CAREFULLY IN
DETERMINING WHETHER TO APPROVE THE MERGER AGREEMENT.
BECAUSE THE MERGER CONSIDERATION MAY REMAIN FIXED DESPITE POTENTIAL CHANGES IN
RELATIVE STOCK PRICES, PROFESSIONAL BANCORP SHAREHOLDERS WILL NOT KNOW THE VALUE
OF THE STOCK CONSIDERATION THEY ARE RECEIVING UNTIL THE DATE WE CONSUMMATE THE
MERGER.
For each outstanding share of Professional Bancorp common stock,
shareholders of Professional Bancorp may elect to receive 0.55 shares of First
Community common stock. Because of market fluctuations, the value of the shares
received by Professional Bancorp shareholders could be higher or lower than the
relative value associated with those shares at the date of this document or on
the day of the special meeting. Such variations in the market prices of First
Community common stock and Professional Bancorp common stock may result from
changes in the business, operations or prospects of First Community,
Professional Bancorp or the combined company, market assessments of the
likelihood that the merger will be consummated and the timing thereof,
regulatory considerations, general market and economic conditions and other
factors.
Shareholders who elect to receive cash will, subject to proration, receive
$8.00 for each share of Professional Bancorp common stock. Because the market
price of First Community common stock fluctuates, the value of merger
consideration received by any Professional Bancorp shareholder receiving First
Community common stock could fluctuate and be less than $8.00 per share. If the
market price of First Community common stock is less than $14.55 at the time of
the merger, the value of stock consideration will be less than $8.00 per share.
Conversely, if the market price of First Community common stock is greater than
$14.55 at the time of the merger, the value of the stock consideration will be
greater than $8.00 per share. Accordingly, the value of the merger consideration
received by Professional Bancorp shareholders may differ depending on what form
of consideration Professional Bancorp shareholders elect.
We urge you to obtain current market quotations for First Community common
stock and Professional Bancorp common stock.
PROFESSIONAL BANCORP SHAREHOLDERS MAY RECEIVE A FORM OF CONSIDERATION DIFFERENT
FROM WHAT THEY ELECT.
Because of possible proration, Professional Bancorp shareholders may not
receive all of the form of merger consideration they elect. If a shareholder
elects cash and cash is oversubscribed, then the holder will receive a portion
of the merger consideration in First Community common stock. Similarly, if a
shareholder elects First Community common stock and First Community common stock
is oversubscribed, then the shareholder will receive a portion of the merger
consideration in cash. As a result, we cannot assure shareholders that they will
receive all of the form of consideration that they elect. In addition, because
the receipt of cash in the merger may be taxable to a shareholder, no assurance
can be given that any shareholder can exchange shares of Professional Bancorp in
an entirely tax-free transaction.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE.
First Community and Professional Bancorp have each made forward-looking
statements in this document, and in certain documents that we refer to in this
document, that are subject to risks and uncertainties. These statements are
based on the beliefs and assumptions of each respective company's management,
and on information currently available to such management. In particular, we
have made statements in this document regarding expected cost savings from the
merger, the anticipated effect of the merger and First Community's anticipated
performance in future periods. With respect to estimated cost savings, First
Community has made certain assumptions regarding, among other things, the extent
of
21
<PAGE>
operational overlap between First Community and Professional Bancorp, the size
of anticipated reductions in fixed labor costs, the amount of severance
expenses, and the costs related to the merger. The realization of cost savings
are subject to the risk that the foregoing assumptions are not accurate.
WE FACE STRONG COMPETITION FROM FINANCIAL SERVICE COMPANIES AND OTHER COMPANIES
THAT OFFER BANKING SERVICES WHICH CAN HURT OUR BUSINESS.
After the merger, we will continue to conduct our banking operations
primarily in Southern California. Increased competition in our market may result
in reduced loans and deposits. Ultimately, we may not be able to compete
successfully against current and future competitors. Many competitors offer the
banking services that we offer in our service area. These competitors include
national banks, regional banks and other community banks. We also face
competition from many other types of financial institutions, including, without
limitation, savings and loans, finance companies, brokerage firms, insurance
companies, credit unions, mortgage banks and other financial intermediaries.
These competitors of First Community and Professional Bancorp may have greater
financial resources and develop products that enable such competitors to compete
more successfully than First Community and Professional Bancorp.
IF WE ARE UNABLE TO INTEGRATE OUR BUSINESSES SUCCESSFULLY, OUR BUSINESS AND
EARNINGS MAY BE NEGATIVELY EFFECTED.
The merger involves the integration of companies that have previously
operated independently. Successful integration of Professional Bancorp's
operations will depend primarily on First Community's ability to consolidate
operations, systems and procedures and to eliminate redundancies and costs. No
assurance can be given that we will be able to integrate our operations without
encountering difficulties including, without limitation, the loss of key
employees and customers, the disruption of our respective ongoing businesses or
possible inconsistencies in standards, controls, procedures and policies.
Estimated cost savings and revenue enhancements are projected to come from
various areas that management has identified through the due diligence and
integration planning process. The elimination and consolidation of duplicate
tasks are projected to result in annual cost savings of approximately
$3.5 million in the areas of salary expense, item processing, data processing,
professional and audit fees, marketing and other operating expenses. Estimated
revenue enhancements of approximately $450,000 annually are projected to come
from increased efficiencies in the management of cash and due from accounts as
well as improvements in merchant processing margins. If we have difficulties
with the integration, we might not achieve the economic benefits we expect to
result from the merger and this would likely hurt our business and our earnings.
In addition, First Community may experience greater than expected costs or
difficulties relating to the integration of the businesses of Professional
Bancorp and/or may not realize expected cost savings from the merger within the
expected time frame.
AN ECONOMIC SLOWDOWN IN SOUTHERN CALIFORNIA COULD HURT OUR BUSINESS.
We focus our business in Southern California. An economic slowdown in
Southern California could include the following consequences, any of which could
hurt our business:
- loan delinquencies may increase;
- problem assets and foreclosures may increase;
- demand for our products and services may decline; and
- collateral for loans made by us, especially real estate, may decline in
value, in turn reducing customers' borrowing power, and reducing the value
of assets and collateral associated with our existing loans.
22
<PAGE>
A DOWNTURN IN THE REAL ESTATE MARKET OR HEALTH CARE INDUSTRY COULD HURT OUR
BUSINESS.
A downturn in the real estate market could hurt our business because many of
our loans are secured by real estate. Our ability to recover on defaulted loans
by selling the real estate collateral would then be diminished, and we would be
more likely to suffer losses on defaulted loans. As of June 30, 2000,
approximately 57 percent of the book value of First Community's loan portfolio
and 24 percent of the book value of Professional Bancorp's loan portfolio
consisted of loans secured by various types of real estate. Most of our real
property collateral is located in Southern California. If there is a significant
decline in real estate values, especially in Southern California, the collateral
for our loans will provide less security.
In addition, after the merger, a downturn in the health care industry could
adversely affect our loan portfolio and business because most of the customers
of First Professional are in the health care industry. Such downturn might
result from changes in the methods used by health care insurers and/ or the
government (Medicare) to reimburse health care providers for their services. If
there is a downturn in the health care industry, we are more likely to suffer
losses on defaulted loans and demand for First Professional's products and
services may decline.
INTEREST RATE RISK.
Changes in the interest rate environment may reduce profits. It is expected
that First Community will continue to realize income from the differential or
"spread" between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. Net interest spreads are affected by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities. In addition, loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with a lower volume of loan
originations. There can be no assurance that First Community's interest rate
risk will be minimized or eliminated. In addition, an increase in the general
level of interest rates may adversely affect the ability of certain borrowers to
pay the interest on and principal of their obligations. Accordingly, changes in
levels of market interest rates could materially adversely affect First
Community's net interest spread, asset quality, loan origination volume and
overall profitability.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION.
Shares of First Community common stock eligible for future sale could have a
dilutive effect on the market for First Community common stock and could
adversely affect market prices.
As of September 30, 2000, there are 15,000,000 shares of First Community
common stock authorized, of which approximately 3,958,416 shares are
outstanding. Approximately 558,457 additional shares will be issued in the
merger to Professional Bancorp shareholders (assuming no adjustment is made to
the exchange ratio based on the average market price of First Community common
stock during the prescribed measurement period shortly before the merger). In
addition, after the merger First Community will have outstanding stock options
to purchase approximately 750,641 additional shares of First Community common
stock with exercise prices of between $3.60 and $30.91 and outstanding warrants
to purchase an additional 92,749 shares of First Community common stock with
exercise prices of between $4.80 and $23.09.
WE ARE SUBJECT TO EXTENSIVE REGULATION WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.
The operations of First Community and Professional Bancorp are subject to
extensive regulation by federal, state and local governmental authorities and
are subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of their respective operations.
First Community and Professional Bancorp each believes that it is in substantial
compliance in all material respects with applicable federal, state and local
laws, rules and regulations. Because the business of each of First Community and
Professional Bancorp is highly regulated, the laws, rules and regulations
23
<PAGE>
applicable to First Community and Professional Bancorp are subject to regular
modification and change. There are currently proposed various laws, rules and
regulations that, if adopted, would impact First Community. There can be no
assurance that these proposed laws, rules and regulations, or other such laws,
rules or regulations, will not be adopted in the future, which could make
compliance much more difficult or expensive, restrict First Community's ability
to originate, broker or sell loans, further limit or restrict the amount of
commissions, interest or other charges earned on loans originated or sold by
First Community or otherwise adversely affect the business or prospects of First
Community.
ONLY A LIMITED MARKET EXISTS FOR FIRST COMMUNITY COMMON STOCK.
First Community common stock was designated for quotation on the NASDAQ
National Market in June 2000 and trading volumes have been modest. There can be
no assurance that an active trading market for First Community common stock will
develop. The limited trading market for First Community common stock may cause
fluctuations in the market value of First Community common stock to be
exaggerated, leading to price volatility in excess of that which would occur in
a more active trading market.
24
<PAGE>
INFORMATION ABOUT FIRST COMMUNITY
BUSINESS OF FIRST COMMUNITY
First Community is a California corporation registered under the Bank
Holding Company Act of 1956, as amended. First Community's principal business is
to serve as a holding company for its banking subsidiaries, Rancho Santa Fe
National Bank and First Community Bank of the Desert. First Community was formed
to operate Rancho Santa Fe which is a federally chartered commercial bank
organized in 1982. Rancho Santa Fe is a community bank serving the commercial,
industrial, professional, real estate and private banking markets of San Diego
County. In May 2000, First Community acquired First Community Bank of the
Desert. First Community Bank of the Desert is a state chartered commercial bank
organized under the laws of California in 1980. First Community Bank of the
Desert is a community bank that was established to serve the commercial,
industrial, professional, real estate and private banking markets of San
Bernardino and Riverside Counties.
BUSINESS OF RANCHO SANTA FE
Rancho Santa Fe, a national banking association, commenced operations on
March 2, 1982. Rancho Santa Fe's main office is located at 6110 El Tordo, Rancho
Santa Fe, California. Rancho Santa Fe is a member of the Federal Reserve System
and its deposits are insured by the Federal Deposit Insurance Corporation up to
the maximum limits prescribed by law.
In addition to the main office in Rancho Santa Fe, Rancho Santa Fe operates
three full-service offices located in Golden Triangle (University Towne Centre),
Escondido and Carlsbad, all in San Diego County. In addition, it is an active
participant in the Small Business Administration (SBA) guaranteed lending
program through its lending department in San Diego.
Rancho Santa Fe concentrates on providing community banking services to, and
serving the needs of, small and medium-sized businesses, professionals, local
area residents and affluent individuals throughout San Diego County, with an
emphasis on cultivating long-term overall banking relationships. Rancho Santa Fe
also offers mortgage brokerage services. Rancho Santa Fe receives fees for
packaging and processing loan applications for financing the purchase or
refinance of single-family residences to several mortgage lenders for funding.
FIRST COMMUNITY BANK OF THE DESERT
First Community Bank of the Desert opened in 1980 as Bank of Yucca Valley.
First Community Bank of the Desert is an independent, commercial bank that
accepts demand, savings, and time deposits and makes commercial, real estate and
consumer loans. First Community Bank of the Desert emphasizes consumer and small
business banking. Most of First Community Bank of the Desert's depositors are
consumers and small business customers.
First Community Bank of the Desert issues cashier's checks and money orders,
sells traveler's cheques and provides other customary banking services. First
Community Bank of the Desert sells to its customers, through a third party
broker/dealer, nondeposit investment products including mutual funds, fixed and
variable annuities, stocks, bonds, and other nondeposit investment products.
First Community Bank of the Desert also offers a variety of conventional Federal
Housing Authority and Department of Veterans Affairs residential estate loan
products as well as commercial loan products.
Most of First Community Bank of the Desert's business originates from its
primary service areas, consisting of the immediate and surrounding communities
of Yucca Valley (San Bernardino County), Twenty-nine Palms (San Bernardino
County), Cathedral City (Riverside County), Indian Wells (Riverside County), and
Palm Springs (Riverside County).
SUPERVISION AND REGULATION
For a summary of certain legislation, regulations and government policies
affecting First Community and its subsidiaries, see "SUPERVISION AND REGULATION"
herein.
25
<PAGE>
FIRST COMMUNITY'S
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is First Community's management discussion and analysis of the
results of operations and the historical financial condition of First Community
and its wholly-owned subsidiaries. The discussion should be read in conjunction
with First Community's audited and unaudited consolidated financial statements
and accompanying footnotes and other selected financial data presented in this
proxy statement/prospectus.
I.__ PERIOD ENDED JUNE 30, 2000
The following tables and data set forth certain statistical information
relating to First Community as of June 30, 2000, and for the six and three month
periods ended June 30, 2000, and June 30, 1999. This discussion should be read
in conjunction with the unaudited condensed consolidated financial statements
and notes thereto as of June 30, 2000 and the consolidated financial statements
and notes thereto for the year ended December 31, 1999 included herein.
In the six months ended June 30, 2000, First Community's total assets have
increased by approximately $37.3 million. The major components of this increase
in assets are an increase of approximately $19.2 million in federal funds sold
and an increase of approximately $17.8 million in net loans. The increase in
loans is a result of the overall increase in economic activity in Southern
California and First Community's success in developing new business.
In the six months ended June 30, 2000, First Community's total deposits have
increased by approximately $36.1 million, including an increase of approximately
$12.3 million in noninterest-bearing deposits and an increase in
interest-bearing deposits of approximately $23.8 million. This increase resulted
primarily from the overall increase in economic activity in Southern California,
First Community's success in obtaining new business and an increase in rates
paid on some deposits.
Operating earnings (net income before one-time after-tax merger costs) for
the six months ended June 30, 2000 were $2,599,000 or $0.63 per diluted share.
This compares with consolidated operating earnings of $1,938,000 or $0.48 per
diluted share, for the six months ended June 30, 1999, a growth of approximately
31%. Consolidated operating earnings (net income before one-time after-tax
merger costs) for the three months ended June 30, 2000 were $1,307,000 or $0.32
per diluted share. This compares with consolidated operating earnings of
$1,053,000 or $0.26 per diluted share, for the three months ended June 30, 1999,
a growth of approximately 23%.
Consolidated results of operations, including one-time after-tax merger
costs of $2,798,000, for the six months ended June 30, 2000 were a loss of
$199,000 or ($0.05) per diluted share. This compares with earnings of $1,938,000
or $0.48 per diluted share for the six months ended June 30, 1999. Consolidated
earnings for the three months ended June 30, 2000, including one-time after-tax
merger costs, were a loss of $1,491,000 or ($0.38) per diluted share. This
compares with consolidated earnings of $1,053,000 or $0.26 per diluted share for
the three months ended June 30, 1999.
On July 27, 2000 First Community's board of directors approved a quarterly
dividend of $0.09 per common share which is payable on August 31, 2000 to
shareholders of record on August 15, 2000.
RESULTS OF OPERATIONS
OPERATING INCOME. First Community defines operating income as net income
before after-tax merger costs. First Community's operating return on average
assets was 1.54% in the second quarter of 2000 versus 1.45% in the second
quarter of 1999. The operating efficiency ratio improved from 62.7% in the first
half of 1999 to 61.2% in the first half of 2000. First Community is working on
various efficiency and revenue initiatives that are now available as a result of
the acquisition of First Community Bank of the Desert.
26
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE INFORMATION:
Number of shares (weighted average, in thousands)..... 3,880.9 3,857.0 3,883.7 3,859.6
Diluted shares (weighted average, in thousands) (a)... 4,093.5 4,059.0 4,082.6 4,058.4
Basic income (loss) per share......................... $ (0.05) $ 0.50 $ (0.38) $ 0.27
Diluted income (loss) per share....................... $ (0.05) $ 0.48 $ (0.38) $ 0.26
PER SHARE INFORMATION BEFORE MERGER COSTS:
Basic income per share................................ $ 0.67 $ 0.50 $ 0.34 $ 0.27
Diluted income per share.............................. $ 0.63 $ 0.48 $ 0.32 $ 0.26
PROFITABILITY MEASURES BEFORE MERGER COSTS:
Return on average assets.............................. 1.59% 1.36% 1.54% 1.45%
Return on average equity.............................. 18.8% 16.4% 18.0% 17.4%
Efficiency ratio...................................... 61.2% 62.7% 62.1% 62.1%
ADJUSTMENTS TO NET INCOME (LOSS) (IN THOUSANDS):
Net income (loss)..................................... $ (199) $ 1,938 $(1,491) $ 1,053
Merger costs.......................................... 3,561 -- 3,561 --
Tax benefits........................................ 763 -- 763 --
------- ------- ------- -------
After tax merger costs................................ 2,798 -- 2,798 --
------- ------- ------- -------
Adjusted net income................................. $ 2,599 $ 1,938 $ 1,307 $ 1,053
======= ======= ======= =======
ADJUSTMENTS TO REVENUES (IN THOUSANDS):
Net-interest income................................... $10,287 $ 8,530 $ 5,323 $ 4,581
Non-interest income................................... 1,273 1,158 692 601
------- ------- ------- -------
Operating revenues.................................. $11,560 $ 9,688 $ 6,015 $ 5,182
======= ======= ======= =======
ADJUSTMENTS TO EXPENSES (IN THOUSANDS):
Non-interest expense.................................. $10,634 $ 6,071 $ 7,299 $ 3,220
Merger costs.......................................... (3,561) -- (3,561) --
------- ------- ------- -------
Adjusted operating expenses......................... $ 7,073 $ 6,071 $ 3,738 $ 3,220
======= ======= ======= =======
</TABLE>
------------------------
(a) Effect is anti-dilutive
Profits for First Community are dependent on loan growth, controlling costs
and continual efforts to prevent any unexpected loan losses that would require
additions to the allowance for loan losses ("ALL"). First Community believes
that the demand for loans has increased in First Community's primary market
areas due to the growth in the Southern California economy along with the
ability of First Community's customers to participate in that growth. However,
the perceived increase in the demand for loans is tempered by the highly
competitive banking marketplace and First Community's desire to maintain strong
credit quality standards. These factors contributed to First Community's loan
growth of approximately 8.6% since December 31, 1999. As a result of the
increase in loans and the approximate 13.2% increase in deposits, First
Community's loan-to-deposit ratio, has decreased from 75.4% as of December 31,
1999, to 72.3% as of June 30, 2000.
NET INTEREST INCOME. Net interest income is the difference between interest
earned on assets and interest paid on liabilities. Net interest margin is net
interest income expressed as a percentage of average interest-earning assets.
The following tables provide information concerning average interest-earning
assets and interest-bearing liabilities and yields and rates thereon for the six
and three months ended June 30, 2000 and June 30, 1999, respectively. Nonaccrual
loans are included in the average earning assets amounts.
27
<PAGE>
UNAUDITED AVERAGE BALANCE SHEETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVERAGE ASSETS:
Loans, net of deferred fees and costs........... $219,892 $178,490 $222,041 $182,552
Investment securities........................... 48,035 42,314 46,795 44,494
Federal funds sold.............................. 22,524 35,774 34,492 31,148
Interest-bearing deposits in financial
institutions.................................. 6,125 5,772 5,107 6,349
-------- -------- -------- --------
Average earning assets........................ 296,576 262,350 308,435 264,543
Other assets.................................... 31,643 25,914 33,445 26,209
-------- -------- -------- --------
Average total assets........................ $328,219 $288,264 $341,880 $290,752
======== ======== ======== ========
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY:
AVERAGE LIABILITIES:
Noninterest-bearing deposits.................... $101,337 $ 83,580 $104,102 $ 86,403
Time deposits of $100,000 or more............... 25,483 22,154 19,727 21,945
Interest-bearing deposits....................... 169,836 156,443 186,141 155,351
-------- -------- -------- --------
Average deposits.............................. 296,656 262,177 309,970 263,699
Other interest-bearing liabilities.............. 1,991 752 1,288 1,063
Other liabilities............................... 1,734 1,529 1,486 1,654
-------- -------- -------- --------
Average liabilities........................... 300,381 264,458 312,744 266,416
Average equity.................................. 27,838 23,806 29,136 24,336
-------- -------- -------- --------
Average liabilities and shareholders'
equity.................................... $328,219 $288,264 $341,880 $290,752
======== ======== ======== ========
YIELD ANALYSIS:
(Dollars in thousands)
Average earning assets.......................... $296,576 $262,350 $308,435 $264,543
Yield......................................... 9.38% 8.71% 9.48% 9.02%
Average interest-bearing deposits............... $195,319 $178,597 $205,868 $177,296
Cost.......................................... 3.60% 3.14% 3.77% 3.06%
Average deposits................................ $296,656 $262,177 $309,970 $263,699
Cost.......................................... 2.37% 2.14% 2.50% 2.06%
Average interest-bearing liabilities............ $197,310 $179,349 $207,156 $178,359
Cost.......................................... 3.62% 3.15% 3.78% 3.07%
Interest spread................................. 5.76% 5.56% 5.70% 5.95%
Net interest margin............................. 6.98% 6.56% 6.94% 6.95%
</TABLE>
Interest income increased by approximately $1.3 million from $5.9 million
for the second quarter of 1999 to $7.3 million for the same period of 2000. The
increase was due to an increase of approximately $43.9 million in average
earning assets, mostly in loans, and an increase in the yield on earning assets
from 9.02% to 9.48% due to the higher percentage of loans to earning assets and
the higher interest rate environment in the 2000 period versus the 1999 period.
Interest income increased by approximately $2.5 million from $11.3 million
for the first six months of 1999 to $13.8 million for the same period of 2000.
The increase was due to an increase in the yield on earnings assets from 8.71%
to 9.38% due to the higher percentage of loans to earning assets and the higher
interest rate environment in the 2000 period versus the 1999 period. Average
earning assets also increased over the same period by approximately
$34.2 million as a result of the increased level of economic activity.
28
<PAGE>
Interest expense increased by approximately $580,000 from $1.4 million for
the second quarter of 1999 to $1.9 million for the same period of 2000. This
increase is due both to the increase in average interest-bearing liabilities
from $178.4 million to $207.2 million and the increase in the cost of
interest-bearing liabilities from 3.07% to 3.78% over the same periods of time
as a result of the previously mentioned increase in the general level of
interest rates. The growth in average deposits is a result of the increased
level of interest rates and the ability of First Community to capture new
business.
Interest expense increased by approximately $750,000 from $2.8 million for
the first six months of 1999 to $3.5 million for the same period of 2000. This
increase is due both to the increase in average interest-bearing liabilities
from $179.3 million to $197.3 million and the increase in the cost of interest-
bearing liabilities from 3.15% to 3.62% over the same periods of time as a
result of the previously mentioned increase in the general level of interest
rates. The growth in average deposits is a result of the increased level of
interest rates and the ability of First Community to capture new business.
NON-INTEREST INCOME. The following table sets forth the details of
non-interest income for the six months ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
------------------- INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
NON-INTEREST INCOME:
Service charges and fees on deposit accounts.... $ 595 $ 583 $ 12
Merchant discount fees.......................... 51 47 4
Other commissions and fees...................... 312 265 47
Gain on sale of loans........................... 179 167 12
Other income.................................... 136 96 40
------ ------ ----
Total non-interest income..................... $1,273 $1,158 $115
====== ====== ====
</TABLE>
Total non-interest income increased by approximately $115,000 from
$1,158,000 to $1,273,000, or approximately 9.9%, from the six months ended
June 30, 1999 to the six months ended June 30, 2000. The largest increase in
other income was due to a recovery on an old litigation. Other items making up
other income were relatively small.
The following table sets forth the details of non-interest income for the
three months ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30,
------------------- INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
NON INTEREST INCOME:
Service charges and fees on deposit accounts....... $285 $301 $(16)
Merchant discount fees............................. 34 31 3
Other commissions and fees......................... 157 148 9
Gain on sale of loans.............................. 124 75 49
Other income....................................... 92 46 46
---- ---- ----
Total non interest income........................ $692 $601 $ 91
==== ==== ====
</TABLE>
29
<PAGE>
Total non interest income increased by approximately $91,000 from $601,000
to $692,000, or approximately 15.1%, from the three months ended June 30, 1999
to the three months ended June 30, 2000. Gain on sale of loans increased due to
a higher level of SBA loan sale activity. The increase of $46,000 in other
income consisted of several small items.
NON-INTEREST EXPENSE. The following table sets forth the details of
non-interest expense for the six months ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
6 MONTHS
ENDED
JUNE 30,
------------------- INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
NON-INTEREST EXPENSE:
Salaries and employee benefits................. $ 3,329 $2,853 $ 476
Occupancy...................................... 773 684 89
Furniture and equipment........................ 478 332 146
Legal expenses................................. 159 107 52
Other professional services.................... 913 675 238
Stationery, supplies and printing.............. 135 117 18
FDIC assessment................................ 32 22 10
Cost of other real estate owned................ 33 160 (127)
Advertising.................................... 196 196 --
Insurance...................................... 63 53 10
Loss on sale of securities..................... 11 2 9
Other.......................................... 951 870 81
------- ------ ------
Non-interest expense before merger costs......... 7,073 6,071 1,002
Merger costs................................... 3,561 -- 3,561
------- ------ ------
Total non-interest expense....................... $10,634 $6,071 $4,563
======= ====== ======
</TABLE>
Total operating non-interest expense increased approximately $1,002,000 from
$6,071,000 to $7,073,000, or 16.5%, from the six months ended June 30, 1999 to
the six months ended June 30, 2000. The increase in operating expenses in almost
all categories is primarily a result of the increased level of economic activity
in First Community's markets and First Community's response to this increased
level of customers and customer activity. Average loans grew by approximately
23.3% during the same period and average non-interest-bearing deposits grew by
approximately 21.2% between the two periods. The growth in these activities
bears directly on the variable costs of First Community. First Community is also
making various technology investments and upgrades. The decline in cost of other
real estate owned is a result of the lower level of other real estate of First
Community and increases in the valuation of reserve in the 1999 period. Merger
costs of $3,561,000 are one-time costs relating to the acquisition of First
Community Bank of the Desert.
The efficiency ratio (operating expense before merger costs divided by net
interest income plus non-interest income) is a measure of how effective First
Community is at using its expense dollars. A lower or declining ratio indicates
improving efficiency. First Community's efficiency ratio improved from 62.7% in
the first six months of 1999 to 61.2% in the first six months of 2000.
30
<PAGE>
The following table sets forth the details of non-interest expense for the
three months ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
3 MONTHS
ENDED
JUNE 30,
------------------- INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
NON-INTEREST EXPENSE:
Salaries and employee benefits.................. $1,668 $1,435 $ 233
Occupancy....................................... 377 363 14
Furniture and equipment......................... 236 179 57
Legal expenses.................................. 75 52 23
Other professional services..................... 510 372 138
Stationery, supplies and printing............... 90 60 30
FDIC assessment................................. 17 11 6
Cost of other real estate owned................. 33 159 (126)
Advertising..................................... 95 101 (6)
Insurance....................................... 32 27 5
Loss on sale of securities...................... -- 2 (2)
Other........................................... 605 459 146
------ ------ ------
Non-interest expense before merger costs.......... 3,738 3,220 518
Merger costs.................................... 3,561 -- 3,561
------ ------ ------
Total non-interest expense........................ $7,299 $3,220 $4,079
====== ====== ======
</TABLE>
Total operating non-interest expense increased approximately $518,000 from
$3,220,000 to $3,738,000, or 16.1%, from the three months ended June 30, 1999 to
the three months ended June 30, 2000. The increase in operating expenses in
almost all categories is primarily a result of the increased level of economic
activity in First Community's markets and First Community's response to this
increased level of customers and customer activity. Average loans grew by
approximately 21.6% during the same period and average non-interest-bearing
deposits grew by approximately 20.5% between the two periods. First Community is
also making various technology investments and upgrades. The decline in cost of
other real estate owned is a result of the lower level of other real estate of
First Community. Merger costs of $3,561,000 are one-time costs relating to the
acquisition of First Community.
The efficiency ratio (operating expense before merger costs divided by net
interest income plus non-interest income) is a measure of how effective First
Community is at using its expense dollars. A lower or declining ratio indicates
improving efficiency. First Community's operating efficiency ratio remained flat
at 62.1% for both three month periods.
INCOME TAXES. First Community's normal effective income tax rate is
approximately 42.0%, representing a blend of the statutory Federal income tax
rate of 35.0% and the California income tax rate of 10.84%. First Community's
actual effective income tax rates were 121.5% and 42.6% for the six months ended
June 30, 2000 and 1999, respectively. First Community's actual effective income
tax rates were (16.1%) and 43.3% for the three months ended June 30, 2000 and
1999, respectively. The actual effective tax rates vary from the normal
effective tax rate in the 2000 periods largely as a result of nondeductible
merger costs. Adjusting for the nondeductible merger costs, the effective tax
rates in the six month periods of 2000 and 1999 were 42.1% and 42.6%,
respectively and 42.6% and 43.3% in the three month periods in 2000 and 1999,
respectively.
31
<PAGE>
BALANCE SHEET ANALYSIS
CREDIT QUALITY. First Community defines nonperforming assets to include
(i) loans past due 90 days or more and still accruing; (ii) loans on which it
has ceased to accrue interest ("Nonaccrual Loans") and (iii) assets acquired
through foreclosure including other real estate owned. "Impaired loans" are
commercial, commercial real estate, and individually significant mortgage and
consumer loans for which it is probable that First Community will not be able to
collect all amounts due according to the original contractual terms of the loan
agreement. The category of "impaired loans" is not coextensive with the category
of "nonaccrual loans," although the two categories overlap. "Nonaccrual loans"
include impaired loans and are those on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or
payments of principal or interest have become contractually past due 90 days.
First Community may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan
impaired, if (i) it is probable that First Community will collect all amounts
due in accordance with the original contractual terms of the loan or (ii) the
loan is not a commercial, commercial real estate or an individually significant
mortgage or consumer loan.
Planned workout arrangements are currently in place or in negotiation for
all nonperforming assets. Management is not aware of any additional significant
loss potential that has not already been included in the estimation of the
allowance for loan losses ("ALL").
The following table shows the historical trends in nonperforming assets and
key credit quality statistics for First Community:
CREDIT QUALITY MEASURES
<TABLE>
<CAPTION>
AS OF AND FOR THE PERIODS ENDING
---------------------------------------------------------------
3 MONTHS 6 MONTHS 9 MONTHS YEAR 3 MONTHS 6 MONTHS
3/31/99 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans past due 90 days or more and
still accruing...................... $1,441 $ 139 $ 209 $ 75 $ -- $ 218
Nonaccrual loans...................... 1,608 858 821 1,845 442 2,268
Other real estate owned (OREO)........ 1,392 1,466 1,315 1,315 1,315 1,315
------ ------ ------ ------ ------ ------
Nonperforming assets................ $4,441 $2,463 $2,345 $3,235 $1,757 $3,801
====== ====== ====== ====== ====== ======
Impaired loans, gross................. $1,489 $ 802 $2,136 $1,833 $ 434 $2,268
Allocated allowance for loan losses... (64) (47) (277) (159) (201) (574)
------ ------ ------ ------ ------ ------
Net investment in impaired loans.... $1,425 $ 755 $1,859 $1,674 $ 233 $1,694
====== ====== ====== ====== ====== ======
Charged off loans year-to-date........ $ 46 $ 452 $ 540 $ 592 $ 15 $ 92
Recoveries year-to-date............... (52) (85) (110) (314) (42) (54)
------ ------ ------ ------ ------ ------
Net charge-offs (recoveries)........ $ (6) $ 367 $ 430 $ 278 $ (27) $ 38
====== ====== ====== ====== ====== ======
Allowance for loan losses to loans,
net of deferred fees and costs...... 2.15% 1.95% 1.89% 1.95% 1.82% 1.78%
Allowance for loan losses to
nonaccrual loans and leases......... 244.2% 426.3% 459.0% 218.2% 916.7% 175.8%
Nonperforming assets to loans and
OREO................................ 2.41% 1.30% 1.17% 1.56% 0.79% 1.69%
Annualized net charge offs to average
loans............................... (0.01)% 0.41% 0.31% 0.15% (0.05)% 0.03%
Nonaccrual loans to loans, net of
deferred fees and costs............. 0.88% 0.46% 0.41% 0.90% 0.20% 1.01%
Allowance for loan losses to
nonperforming assets................ 88.4% 148.5% 160.7% 124.4% 230.6% 104.9%
</TABLE>
32
<PAGE>
Loans past due 90 days and still accruing represent loans which are past due
90 days or more as to interest or principal, but not included in the nonaccrual
or restructured categories. All loans in this category are well-secured and in
the process of collection or renewal.
On June 30, 2000, First Community had approximately $2,268,000 of loans
which were considered impaired, all of which were on nonaccrual status, compared
to $442,000 at March 31, 2000 and $1,833,000 of impaired loans at December 31,
1999. The ALL at June 30, 2000, includes allocated allowances of approximately
$574,000 established for certain impaired loans. Nonperforming assets increased
approximately $566,000 from $3,235,000 at December 31, 1999, to $3,801,000 at
June 30, 2000. This increase is a result of nonaccrual loans increasing $423,000
to $2,268,000 as a result of improvements in most nonaccrual loans in the period
and one large loan being put on nonaccrual in the second quarter.
ALLOWANCE FOR LOAN LOSSES. First Community has established a monitoring
system for its loans in order to identify impaired loans and potential problem
loans and to permit periodic evaluation of impairment and the adequacy of the
ALL in a timely manner. The monitoring system and ALL methodology have evolved
over a period of years, and loan classifications have been incorporated into the
determination of the ALL. This monitoring system and allowance methodology
include a loan-by-loan analysis for all classified loans as well as loss factors
for the balance of the portfolio that are based on migration analysis relative
to First Community's unclassified portfolio. This analysis includes such factors
as historical loss experience, current portfolio delinquency and trends, and
other inherent risk factors such as economic conditions, concentrations in the
portfolio risk levels of particular loan categories, internal loan review and
management oversight.
The percentage of ALL to gross loans was 1.78% at June 30, 2000, a decrease
from 1.95% at December 31, 1999. This decrease in the percentage is almost
entirely a result of the growth in loans and not due to a decrease in the
allowance for loan losses. Nonaccrual loans increased by $1,826,000 during the
quarter ended June 30, 2000, from 0.20% to 1.01% of loans, net of deferred fees
and costs, due mainly to one loan. Net OREO remained flat at $1,315,000 during
the quarter. Total nonperforming assets increased by $2,044,000 during the
second quarter of 2000, increasing from 0.79% to 1.69% of total loans and OREO
at March 31, 2000 and June 30, 2000, respectively. First Community had net
charge-offs of $38,000 in the six months ended June 30, 2000 represented by net
recoveries during the first quarter of $27,000 and net charge-offs of $65,000
during the second quarter of 2000. With no provision for loan losses and net
charge-offs of $38,000, the allowance for loan losses declined slightly by
$38,000 from $4,025,000 at December 31, 1999 to $3,987,000 at June 30, 2000. The
allowance as a percentage of nonperforming assets decreased from 124.4% at
December 31, 1999 to 104.9% at June 30, 2000 due to the increase in
nonperforming assets. Management believes that the allowance for loan losses at
June 30, 2000 is adequate based on First Community's quarterly migration
analysis of loan losses, improved economic conditions and continued adherence to
established credit policies.
REGULATORY MATTERS. The regulatory capital guidelines as well as the actual
regulatory capital ratios for Rancho, First Community and First Community on a
consolidated basis as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
REGULATORY REQUIREMENTS ACTUAL
------------------------- ----------------------------------------
ADEQUATELY WELL FIRST
CAPITALIZED CAPITALIZED RANCHO COMMUNITY BANK CONSOLIDATED
----------- ----------- -------- -------------- ------------
(GREATER THAN OR EQUAL TO
STATED PERCENTAGE)
<S> <C> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital ratio...... 4.00% 5.00% 8.43% 6.93% 7.57%
Tier 1 risk-based capital ratio.... 4.00% 6.00% 10.16% 9.17% 9.49%
Total risk-based capital........... 8.00% 10.00% 11.42% 10.43% 10.74%
</TABLE>
33
<PAGE>
On September 8, 2000 First Community issued $8 million of trust preferred
securities. These securities are considered Tier 1 capital.
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK. On a stand-alone
basis, First Community's sources of liquidity include dividends from the banks
and outside borrowings. The amount of dividends that the banks can pay to First
Community is restricted by regulatory guidelines.
The primary function of asset/liability management is to ensure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities at the banks. Liquidity management
involves the ability to meet the cash flow requirements of customers who may be
either depositors wanting to withdraw funds or borrowers who may need assurance
that sufficient funds will be available to meet their credit needs. Interest
rate sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the banks is based on the core
deposit base of the banks. The banks have not relied on large denomination time
deposits. To meet short-term liquidity needs, First Community has maintained at
the banks what it believes are adequate balances in federal funds sold,
interest-bearing deposits in financial institutions and investment securities
having maturities of five years or less. On a consolidated basis, liquid assets
(cash, federal funds sold and investment securities available-for-sale) as a
percent of total deposits were 29.3% and 24.2% as of June 30, 2000 and
December 31, 1999, respectively.
Market risk sensitive instruments are generally defined as on and off
balance sheet derivatives and other financial instruments. At December 31, 1999
and June 30, 2000, First Community had no material on or off balance sheet
derivatives. First Community's financial instruments include interest sensitive
loans receivable, federal funds sold, interest-bearing deposits in financial
institutions, FRB and FHLB stock, investment securities, deposits and
borrowings. At December 31, 1999, First Community had approximately
$275 million in interest sensitive assets and approximately $276 million in
interest sensitive liabilities (deposits and borrowings). At June 30, 2000,
First Community's interest sensitive assets and interest sensitive liabilities
totaled approximately $304 million and $313 million, respectively.
The yield on interest sensitive assets and the cost of interest sensitive
liabilities for the second quarter of 2000 was 9.48% and 2.51%, respectively,
compared to 8.42% and 2.10%, respectively, at December 31, 1999. The increase in
the yield on interest sensitive assets is primarily a result of the percentage
of average loans to average interest sensitive assets increasing from
approximately 70.7% at December 31, 1999 to 72.0% for the quarter ended
June 30, 2000 and the general increase in the level of interest rates. The
increase in the cost of interest sensitive liabilities is primarily a result of
the increase in the level of interest rates over the same period of time.
First Community's interest sensitive assets and interest sensitive
liabilities were reported to have estimated fair values of $271 million and
$274 million, respectively, at December 31, 1999. Because of the floating and
short-term nature of its interest sensitive assets and liabilities, management
believes that there has been no material change in the difference between the
book value of the interest sensitive assets and liabilities and their estimated
fair values.
II._ YEAR ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
EARNINGS PERFORMANCE. First Community reported net earnings for the year
ended December 31, 1999 of $4,264,000, compared with $3,582,000 for 1998, an
increase of $682,000 or 19.0%. In 1999, basic earnings per share and diluted
earnings per share were $1.10 and $1.05, respectively, compared with $0.93 and
$0.88, respectively, in 1998. First Community's improved earnings performance
between 1999 and 1998 is primarily attributable to an increase in net interest
income arising from a greater quantity of
34
<PAGE>
interest-earnings assets, particularly in the loan segment of earnings assets.
First Community believes that the demand for loans increased in First
Community's market areas due to a strong local economy as well as low interest
rates. In addition to the growth in earning assets, a general improvement in
operating efficiencies contributed to First Community's earnings performance.
First Community reported net earnings for the year ended December 31, 1998 of
$3,582,000, compared with $2,837,000 for 1997, an increase of $745,000 or 26.3%.
In 1998, basic earnings per share and diluted earnings per share were $0.93 and
$0.88, respectively, compared with $0.74 and $0.71, respectively, in 1997. First
Community's improved earnings performance between 1998 and 1997 is primarily
attributable to an increase in net interest income arising from a greater
quantity of interest-earning assets particularly in the loan segment of earnings
assets. First Community believes that the demand for loans increased in First
Community's market areas due to a strong local economy as well as low interest
rates. In addition to the growth in earning assets, a general improvement in
operating efficiencies contributed to First Community's earnings performance.
The following is a condensed summary of the statement of operations along
with selected profitability ratios:
ANALYSIS OF NET INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net interest income................................... $17,717,000 $14,868,000 $12,143,000
Provision for loan losses............................. 518,000 941,000 310,000
Other non-interest income............................. 2,666,000 2,575,000 2,357,000
Net gains on sales of SBA loans....................... 353,000 621,000 441,000
Non-interest expenses................................. 12,788,000 11,401,000 9,916,000
Income taxes.......................................... 3,166,000 2,140,000 1,878,000
Net income............................................ 4,264,000 3,582,000 2,837,000
Return on average assets.............................. 1.44% 1.48% 1.45%
Return on average equity.............................. 17.46 16.87 15.62
Dividend payout ratio................................. 28.69 27.35 0.00
Equity to assets at period end........................ 8.27 8.77 9.30
</TABLE>
NET INTEREST INCOME. Net interest income, which constitutes one of the
principal sources of income for First Community, represents the difference
between interest earned on assets and interest paid on liabilities. Net interest
margin is net interest income expressed as a percentage of average
interest-earning assets. Net interest income is affected by changes in both
interest rates and the volume of average earning assets and interest-bearing
liabilities. The following tables provide information concerning average
interest-earning assets and interest-bearing liabilities, interest earned and
paid, and the related yields and rates on major categories for the periods
indicated:
35
<PAGE>
ANALYSIS OF AVERAGE RATES AND BALANCES
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------- -------------------------------------- ------------
INTEREST INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELDS AND AVERAGE INCOME/ YIELDS AND AVERAGE
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE
------------ ------------ ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net (1) and (2)........... $187,811,000 19,056,000 10.15% $160,895,000 16,971,000 10.55% $133,387,000
Investment securities (2)........ 45,731,000 2,614,000 5.72 31,549,000 1,838,000 5.83 24,389,000
Federal funds sold............... 28,372,000 1,380,000 4.86 21,524,000 1,135,000 5.27 17,853,000
Deposits with financial
institutions................... 6,512,000 355,000 5.45 5,111,000 314,000 6.14 1,586,000
------------ ------------ ----- ------------ ---------- ----- ------------
Total interest earning
assets....................... 268,426,000 23,405,000 8.72% 219,079,000 20,258,000 9.25% 177,215,000
Noninterest earning assets....... 26,930,000 22,961,000 18,121,000
------------ ------------ ------------
Total assets................... 295,356,000 242,040,000 195,336,000
============ ============ ============
LIABILITIES
Time deposits of $100,000 or
more........................... 25,680,000 1,253,000 4.88% 17,181,000 904,000 5.26% 12,379,000
All other interest-bearing
deposits....................... 154,692,000 4,395,000 2.84 133,127,000 4,450,000 3.34 110,875,000
Other interest-bearing
liabilities.................... 793,000 40,000 5.04 622,000 36,000 5.79 775,000
------------ ------------ ----- ------------ ---------- ----- ------------
Total interest-bearing
liabilities.................. 181,165,000 5,688,000 3.14% 150,930,000 5,390,000 3.57% 124,029,000
Noninterest-bearing deposits..... 87,466,000 67,344,000 51,265,000
Other liabilities................ 2,310,000 2,529,000 1,885,000
Shareholders' equity............. 24,415,000 21,237,000 18,157,000
------------ ------------ ------------
Total liabilities and
shareholders' equity........... $295,356,000 $242,040,000 $195,336,000
============ ============ ============
Net interest rate spread......... 5.58% 5.68%
Net interest income.............. 17,717,000 14,868,000
Net yield of interest-earning
assets......................... 6.60% 6.79%
<CAPTION>
1997
-----------------------
INTEREST INTEREST
INCOME/ YIELDS AND
EXPENSE RATES
---------- ----------
<S> <C> <C>
ASSETS
Loans, net (1) and (2)........... 14,221,000 10.66%
Investment securities (2)........ 1,456,000 5.97
Federal funds sold............... 948,000 5.31
Deposits with financial
institutions................... 82,000 5.17
---------- -----
Total interest earning
assets....................... 16,707,000 9.43%
Noninterest earning assets.......
Total assets...................
LIABILITIES
Time deposits of $100,000 or
more........................... 669,000 5.40%
All other interest-bearing
deposits....................... 3,854,000 3.48
Other interest-bearing
liabilities.................... 41,000 5.29
---------- -----
Total interest-bearing
liabilities.................. 4,564,000 3.68%
Noninterest-bearing deposits.....
Other liabilities................
Shareholders' equity.............
Total liabilities and
shareholders' equity...........
Net interest rate spread......... 5.75%
Net interest income.............. 12,143,000
Net yield of interest-earning
assets......................... 6.85%
</TABLE>
----------------------------------
(1) Includes nonaccrual loans and loan fees
(2) Yields on loans and securities have not been adjusted to a tax-equivalent
basis
36
<PAGE>
Net interest income before provision for loan losses for the year ended
December 31, 1999 increased $2,849,000 or 19.2% compared with the year ended
December 31, 1998. The increase in 1999 compared to 1998 was due to the increase
in average earning assets of $49,347,000 or 22.5%. The rate earned on
interest-earning assets during 1999 declined to 8.72% from 9.25% for the same
period in 1998. The decline was primarily attributable to the effect of the
overall decline in market interest rates experienced at the end of 1998. Average
loans outstanding during 1999 were $187,811,000, which earned interest at an
average rate of 10.15%, compared with $160,895,000 at 10.55% for the same period
in 1998. This increase in loans was due primarily to the strong economic climate
in First Community's market areas and emphasis on business development efforts
to expand business in First Community's market areas resulting in growth in all
categories of loans.
Average investments outstanding during 1999 were $45,731,000 and these
investments earned interest at an average rate of 5.72%, compared with
$31,549,000 and 5.83% for the same period in 1998. Average federal funds sold
during 1999 were $28,372,000 and earned an average rate of 4.86% in 1999,
compared with $21,524,000 at 5.27% for the same period in 1998. Average deposits
with financial institutions during 1999 were $6,512,000 and earned an average
rate of 5.45% in 1999, compared with $5,111,000 at 6.14% for the same period in
1998. Short-term interest rates were lowered by the Federal Reserve Bank during
the fourth quarter of 1998 resulting in lower short-term rates during 1999
compared with the same period of 1998.
Average outstanding interest-bearing liabilities of $181,165,000 in 1999
paid an average rate of 3.14% during that period, as compared to average
outstanding interest-bearing liabilities of $150,930,000, which paid an average
rate of 3.57% for the year ended December 31, 1998. This decrease in average
rates paid in 1999 is a result of the above mentioned decline in the general
level of interest rates.
During 1998, average earning assets grew to $219,079,000, an increase of
$41,864,000 or 23.6% over 1997. Average loans increased $27,508,000 or 20.6%,
accounting for the largest dollar increase in average earning assets. During
1998, First Community's management increased its efforts to generate loans
through strong emphasis on business development in order to expand its business
in First Community's market areas. In addition, the overall economic conditions
in First Community's market areas have been favorable to customers' business
interests, resulting in increased demand for loans. Low interest rates, low
unemployment and rising real estate values are some of the factors that helped
the local economy and contributed to First Community's operating results in
1998. Average securities increased $7,160,000 or 29.4%. Average federal funds
sold increased $3,671,000 or 20.6%. Average deposits with financial institutions
increased $3,525,000 or 222.3%. Average interest-bearing liabilities increased
$26,901,000 or 21.7%.
As discussed above, First Community's net interest income is affected by the
change in the amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as a "volume change," as well as yields earned on
interest-earning assets and rates paid on deposits and other borrowed funds,
referred to as a "rate change."
37
<PAGE>
The following table reflects changes in interest income and expense
attributable to changes in volume and interest rates of significant
interest-bearing assets and liabilities:
ANALYSIS OF VOLUME AND INTEREST RATES
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
----------------------------------- -----------------------------------
ATTRIBUTABLE TO CHANGE ATTRIBUTABLE TO CHANGE
----------------------------------- -----------------------------------
TOTAL IN TOTAL IN
CHANGE VOLUME IN RATE CHANGE VOLUME IN RATE
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans, net (1) and (2)...... $2,085,000 $2,839,000 $(754,000) $2,750,000 $2,933,000 $(183,000)
Investment securities (2)... 776,000 826,000 (50,000) 382,000 427,000 (45,000)
Federal funds sold.......... 245,000 361,000 (116,000) 187,000 195,000 (8,000)
Deposits with financial
institutions.............. 41,000 86,000 (45,000) 232,000 182,000 50,000
---------- ---------- --------- ---------- ---------- ---------
Total..................... 3,147,000 4,112,000 (965,000) 3,551,000 3,737,000 (186,000)
---------- ---------- --------- ---------- ---------- ---------
Time deposits of $100,000 or
more...................... 349,000 447,000 (98,000) 235,000 260,000 (25,000)
All other interest-bearing
deposits.................. (55,000) 721,000 (776,000) 596,000 773,000 (177,000)
Other interest-bearing
liabilities............... 4,000 10,000 (6,000) (5,000) (8,000) 3,000
---------- ---------- --------- ---------- ---------- ---------
Total..................... 298,000 1,178,000 (880,000) 826,000 1,025,000 (199,000)
---------- ---------- --------- ---------- ---------- ---------
Changes in net interest
income.................... $2,849,000 $2,934,000 $ (85,000) $2,725,000 $2,712,000 $ 13,000
========== ========== ========= ========== ========== =========
</TABLE>
------------------------
(1) Includes nonaccrual loans and loan fees
(2) Yields on loans and securities have not been adjusted to a tax-equivalent
basis
The change in interest income/expense attributable to volume reflects the
change in volume times the prior year's rate and the change in interest
income/expense attributable to rate reflects the change in rates times the
current year's volume. The change in rate/volume has been allocated to the
change attributed to the change attributed to rate.
PROVISION FOR LOAN LOSSES. The amount of the provision for loan losses in
each period is a charge against earnings in that period. The amount of provision
is based upon management's evaluation of the loan portfolio, past loan loss
experience, general economic conditions and other pertinent factors.
A provision for loan losses of $518,000 was made for the year ended
December 31, 1999, as compared to $941,000 for the same period in 1998. The
decreased provision in 1999 was attributable to improvements in First
Community's credit quality. The allowance for loan losses at December 31, 1999
was $4,025,000 or 1.95% of total loans, net of deferred fees and costs, a
decrease from 2.21% at December 31, 1998. The allowance for loan losses as a
percentage of total loans declined at December 31, 1999 compared to the prior
year period, due to the previously mentioned improvements in First Community's
credit quality. Additionally, net charge-offs declined from $538,000 in 1998 to
$278,000 in 1999.
A provision for loan losses of $941,000 was made for the year ended
December 31, 1998, as compared to $310,000 for the same period in 1997. During
1998, net charged off loans increased from $122,000 to $538,000. The increase in
the provision for loan losses was a result of the increased level of net charge
offs and a slight decline in First Community's credit quality.
NON-INTEREST INCOME. Non-interest income decreased $388,000 or 14.4% to
$2,304,000 in 1999 compared with $3,196,000 for the same period in 1998. This
decrease is primarily the result of a decrease in
38
<PAGE>
mortgage brokerage fee income of $181,000 or 68.8% to $82,000 in 1999 compared
with $263,000 in 1998. First Community receives fees for packaging and
processing loan applications for financing the purchase or refinance of
single-family residences. Funding is provided by various outside mortgage
lenders. The volume of transactions decreased during 1999 as a result of a less
favorable interest rate environment for refinance or purchase transactions. In
addition, gain on sale of loans decreased $268,000 or 43.2% to $353,00 in 1999
compared with $621,000 for the same period in 1998. Gain on sale of loans
represents the premium earned on the sale of the guaranteed portion of Small
Business Administration loans. During 1999, a smaller volume of loans were sold
at a lower premium compared with the same period in 1998.
Service charges on deposit accounts increased $17,000 or 1.5% to $1,175,000
in 1999 compared with $1,158,000 in 1998. This increase is due to the growth in
the number of accounts subject to service charges. Merchant discount fees
increased $224,000 or 39.0% during 1999 compared with the same period in 1998 as
a result of a greater number of merchant accounts and transactions.
Non-interest income in 1998 totaled 2,692,000, an increase of $266,000 or
11.0% over 1997. Increases were recognized in all categories of non-interest
income with the exception of escrow fee and merchant discount fee income. During
the second quarter of 1997, First Community eliminated escrow services resulting
in no additional recognition of escrow fee income after 1997. Merchant discount
fees fluctuate due to the number of accounts and transactions processed.
Service charges on deposit accounts increased $95,000 or 8.9% to $1,158,000
in 1998 compared with $1,063,000 in service charges realized for the same period
in 1997. The increase was primarily the result of growth in the number of
accounts subject to service charges.
Mortgage brokerage fee income increased $149,000 or 130.7% to $263,000 in
1998 compared with $114,000 in 1997. The volume of mortgage brokerage
transactions increased during 1998 as a result of an interest rate environment
favorable to refinance and purchase transactions. Income from gain on sale of
loans increased $180,000 or 40.8% in 1998 compared with 1997. Gain on sale of
loans represents the premium earned on the sale of the guaranteed portion of
Small Business Administration loans. The increase is a result of increased
economic activity and a lower interest rate environment.
NON-INTEREST EXPENSE. Total non-interest expenses increased $1,176,000 or
10.8% to $12,073,000 for 1999 compared with $10,897,000 for the same period in
1998. Salaries and employee benefits increased $369,000 or 6.7% to $5,853,000
during 1999 compared with $5,484,000 for the same prior year period. This
increase is primarily the result of an increase in the number of employees, pay
increases, incentives and promotions granted to employees for improved
performance in their assigned duties.
Occupancy and furniture and equipment expenses increased $194,000 or 9.8%
during 1999 compared with the prior year period. The increase is attributable
primarily to additional banking offices and rental expenses which generally
increase annually according to lease agreements. In addition, during the second
quarter of 1999, the sale of the premises held-for-sale was completed resulting
in no further tenant rental income to First Community.
Legal expenses and other professional services, consisting of audit, tax and
accounting services, data processing and other outside services, increased
$277,000 or 19.5% during 1999 compared with the same period in 1998. The
increase is attributable to consultant services for Y2K readiness and some
modest price increases. In addition, other operating expenses increased $337,000
or 33.7% during 1999 compared with the same period as a result of the general
growth of First Community as well as routine vendor price increases.
Real estate owned and property held-for-sale expenses increased $120,000 or
193.6% to $182,000 in 1999 compared with $62,000 for the same period in 1998 due
to primarily to $159,000 in write-downs of properties, primarily land acquired
for development.
39
<PAGE>
Total non-interest expenses for the year ended December 31, 1998 increased
$1,353,000 or 14.2% to $10,897,000 from $9,544,000 for 1997. Salaries and
employee benefits expenses, the largest component of non-interest expense,
increased $728,000 or 15.3% compared to 1997. The increase was due to an
increase in the number of employees and higher incentive compensation and
commission expenses paid to employees during 1998 compared to 1997.
Occupancy and furniture and equipment expenses increased $240,000 or 13.8%
to $1,974,000 from $1,734,000 for 1997. During 1997 and the first quarter of
1998, refurbishment of three of First Community's offices was completed
resulting in increased depreciation and amortization of furnishings and
leasehold improvements compared to the prior year. During the second quarter of
1998, a major portion of the building comprising premises held-for-sale was
leased. Lease income, which commenced May 1998, partially offset increases to
occupancy and furniture and equipment expenses. Additionally, in May 1998, First
Community opened a branch in Palm Springs, resulting in increased occupancy
expenses.
Legal expenses and other professional services, consisting of audit, tax and
accounting services, data processing, and other outside services, increased by
$134,000 or 10.4% for the year ended December 31, 1998 compared with the same
period in 1997. The increases relate to special services required to support
First Community's deposit customers as well as, in general, greater business
activity of First Community in 1998 compared to the prior year.
Stationery, supplies and printing expense increased $79,000 or 29.4% in 1998
compared with the same period in 1997. The increase was as a result of general
growth. Other operating expenses increased $102,000 or 11.4% to $999,000 during
1998 compared to the same period in 1997. Expenses in this category include
general bank operating expenses such as travel, postage, telephone and
memberships and increases are related to First Community's growth in 1998.
INCOME TAXES. The provision for income taxes was $3,166,000, $2,140,000 and
$1,878,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Effective tax rates were 42.6%, 37.4% and 39.8% for the years ended
December 31, 1999, 1998 and 1997, respectively.
FINANCIAL CONDITION
LOANS. The following table presents the balance of each major category of
loans at the dates indicated:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
% OF % OF % OF % OF % OF
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Category:
Commercial........... $ 94,657 46% $ 86,946 51% $ 80,247 53% $ 65,002 52% $ 51,154 49%
Real estate--
construction....... 38,464 19% 31,492 18% 48,452 32% 35,408 28% 26,864 26%
Real estate--
mortgage........... 67,235 33% 48,060 28% 19,066 13% 22,913 18% 23,101 22%
Consumer............. 6,293 3% 5,121 3% 3,944 3% 2,448 2% 2,331 2%
-------- --- -------- --- -------- --- -------- --- -------- ---
Total gross loans.... 206,649 100% 171,619 100% 151,709 100% 125,771 100% 103,450 100%
Less allowance for
loan losses........ (4,025) (3,785) (3,382) (3,194) (2,948)
Less deferred loan
fees............... (547) (639) (645) (524) (462)
-------- -------- -------- -------- --------
Total net loans...... $202,077 $167,195 $147,682 $122,053 $100,040
======== ======== ======== ======== ========
</TABLE>
40
<PAGE>
First Community's loan portfolio net of allowance for loan losses and
deferred fees and costs totaled $202,077,000 as of December 31, 1999, an
increase of $34,882,000 or 20.9% over December 31, 1998. Loans have increased
consistently over the past five years. Net loans increased $19,513,000 or 13.2%
at December 31, 1998 compared with the prior year end. First Community focuses
on small to medium sized business commercial and real estate secured lending, as
well as loans guaranteed by the Small Business Administration. During 1999 and
1998, demand for commercial real estate and construction lending has been strong
primarily attributable to the strength of the Southern California economy.
The following table presents First Community's interest rate sensitivity
analysis at the dates indicated with respect to individual categories of loans
and provides separate analyses with respect to fixed interest rate loans and
floating interest rate loans:
LOAN REPRICING OR MATURING
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
------------------------------------------------------------
1 YEAR OR LESS OVER 1 TO 5 YEARS OVER 5 YEARS TOTAL
-------------- ----------------- ------------ --------
<S> <C> <C> <C> <C>
Loan Category:
Commercial................................... $ 78,214 7,672 1,579 87,465
Real estate--construction.................... 38,464 -- -- 38,464
-------- ----- ----- -------
Total........................................ $116,678 7,672 1,579 125,929
======== ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
FIXED RATE FLOATING RATE TOTAL
---------- ------------- --------
<S> <C> <C> <C>
Commercial.................................................. $ 9,869 77,596 87,465
Real estate--construction................................... 1,450 37,014 38,464
------- ------- -------
Total..................................................... $11,319 114,610 125,929
======= ======= =======
</TABLE>
NONPERFORMING LOANS. The following table sets forth certain information
with respect to First Community's nonaccrual loans and accruing loans for which
payments of principal and interest were contractually past due 90 days or more.
NONACCRUAL LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........................................... $1,845 559 490 1,401 2,200
Loans past due 90 days or more and still accruing.......... 75 243 408 -- --
------ --- --- ----- -----
Nonperforming loans........................................ $1,920 802 898 1,401 2,200
====== === === ===== =====
</TABLE>
Loans are generally placed on nonaccrual status when the borrowers are past
due 90 days and when payment in full of principal or interest is not expected.
At the time a loan is placed on nonaccrual status, any interest income
previously accrued but not collected is reversed against current period income.
Income on nonaccrual loans is subsequently recognized only to the extent cash is
received and the loan's principal balance is deemed collectible. Loans are
restored to accrual status when the loans become both well secured and are in
the process of collection.
On December 31, 1999, First Community had $1,845,000 of loans on nonaccrual
status, compared to $559,000 and $490,000 on December 31, 1998 and 1997,
respectively. On December 31, 1999, First Community had $75,000 of loans that
were past due 90 days or more and still accruing interest, compared
41
<PAGE>
to $243,000 and $408,000 on December 31, 1998 and 1997, respectively. For
further information, see Note 4 of Notes to Financial Statements contained in
audited financial statements for the years ended December 31, 1999 and 1998.
ALLOWANCE FOR LOAN LOSSES. First Community's allowance is available to
absorb future loan losses. The current level of the allowance for loan losses is
a result of management's assessment of the risk within the loan portfolio based
on the information revealed in the credit reporting processes. First Community
utilizes a risk-rating system on loans and a monthly credit review and reporting
process. This assessment of risk takes into account the composition of the loan
portfolio, review of specific problem loans, previous loan experience, current
and anticipated economic conditions and other factors which, in management's
judgment, deserve recognition.
The following table presents the changes in First Community's allowance for
loan losses as of the dates indicated:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............................ $3,785 3,382 3,194 2,948 3,381
Loans charged off:
Commercial............................................ (480) (664) (274) * *
Real estate--construction............................. -- -- -- * *
Real estate--mortgage................................. (60) (664) (274) * *
Consumer.............................................. (52) (32) (25) * *
Small Business Administration, unguaranteed portion
held for investment................................. -- -- -- * *
------ ----- ----- ----- -----
Total loans charged off............................. (592) (696) (299) (290) (308)
------ ----- ----- ----- -----
Recoveries on loans charged off:
Commercial............................................ 271 150 153 * *
Real estate--construction............................. -- -- -- * *
Real estate--mortgage................................. 271 -- 20 * *
Consumer.............................................. 37 8 4 * *
Small Business Administration, unguaranteed portion
held for investment................................. -- -- -- * *
------ ----- ----- ----- -----
Total recoveries on loans charged off............... 314 158 177 27 7
------ ----- ----- ----- -----
Net loans charged off................................... (278) (538) (122) (114) (794)
------ ----- ----- ----- -----
Provision for loan losses............................... 518 941 310 360 361
------ ----- ----- ----- -----
Balance at end of year.................................. $4,025 3,785 3,382 3,194 2,948
====== ===== ===== ===== =====
Ratios:
Allowance for loan losses as a % of total loans at
period end............................................ 1.95% 2.21% 2.24% 2.55% 2.86%
Net loans charged off to average loans.................. 0.15% 0.33% 0.09%
</TABLE>
------------------------
* First Community did not maintain records for this category during the period
specified.
The allowance for loan losses at December 31, 1999 was $4,025,000 or 1.95%
of total loans, net of deferred fees and costs, a decrease from 2.21% at the end
of 1998. The decrease in the allowance for loan losses as a percentage of total
loans, net of deferred fees and costs, is the result of improved credit quality.
During 1999, First Community had net charge-offs of $278,000 compared to
$538,000 for the year ended
42
<PAGE>
December 31, 1998. Management believes that the allowance for loan losses of
$4,025,000 at December 31, 1999 is adequate to cover known and inherent risks in
the loan portfolio.
The following table allocates the allowance for loan losses based on
management's judgment of potential losses in the respective areas. While
management has allocated reserves to various portfolio segments for purposes of
this table, the allowance for loan losses in general and is available for the
portfolio in its entirety.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
SMALL
REAL BUSINESS
COMMERCIAL ESTATE CONSUMER ADMINISTRATION TOTAL
---------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31,
-------------------------------------------
1999
Allowance for loan losses.................. $1,622 $1,430 $356 $617 $4,025
% of loans in each category to total
loans.................................... 40% 36% 9% 15% 100%
1998
Allowance for loan losses.................. $1,894 $ 757 $379 $755 $3,785
% of loans in each category to total
loans.................................... 50% 20% 10% 20% 100%
1997
Allowance for loan losses.................. $1,693 $ 676 $339 $674 $3,382
% of loans in each category to total
loans.................................... 50% 20% 10% 20% 100%
1996
Allowance for loan losses.................. $1,598 $ 638 $320 $638 $3,194
% of loans in each category to total
loans.................................... 50% 20% 10% 20% 100%
1995
Allowance for loan losses.................. $1,474 $ 590 $294 $590 $2,948
% of loans in each category to total
loans.................................... 50% 20% 10% 20% 100%
</TABLE>
INVESTMENT PORTFOLIO. The investment activities of First Community are
designed to assist in maximizing income consistent with quality and liquidity
requirements, supply collateral to secure public funds, provide a means for
balancing market and credit risks and to provide consistent income and market
value throughout changing economic times.
First Community's portfolio consists of U.S. Treasury and U.S. Government
agency obligations, mortgage-backed securities, obligations of states and
political subdivisions, corporate debt and Federal Reserve Bank and Federal Home
Loan Bank stock. First Community's investment portfolio contains no investments
in any one issuer in excess of 10% of First Community's total equity. Exempt
from this calculation are securities of the U.S. Treasury and U.S. government
agencies.
The following table presents the composition of First Community's investment
portfolio at the dates indicated:
43
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. Treasury and government agency securities........ $48,475,000 $36,667,000 $26,909,000
States and political subdivisions..................... 349,000 351,000 352,000
Corporate bonds....................................... 504,000 506,000 504,000
Federal Reserve Bank Stock............................ 725,000 440,000 371,000
Federal Home Loan Bank Stock.......................... 510,000 416,000 --
----------- ----------- -----------
Total Investments................................... $50,563,000 $38,380,000 $28,136,000
=========== =========== ===========
</TABLE>
For the investment portfolio as of December 31, 1999, the following table
presents a summary of yields and maturities:
ANALYSIS OF INVESTMENT YIELDS AND MATURITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FIVE YEARS
ONE YEAR THROUGH THROUGH
ONE YEAR OR LESS FIVE YEARS TEN YEARS OVER TEN YEARS
---------------------- ---------------------- --------------------- ---------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------- -------- ----------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government
agency securities............. $13,139,000 5.35% $26,786,000 6.06% $6,272,000 5.97% $2,278,000 6.41%
States and political
subdivisions.................. -- -- -- -- 349,000 4.89 -- --
Corporate bonds................. -- -- 504,000 6.34 -- -- -- --
----------- ---- ----------- ---- ---------- ---- ---------- ----
Total investments (1)......... $13,139,000 5.35% $27,290,000 6.07% $6,621,000 5.91% $2,278,000 6.41%
=========== ==== =========== ==== ========== ==== ========== ====
<CAPTION>
TOTAL
----------------------
AMOUNT YIELD
----------- --------
<S> <C> <C>
U.S. Treasury and government
agency securities............. $48,475,000 5.88%
States and political
subdivisions.................. 349,000 4.89
Corporate bonds................. 504,000 6.34
----------- ----
Total investments (1)......... $49,328,000 5.87%
=========== ====
</TABLE>
------------------------------
(1) Yields on securities have not been adjusted to a fully tax-equivalent basis
NOTE: Federal Reserve Bank stock and Federal Home Loan Bank stock have no
maturity and have been excluded from this table.
DEPOSITS. The following table presents a summary of First Community's
average deposits as of the dates indicated and average rate paid:
ANALYSIS OF AVERAGE DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing............. $ 87,466,000 $ 67,344,000 $ 51,265,000
Savings deposits................. 11,567,000 1.62% 10,891,000 1.95% 8,541,000 2.45%
Market rate deposits............. 115,333,000 2.56 98,360,000 3.08 80,313,000 3.15
Time deposits LESS THAN
$100,000....................... 27,792,000 4.51 23,876,000 5.06 22,021,000 5.07
Time deposits GREATER THAN
$100,000....................... 25,680,000 4.88 17,181,000 5.26 12,379,000 5.40
------------ ------------ ------------
Total deposits................. $ 67,838,000 2.11% $217,652,000 2.46% $174,519,000 2.59%
============ ============ ============
</TABLE>
44
<PAGE>
For time deposits $100,000 or more, the following table presents a summary
of maturities for the time periods indicated:
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
OVER 3 MONTHS OVER 6 MONTHS
3 MONTHS OR THROUGH THROUGH OVER
LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL
----------- ------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1999............... $20,296,000 4,222,000 6,096,000 485,000 31,099,000
</TABLE>
Deposits have increased consistently over the past three years. Average
deposits for the period through December 31, 1999 were $267,838,000 compared
with $217,652,000 for the same prior year period, an increase of $50,186,000 or
23.1%. For 1998, average deposits were $217,652,000 compared with $174,519,000
for 1997, an increase of $43,133,000 or 24.7%. During 1999, time deposits of
$100,000 or more increased at a faster rate than in previous years due to higher
rates paid for these deposits.
CAPITAL. Bank regulatory agencies measure capital adequacy through
standardized risk-based capital guidelines which compare different levels of
capital (as defined by such guidelines) to risk-weighted assets and off-balance
sheet obligations. Banks are required to maintain a minimum total risk-based
capital ratio of 8% of which at least 4.0% must be Tier 1 capital. Banking
organizations considered to be among the most highly rated, based upon
examination results, also must maintain a minimum leverage ratio of 3% and a
minimum risk-based capital ratio of 10% of which at least 6.0% must be Tier 1
capital. Banks that are not the most highly rated are expected to maintain a
capital leverage ratio of at least 100 to 200 basis points above the minimum 3%
levels.
The following table presents regulatory capital requirements and risk-based
capital levels of First Community:
<TABLE>
<CAPTION>
REGULATORY REQUIREMENTS ACTUAL
------------------------------ ---------------
ADEQUATELY FIRST COMMUNITY
CAPITALIZED WELL CAPITALIZED BANCORP
----------- ---------------- ---------------
<S> <C> <C> <C>
December 31, 1999
Tier 1 leverage capital ratio........................ 4.00% 5.00% 8.56%
Tier 1 risk-based capital ratio...................... 4.00% 6.00% 10.89%
Total risk-based capital............................. 8.00% 10.00% 12.15%
</TABLE>
As of December 31, 1999, First Community exceeded each of the capital
requirements of the Federal Reserve Board and was deemed to be well capitalized.
In addition, each of First Community's bank subsidiaries exceeded the capital
requirements of its primary federal banking regulator and was deemed to be well
capitalized.
In January 1998, Rancho Santa Fe instituted a quarterly dividend of $0.06
per share, which increased to $0.09 per share in the third quarter of 1999.
First Community Bank of the Desert did not pay a dividend.
LIQUIDITY AND FUNDS MANAGEMENT. Liquidity management requires an ability to
meet financial commitments when contractually due and to respond to other
requirements for funds. First Community has an Asset/Liability Management
Committee responsible for managing balance sheet and off-balance sheet
commitments to meet the needs of customers while achieving First Community's
financial objectives. First Community's Asset/Liability Management Committee
meets regularly to review funding capacities, current and forecasted loan demand
and investment opportunities.
Funds are held in cash and cash equivalents, which are comprised of cash and
due from banks plus federal funds sold. Cash and cash equivalents at
December 31, 1999 totaled $32,037,000, or 10.53% of total assets, compared with
$54,966,000 at December 31, 1998. The decrease was the result of loans
increasing
45
<PAGE>
during the period at a faster rate than deposits. Loans net of deferred loan
fees increased $35,122,000 during 1999 as a result of significant loan demand,
particularly in commercial real estate and construction lending. Total deposits,
by comparison, increased $22,811,000 during this same period, primarily in
non-interest bearing and market rate deposits. Cash and cash equivalents
increased to $54,966,000 at December 31, 1998 largely through increased
interest-bearing deposits. The only restriction on First Community's cash and
cash equivalents is reserve requirements with the Federal Reserve Bank.
As an additional source of liquidity, First Community maintains lines of
credit for $11,500,000 with correspondent banks for purchase of overnight funds.
These lines are subject to availability of funds. First Community also has a Fed
discount window limit of approximately $3,327,000 as well as a credit line with
the Federal Home Loan Bank which would allow First Community to borrow up to
$9,000,000. Historically, First Community has used its borrowing capabilities
infrequently.
The ability of First Community to obtain funds for the payment of dividends
and for other cash requirements is largely dependent upon First Community's
earnings. Dividends paid by a national bank, like Rancho Santa Fe, are regulated
by the Office of the Comptroller of the Currency under its general supervisory
authority as it relates to a bank's requirement to maintain adequate capital. A
national bank may declare a dividend without the approval of the Office of the
Comptroller of the Currency as long as the total of dividends declared in a
calendar year does not exceed the total of net profits for that year combined
with the retained profits for the preceding two years. Dividends paid by a
California state-chartered bank, like First Community Bank of the Desert, are
regulated by California law. In general, a state-chartered bank may declare a
dividend without the approval of the Commissioner of Financial Institutions as
long as the total of dividends declared in a calendar year do not exceed the
lesser of the retained earnings of the bank or the net income of the bank for
its last three fiscal years.
INTEREST RATE SENSITIVITY. Significant changes in interest rates affect the
composition, yield and cost of balance sheet components. The rate sensitivity of
these assets and liabilities is monitored and matched to control the risk
associated with movements in rates. The Asset/Liability Management Committee for
First Community meets quarterly to monitor and formulate strategies and policies
to provide sufficient levels of net interest income while maintaining acceptable
levels of interest rate sensitivity, risk and liquidity. The primary objective
of rate sensitivity management is to ensure earnings stability by minimizing the
sensitivity of net interest income to fluctuations in interest rates. First
Community uses gap analysis and other systems to measure, monitor and adapt to
changing interest rate environments. First Community monitors and evaluates its
interest rate risk position on a quarterly basis using traditional gap analysis.
Gap analysis calculates the mismatches over certain time periods between assets
and liabilities whose interest rates are subject to repricing at their
contractual maturity dates or repricing period.
In a rising interest rate environment, when rate sensitive assets exceed
rate sensitive liabilities, assets re-price to higher interest rates faster than
liabilities re-price, resulting in a net interest margin that tends to rise.
When rate sensitive liabilities exceed rate sensitive assets, net interest
margin will tend to fall in the same interest rate environment. The opposite
effect on the net interest margin occurs in a decreasing interest rate
environment.
46
<PAGE>
The following table presents First Community's interest rate sensitivity
analysis by contractual repricing or maturity at December 31, 1999:
INTEREST RATE SENSITIVITY
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
LESS THAN 3 MONTHS 1 TO 5 OVER 5 NON-RATE
3 MONTHS TO 1 YEAR YEARS YEARS SENSITIVE TOTAL
--------- --------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Repricing Interval
Deposits with financial
institutions..................... $ 1,382 $ 6,120 $ -- $ -- $ -- $ 7,502
Federal funds sold................. 10,889 -- -- -- -- 10,889
Investment securities.............. 499 12,640 27,285 10,134 5 50,563
Loans, gross....................... 158,467 13,901 25,616 8,665 -- 206,649
-------- ------- ------- ------- -------- --------
Total rate sensitive assets...... 171,237 32,661 52,991 18,299 5 275,603
All other assets................... -- -- -- -- 28,759 28,759
-------- ------- ------- ------- -------- --------
Total assets..................... $171,237 $32,661 $52,901 $18,299 $ 29,264 $304,362
======== ======= ======= ======= ======== ========
Savings deposits................... $ -- $ -- $11,895 $ -- $ -- $ 11,895
Money market deposits.............. 112,358 -- -- -- -- 112,358
Time deposits under $100,000....... 11,067 11,983 2,010 57 -- 25,117
Time deposits of $100,000 or
more............................. 20,296 10,318 485 -- -- 31,099
Other interest-bearing
liabilities...................... 1,657 -- -- -- -- 1,657
-------- ------- ------- ------- -------- --------
Total rate sensitive
liabilities.................... 145,378 22,301 14,390 57 -- 182,126
All other liabilities.............. -- -- -- -- 96,381 96,381
Shareholders' equity............... -- -- -- -- 25,855 25,855
-------- ------- ------- ------- -------- --------
Total liabilities and
shareholders' equity........... $145,378 $22,301 $14,390 $ 57 $122,236 $304,362
======== ======= ======= ======= ======== ========
Period gap......................... $ 25,859 $10,360 $38,511 $18,742 $(93,472)
Cumulative gap..................... 25,859 $36,219 $74,730 $93,472
Cumulative rate sensitive gap %.... 8% 12% 25% 31%
</TABLE>
------------------------
Note: All amounts are reported at their contractual maturity or repricing
periods. This analysis makes certain assumptions as to interest rate sensitivity
of savings and NOW accounts which have no stated maturity and have had very
little price fluctuation in the past three years. Money market accounts are
repriced at discretion of management and generally are more rate sensitive.
47
<PAGE>
INFORMATION ABOUT PROFESSIONAL BANCORP
GENERAL
Professional Bancorp is a bank holding company organized as a corporation
under the laws of the State of California in July 1981 and reincorporated under
the laws of the Commonwealth of Pennsylvania in August 1989. As a bank holding
company, Professional Bancorp is subject to the Bank Holding Company Act of
1956, as amended. Professional Bancorp commenced operations in August 1982. On
the commencement date and from the proceeds of its initial stock offering,
Professional Bancorp purchased all of the outstanding stock of First
Professional.
Professional Bancorp's principal business is to serve as a holding company
for First Professional and for other banking or finance-related subsidiaries
which Professional Bancorp may establish or acquire. At December 31, 1999,
Professional Bancorp had total consolidated assets of approximately
$273.5 million, total consolidated net loans of approximately $156.5 million,
total consolidated deposits of approximately $256.0 million and total
consolidated shareholders' equity of approximately $14.9 million. The discussion
and analysis for the year ended December 31, 1999 reflect the operations of
Professional Bancorp, First Professional and Professional Bancorp
Mortgage, Inc.
FIRST PROFESSIONAL BANK, NATIONAL ASSOCIATION
First Professional commenced operations in August 1982 as a federally
chartered commercial bank. First Professional's strategy is to deliver
value-added products and services that satisfy the financial services needs of
its targeted customers, primarily the health care services sector, emphasizing
superior service and relationships. First Professional provides a wide range of
commercial banking products and services primarily directed towards the health
care community, which includes, physicians, independent practice associations
(IPA), practice management companies (PPM), preferred provider organizations
(PPO), medical billing management companies, home health agencies and hospital
based practices.
PROFESSIONAL BANCORP MORTGAGE, INC.
On November 18, 1998, Professional Bancorp Mortgage commenced operations as
a majority-owned subsidiary of First Professional. First Professional's strategy
was to provide clients access to new products through a co-venture partnership
with REIS Mortgage Holdings, Inc. REIS is a provider of mortgage brokerage
services and has been a long-standing referral partner of First Professional.
Due to changing market conditions, First Professional ceased operations of the
subsidiary effective January 1, 2000.
REGULATORY AGREEMENT
As First Professional's principal regulator, the OCC examines and evaluates
the financial condition, operations and policies and procedures of nationally
chartered banks on a regular basis as part of its legally prescribed oversight
responsibilities. The OCC conducted an examination in 1999 which identified
deficiencies in First Professional's loan underwriting and administration
policies and procedures. The OCC determined that First Professional required
special supervisory attention. To implement corrective action, the OCC and First
Professional entered into a formal regulatory agreement (the "Formal Agreement")
on March 22, 2000.
PRINCIPAL MARKETING AREA
The principal service areas of First Professional consist of the California
counties of Los Angeles, Orange, Riverside, San Bernardino and Ventura with a
full-service office at its Santa Monica headquarters and four full-service
branches located in Beverly Hills, Tarzana, Pasadena and Redlands. In addition,
First Professional has a limited service facility in Los Angeles within the
proximity of Cedars Sinai Medical Center. Since inception, First Professional
has operated an in-house courier service which permits First
48
<PAGE>
Professional to serve areas outside of each branch's immediate vicinity.
Couriers are licensed branches of First Professional and able to facilitate
limited banking transactions.
COMMERCIAL BANKING
First Professional is engaged in the business of general commercial banking.
The services which are offered include those traditionally offered by commercial
banks, such as checking and savings accounts, time certificates of deposit, and
commercial, consumer/installment, home equity and short-term real estate loans.
First Professional also offers cashier's checks, travelers checks, safe deposit
boxes, night deposit facilities, wire transfers, notary services, courier
services, mortgage brokering, merchant accounts, TouchTone Banking and five bank
owned 24-hour automated teller machines which are located at First
Professional's Santa Monica, Cedars Sinai Medical Center, Tarzana, Pasadena and
Redlands facilities. Client access to First Professional is also available
through most ATM networks.
COMPETITION
First Professional faces competition in attracting both deposits and
originating loans. First Professional's competition in loans comes principally
from community based, regional and multi-regional commercial banks, asset based
finance companies, savings and loan associations, mortgage companies, and to a
lesser degree, thrift and loan companies, credit unions and insurance companies.
Many of the nation's largest commercial banks and savings and loan associations
with which First Professional competes have significantly greater lending limits
than First Professional and perform other services for their clients which First
Professional can offer only through correspondents or other vendors, if at all.
Deregulation of the banking industry and increased competition from non-bank
entities for the cash balances of individuals and businesses has had and will
continue to have an impact on the competitive position of First Professional.
Among the advantages of these larger institutions is their ability to make
larger loans, finance extensive advertising campaigns, access international
money markets and generally allocate their assets to regions of highest yield
and demand. Management believes that its most direct competition for deposits
comes from commercial banks, stock brokerage firms, savings and loan
associations, thrift and loan companies and credit unions. In addition,
competition for deposits may be expected to arise from corporate and
governmental debt securities, as well as money market mutual funds. First
Professional does not have a significant market share of the deposits or loans
in the Northern or Southern California marketplace.
In order to compete with other financial service entities in its service
area, First Professional relies principally upon promotional activity and
personal contacts obtained through its officers, directors, employees and
shareholders to attract and maintain relationships. First Professional's
promotional activities emphasize the advantages of banking with an institution
familiar with the particular needs of the health care community. Additionally,
First Professional is informed of the current trends and changing financial
services needs of the health care industry through membership in trade
associations, directorships of health care organizations and through feedback
from existing health care clients of First Professional.
This longstanding and continued presence of First Professional in its niche
is a valuable marketing factor, which not only serves well for clients and
prospects, but serves as a major competitive advantage. For clients whose credit
demands exceed First Professional's lending limits, First Professional attempts
to arrange for such loans on a participated basis with institutions who desire
to work with First Professional to leverage its industry expertise. First
Professional also assists clients requiring services not offered by First
Professional by obtaining these services through its correspondent banks and/or
other joint relationships.
IMPACT OF MONETARY POLICIES
Banking is a business which depends on rate differentials. In general, the
difference between the interest rate paid by First Professional on its deposits
and its other borrowings and the interest rate earned
49
<PAGE>
by First Professional on loans, securities and other interest-earning assets
will comprise the major source of Professional Bancorp's earnings. These rates
are highly sensitive to many factors which are beyond Professional Bancorp's and
First Professional's control and, accordingly, the earnings and growth of First
Professional are subject to the influence of economic conditions generally, both
domestic and foreign, including inflation, recession, and unemployment; and also
to the influence of monetary and fiscal policies of the United States and its
agencies, particularly the FRB. The FRB implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open-market
dealings in United States government securities, by adjusting the required level
of reserves for financial institutions subject to reserve requirements, by
placing limitations upon savings and time deposit interest rates, and through
adjustments to the discount rate applicable to borrowings by banks which are
members of the Federal Reserve System.
The actions of the FRB in these areas influence the growth of bank loans,
investments, and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on Professional Bancorp
or First Professional cannot be predicted; however, depending on the degree to
which First Professional's interest-earning assets and interest-bearing
liabilities are rate sensitive, increases in rates would have the temporary
effect of increasing their net interest margin, while decreases in interest
rates would have the opposite effect.
In addition, adverse economic conditions could make a higher provision for
loan losses more prudent and could cause higher loan charge-offs, thus adversely
affecting Professional Bancorp's net income.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 2000 the Financial Accounting Standards Board issued an
amendment of Statement 133, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. The new Statement clarifies a limited number of
issues that have caused implementation difficulties for a large number of
entities preparing to apply Statement 133.
On September 28, 2000 the Financial Accounting Standards Board issued
Statement 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The new Statement replaces Statement 125, issued
in June 1996 as to certain securitizations of financial assets.
On July 1, 2000 the Financial Accounting Standards Board issued Financial
Interpretation No. 44 which clarifies certain definitions, criteria, and
accounting treatment of Stock Based Compensation (which is addressed by Standard
No. 123 of the Financial Accounting Standards Board and Opinion No. 25 of the
Accounting Principles Board).
During 1998, the Financial Accounting Standard Board (FASB) issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting For Derivative
Instruments and Hedging Activities" (SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. During 1999, the FASB issued Statement
of Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of Effective Date of SFAS 133 and
Amendment to SFAS 133", which amends certain provisions of SFAS 133 and extends
the initial effective date.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, and
unrecognized firm commitment, an available for sale security, or a
foreign-currency-denominated forecasted transaction.
50
<PAGE>
Under these statements, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. These statements are
effective for Professional Bancorp on July 1, 2001. Professional Bancorp
management is in the process of determining what effect, if any, adoption of
this statement will have on the financial position or results of operations of
Professional Bancorp.
EMPLOYEES
As of December 31, 1999, Professional Bancorp had no full-time salaried
employees. All compensation of Professional Bancorp's executive officers was
paid by First Professional, with a portion of such compensation reimbursed by
Professional Bancorp. First Professional employed 123 full-time equivalent
employees as of December 31, 1999.
SUPERVISION AND REGULATION
For a summary of certain legislation, regulations and government policies
affecting Professional Bancorp, see "SUPERVISION AND REGULATION" herein.
51
<PAGE>
PROFESSIONAL BANCORP'S
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is Professional Bancorp's management's discussion and analysis
of the results of operations and the historical financial condition of
Professional Bancorp and its wholly-owned subsidiaries. The discussion should be
read in conjunction with Professional Bancorp's audited and unaudited
consolidated financial statements and accompanying footnotes and other selected
data presented in this proxy statement/prospectus.
I.__PERIOD ENDED JUNE 30, 2000
RESULTS OF OPERATIONS
Professional Bancorp recorded a net loss of $47,000, or $(0.02) per basic
share, for the second quarter of 2000, compared with a net loss of $259,000, or
$(0.13) per basic share for the second quarter of 1999. The improvement during
the second quarter of 2000 compared to 1999 resulted primarily from the increase
in average interest earning assets and a lower provision for loan losses in
2000. Professional Bancorp had total assets of $268.4 million at June 30, 2000,
compared to $253.8 million at June 30, 1999.
The net loss for the first six months of 2000 was $35,000, or $(0.02) per
basic share compared to net earnings of $76,000, or $0.04 per basic and diluted
share for the same period in 1999. The decrease in earnings was primarily due to
increases in the provision for loan losses of $571,000 and other operating
expenses of $212,000. These increases were partially offset by an increase in
net interest income of $753,000.
Return on average shareholders' equity for the second quarter and first half
of 2000 were (1.26%) and (0.47%), respectively, compared to (4.01%) and 0.59%
for the second quarter and first half of 1999, respectively. Additionally,
return on average assets for the second quarter and first half of 2000 was
(0.07%) and (0.02%), respectively, compared to (0.40%) and 0.06% for the second
quarter and first half of 1999, respectively.
Pre-tax operating earnings, which exclude the impact of gains or losses on
the sale of securities and the provision for loan losses, increased $96,000, or
18.9%, to $603,000 for the second quarter of 2000 compared to $507,000 for the
second quarter of 1999. Operating earnings for the first half of 2000 increased
$543,000 or 46.6% to $1.7 million compared to $1.2 million for the first half of
1999. The increase was primarily due to the growth in average interest earning
assets from $246.5 million and $252.2 million for the second quarter and first
half of 2000, respectively, compared to $226.5 million and $227.2 million for
the second quarter and first half of 1999, respectively. Additionally, the
overall level of interest rates increased during 2000 compared to 1999.
At June 30, 2000, total cash and cash equivalents increased $33.0 million,
or 76.0% to $76.4 million from $43.4 million at December 31, 1999. This increase
was primarily due to a reduction of First Professional's loan portfolio and an
increase in deposits.
Total investment securities decreased $1.6 million, or 2.5% to
$62.1 million at June 30, 2000 compared to $63.7 million at December 31, 1999.
Gross loans decreased $33.8 million, or 20.8%, to $128.8 million at
June 30, 2000 compared to $162.6 million at December 31, 1999. Commercial loans
decreased $30.0 million, or 24.1%, to $94.4 million at June 30, 2000 from
$124.4 million at December 31, 1999. Real estate secured loans increased
$200,000, or 0.7%, to $27.7 million at June 30, 2000 compared to $27.5 million
at December 31, 1999. These decreases were the result of loans being paid off in
full, including a single cash secured loan of $12.8 million. Management is
focusing its efforts on reducing the concentration and risk of large loans.
52
<PAGE>
Concurrently, management is adjusting its underwriting to address industry
concentration risk. Both of these efforts contributed to the decrease in loans.
At June 30, 2000, nonperforming loans totaled $15.3 million, or 11.9%, of
gross loans compared with $8.4 million or 5.2% of gross loans at December 31,
1999. The allowance for loan losses as a percent of nonperforming loans was
47.6% at June 30, 2000 compared to 69.8% at December 31, 1999.
Total deposits decreased $5.3 million, or 2.1%, to $250.7 million at
June 30, 2000 from $256.0 million at December 31, 1999. Non-interest-bearing
demand deposit increased $6.7 million or 6.1% to $116.3 million at June 30, 2000
from $109.6 million at December 31, 1999. Time deposits decreased
$17.5 million, or 38.3% to $28.2 million at June 30, 2000 from $45.7 million at
December 31, 1999. The decrease was primarily due to the use of a $12.8 million
time deposit to pay off a loan in April, 2000.
Other operating expense increased $110,000, or 3.1%, to $3.7 million for the
second quarter of 2000 compared to $3.6 million for the same period in 1999. The
increase was due primarily to higher staffing levels and increased legal fees
associated with loan workout activities.
The decrease of net earnings in the second quarter of 2000 was primarily due
to increased provisions for loan losses. Professional Bancorp recorded
provisions for loan losses of $650,000 for the three-month period ended
June 30, 2000, compared to $1.0 million for the same period in 1999.
NET INTEREST INCOME
Professional Bancorp's earnings depend primarily on net interest income,
which is the difference between the interest and fees earned on loans and
investments less the interest paid on deposits, borrowings and convertible
notes. For the quarter ended June 30, 2000, net interest income increased 4.7%
to $3.8 million from $3.7 million for the quarter ended June 30, 1999. The
increase in net interest income for the second quarter of 2000 as compared to
the same period in 1999 is primarily the result of a $20.0 million, or 8.8%,
increase in average interest earning assets.
Net interest income, when expressed as a percentage of average total
interest earning assets, is referred to as the net interest margin. Professional
Bancorp's net interest income is affected by the change in the amount and mix of
interest-earning assets and interest-bearing liabilities. It is also affected by
changes in yields earned on interest-earning assets and rates paid on deposits
and other borrowed funds. The net interest margin was 6.24%, for the second
quarter of 2000 compared to 6.50% for the same period in 1999.
Average yield on interest earning assets decreased 19 basis points to 7.63%
for the three months ended June 30, 2000 from 7.82% for the same period in 1999.
While overall market interest rates generally were higher in 2000 than 1999, the
level of non-accrual loans during the second quarter of 2000 reduced the yield.
Average cost on interest bearing liabilities increased 9 basis points to 2.44%
for the three months ended June 30, 2000 from 2.35% for the same period in 1999.
Average noninterest-bearing demand deposits for the second quarter of 2000
increased $15.1 million, or 15.1%, to $115.1 million from $100.0 million for the
same period in 1999. Average yield on interest-earning assets decreased two
basis points to 7.74% for the six months ended June 30, 2000 from 7.76% for the
same period in 1999. Again, the level of non-accrual loans during the first half
of 2000 reduced the yield. Average cost on interest bearing liabilities
increased one basis point to 2.49% for the six months ended June 30, 2000 from
2.48% for the same period in 1999. Average noninterest-bearing demand deposits
for the first six months of 2000 increased $15.9 million, or 16.3%, to
$113.7 million from $97.8 million for the same period in 1999.
Average federal funds sold increased $29.8 million, or 215.9%, to
$43.6 million for the three months ended June 30, 2000 from $13.8 million for
the same period in 1999. Consistent with the overall increase in market interest
rates, the average yield on federal funds increased 164 basis points to 6.39%
for the second quarter of 2000 from 4.75% for the same period in 1999. The
result was an increase in interest on federal funds sold of $533,000 to $696,000
for the second quarter of 2000 compared to $163,000 for the same
53
<PAGE>
period in 1999. Average federal funds sold increased $27.8 million, or 266.5%,
to $38.2 million for the six months ended June 30, 2000 from $10.4 million for
the same period in 1999. The average yield on federal funds increased 135 basis
points to 6.12% for the first six months of 2000 from 4.77% for the same period
in 1999. The result was an increase in interest on federal funds sold of
$923,000 to $1.2 million for the first six months of 2000 compared to $246,000
for the same period in 1999. The increased volume was primarily due to the
decrease in First Professional's gross loan portfolio and the increase in
deposits.
Average total investment securities decreased $9.8 million, or 13.5%, to
$62.6 million for the three months ended June 30, 2000 from $72.4 million during
the same period in 1999. The average yield on securities increased 57 basis
points to 6.43% for the second quarter of 2000 from 5.86% for the same period in
1999. The net result was a decrease in interest on securities of $51,000 to
$1.0 million for the second quarter of 2000 compared to $1.1 million for the
same period in 1999. Average total investment securities decreased
$19.1 million, or 23.3%, to $62.9 million for the six months ended June 30, 2000
from $82.0 million during the same period in 1999. The average yield on
securities increased 55 basis points to 6.40% for the six months ending
June 30, 2000 from 5.85% for the same period in 1999. The net result was a
decrease in interest on securities of $366,000 to $2.0 million for the six
months ended June 30, 2000 compared to $2.4 million for the same period in 1999.
Average loans increased $70,000, or 0.1%, to $139.2 million for the three
months ended June 30, 2000 compared to $139.1 million during the same period in
1999. While the volume of loans was substantially the same, the yield on loans
decreased 62 basis points to 8.59% for the second quarter of 2000 from 9.21% for
the same period in 1999. The decline in yield was primarily due to the increase
in non-accrual loans and was partially offset by the rise in interest rates. The
net result was a decrease in interest on loans of $204,000 to $3.0 million for
the second quarter of 2000 compared to $3.2 million for the same period in 1999.
Average loans increased $17.2 million, or 12.9%, to $150.6 million for the six
months ended June 30, 2000 compared to $133.4 million during the same period in
1999. The yield on loans decreased 47 basis points to 8.72% for the first six
months ended June 30, 2000 from 9.19% for the same period in 1999.
Average interest-bearing liabilities increased $13.4 million, or 10.5%, to
$141.3 million for the three months ended June 30, 2000 compared to
$127.9 million during the same period in 1999. The cost of interest- bearing
liabilities increased nine basis points to 2.44% for the second quarter of 2000
compared to 2.35% for the second quarter of 1999. Average interest-bearing
liabilities increased $19.8 million, or 15.2%, to $150.0 million for the six
months ended June 30, 2000 compared to $130.2 million during the same period in
1999. The cost of interest-bearing liabilities increased one basis point to
2.49% for the six months ended June 30, 2000 compared to 2.48% during the same
period in 1999.
Average convertible notes decreased $200,000, or 22.8%, to $679,000 for the
three months ended June 30, 2000 from $879,000 during the same period in 1999.
Average convertible notes decreased $240,000, or 26.1%, to $679,000 for the six
months ended June 30, 2000 from $919,000 during the same period in 1999.
Decreases in convertible bonds are a result of conversions to stock.
The following tables present the distribution of average assets, liabilities
and shareholders' equity as well as the total dollar amount of interest income
from average interest-earning assets and resultant yields,
54
<PAGE>
and the dollar amounts of interest expense and average interest-bearing
liabilities, expressed both in dollars and rates for the three months ended
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE INTEREST BALANCE RATE INTEREST
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities............................... $ 62,568 6.43% $1,006 $ 72,389 5.86% $1,057
Loans(1)................................. 139,159 8.59 2,990 139,089 9.21 3,194
Federal funds sold....................... 43,572 6.39 696 13,751 4.75 163
Interest-earning deposits -- banks....... 1,197 3.69 11 1,317 1.51 5
-------- ------ -------- ------
Total interest-earning assets.......... 246,496 7.63 4,703 226,546 7.82 4,419
-------- ------ -------- ------
Deferred loan fees......................... (174) (219)
Allowance for loan losses.................. (7,067) (2,303)
Noninterest-earning assets:
Cash and due from banks.................. 24,555 24,700
Premises and equipment................... 1,090 1,404
Other assets............................. 8,389 5,986
-------- --------
Total assets........................... $273,289 $256,114
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits......... $ 15,975 0.69% $ 28 $ 13,688 0.70% $ 24
Savings and money market deposits........ 92,274 2.04 471 79,559 1.81 359
Time deposits under $100,000............. 7,313 4.01 73 8,716 4.19 91
Time deposits of $100,000 and over....... 25,101 4.38 275 25,107 4.20 263
Convertible notes........................ 679 8.07 14 879 6.04 13
Repurchase agreements.................... -- -- -- -- -- --
-------- ------ -------- ------
Total interest-bearing liabilities..... 141,342 2.44 861 127,949 2.35 750
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...... 115,119 99,951
Other liabilities........................ 2,006 2,405
Shareholders' equity..................... 14,822 25,809
-------- --------
Total liabilities and shareholders'
equity............................... $273,289 $256,114
======== ========
Interest income as a percentage of average
Earning assets........................... 7.63% 7.82%
Interest expense as a percentage of average
Interest-bearing liabilities............. 2.44% 2.35%
Net interest margin and income............. 6.24% $3,842 6.50% $3,669
====== ======
Net interest spread........................ 5.19% 5.47%
</TABLE>
(1) Nonaccrual loans are included in average balances and rate calculations.
55
<PAGE>
The following tables present the distribution of average assets, liabilities
and shareholders' equity as well as the total dollar amount of interest income
from average interest-earning assets and resultant yields, and the dollar
amounts of interest expense and average interest-bearing liabilities, expressed
both in dollars and rates for the six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE INTEREST BALANCE RATE INTEREST
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities................................. $ 62,938 6.40% $2,013 $ 82,045 5.85% $2,379
Loans(1)................................... 150,584 8.72 6,565 133,369 9.19 6,078
Federal funds sold......................... 38,163 6.12 1,169 10,413 4.77 246
Interest-earning deposits -- banks......... 503 6.47 16 1,359 5.35 36
-------- ------ -------- ------
Total interest-earning assets............ 252,188 7.74 9,763 227,186 7.76 8,740
-------- ------ -------- ------
Deferred loan fees........................... (184) (212)
Allowance for loan losses.................... (6,532) (2,089)
Noninterest-earning assets:
Cash and due from banks.................... 25,955 24,293
Premises and equipment..................... 1,102 1,424
Other assets............................... 8,737 5,940
-------- --------
Total assets............................. $281,266 $256,542
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits........... $ 15,138 0.69% $ 52 $ 13,699 0.73% $ 50
Savings and money market deposits.......... 94,753 2.02 959 80,078 1.90 755
Time deposits under $100,000............... 7,450 4.00 149 8,707 4.27 184
Time deposits of $100,000 and over......... 31,946 4.29 685 22,460 4.24 472
Convertible notes.......................... 679 7.39 25 919 6.54 30
Repurchase agreements...................... -- -- -- 4,368 5.02 109
-------- ------ -------- ------
Total interest-bearing liabilities....... 149,966 2.49 1,870 130,231 2.48 1,600
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits........ 113,668 97,795
Other liabilities.......................... 2,649 2,656
Shareholders' equity....................... 14,983 25,860
-------- --------
Total liabilities and shareholders'
equity................................. $281,266 $256,542
======== ========
Interest income as a percentage of average
Earning assets............................. 7.74% 7.76%
Interest expense as a percentage of average
Interest-bearing liabilities............... 2.49% 2.48%
Net interest margin and income............... 6.26% $7,893 6.34% $7,140
====== ======
Net interest spread.......................... 5.25% 5.28%
</TABLE>
------------------------
(1) Nonaccrual loans are included in average balances and rate calculations.
56
<PAGE>
Professional Bancorp's net interest income is affected by changes in the
amount and mix of interest-earning assets and interest-bearing liabilities,
referred to as "volume change." It is also affected by changes in yields earned
on interest-earning assets and interest rates paid on interest-bearing deposits
and other borrowed funds, referred to as a "rate change." The following table
sets forth changes in interest income and interest expense for each major
category of interest-earning assets and interest-bearing liabilities, and the
amount of change attributable to volume and rate changes for the three and six
months ended June 30, 2000 and 1999. The changes due to both rate and volume
have been allocated to rate and volume in proportion to the relationship between
their absolute dollar amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 JUNE 30, 2000 AND 1999
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
(IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Securities........................................... $(152) $ 97 $ (54) $(591) $ 208 $(383)
Loans................................................ 2 (214) (212) 756 (323) 433
Federal funds sold................................... 458 73 531 825 88 913
Interest-bearing deposits -- banks................... -- 7 6 (26) 6 (20)
----- ----- ----- ----- ----- -----
$ 308 $ (37) $ 271 964 (21) 943
----- ----- ----- ----- ----- -----
Increase (decrease) in interest expense:
Interest-bearing demand deposits..................... $ 4 $ -- $ 4 $ 5 $ (3) $ 2
Savings and money market deposits.................... 61 49 111 145 51 196
Time deposits under $100,000......................... (14) (4) (18) (25) (11) (37)
Time deposits of $100,000 and over................... -- 11 11 202 6 208
Convertible notes.................................... (3) 4 1 (8) 3 (5)
Repurchase agreements................................ -- -- -- (54) (54) (109)
----- ----- ----- ----- ----- -----
48 61 108 263 (8) 255
----- ----- ----- ----- ----- -----
Change in net interest income.......................... $ 260 $ (97) $ 163 $ 700 $ (12) $ 688
===== ===== ===== ===== ===== =====
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined by management based upon
Professional Bancorp's loan loss experience, the performance of loans in
Professional Bancorp's portfolio, the quality of loans in Professional Bancorp's
portfolio, evaluation of collateral for such loans, the economic conditions
affecting collectibility of loans, the prospects and financial condition of the
respective borrowers or guarantors and such other factors which, in management's
judgment, deserve recognition in the estimation of probable loan losses. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review First Professional's allowance for loan losses. Such
agencies may require First Professional to recognize additions to the allowance
or to take charge-offs (reductions in the allowance) in anticipation of losses.
Professional Bancorp recorded provisions for loan losses of $650,000 and
$1.0 million for the three month period ended June 30, 2000 and 1999,
respectively. Professional Bancorp recorded provisions for loan losses of
$1.7 million and $1.2 million for the six months ended June 30, 2000 and 1999,
respectively. The increase in provision for loan losses for 2000 was due
primarily to the increase in non-performing loans and a general increase in the
allowance for loan losses. Net charge-offs (recoveries) to average outstanding
loans for the six months ending June 30, 2000 and 1999 were 0.23% and 1.17%,
respectively.
57
<PAGE>
OTHER OPERATING INCOME
For the three months ended June 30, 2000, other operating income totaled
$476,000 compared with $448,000 for the same period in 1999. The increase was
primarily related to an $18,000 increase in service charges on deposits and
other nonrecurring transactions.
OTHER OPERATING EXPENSE
Other operating expenses for the three months ending June 30, 2000, totaled
$3.7 million compared with $3.6 million for the same period in 1999. The net
increase was comprised primarily of increases in salaries and other employee
benefits and legal fees and was offset partially by reductions in donations,
business development and accounting/auditing expenses.
Salaries and other employee benefits increased approximately $300,000 to
$3.8 million for the first six months of 2000 from $3.5 million for the same
period in 1999. The increase primarily relates to an increase in staff and
salaries and increased group health insurance expenses. Legal fees increased
$109,000 to $427,000 for the first six months of 2000 compared $318,000 for the
same period in 1999. Legal expenses related to the workout of problem loans may
be recovered after the loan is fully paid. Professional services decreased
approximately $87,000 to $556,000 for the first six months of 2000 compared to
$643,000 for the same period in 1999. The decrease was primarily due to the
termination of a consulting agreement during the second quarter of 2000.
INCOME TAXES
For the three and six months ended June 30, 2000, no income tax benefit was
recorded. For the three and six months ended June 30, 1999, Professional Bancorp
recorded a tax benefit of $277,000 and $43,000, respectively.
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
Professional Bancorp reported total investment securities of $62.1 million
at June 30, 2000. This represented a decrease of $1.6 million, or 2.5%, from
$63.7 million at December 31, 1999.
Securities available-for-sale increased $454,000, or 1.0%, to $45.5 million
at June 30, 2000. The unrealized loss on securities held-for-sale was
$2.5 million as of June 30, 2000, representing a $143,000 reduction of the
accumulated unrealized loss. The following table sets forth the amortized cost
and fair value of securities available-for-sale as of June 30, 2000 and
December 31, 1999.
58
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
(IN THOUSANDS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government agency and Mortgage-backed
securities......................................... $37,744 $6 $1,867 $35,883
Small Business Administration securities............. 617 1 5 613
Municipal securities................................. 2,550 -- 161 2,389
Collateralized mortgage obligations.................. 7,147 -- 492 6,655
------- -- ------ -------
Total............................................ $48,058 $7 $2,525 $45,540
======= == ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
(IN THOUSANDS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government agency and Mortgage-backed
securities......................................... $37,393 $ -- $1,924 $35,469
Small Business Administration securities............. 647 -- 16 631
Municipal securities................................. 2,551 -- 173 2,378
Collateralized mortgage obligations.................. 7,157 -- 549 6,608
------- --------- ------ -------
Total............................................ $47,748 $ -- $2,662 $45,086
======= ========= ====== =======
</TABLE>
During the three months ended June 30, 2000, no securities
available-for-sale were sold and $2.1 million of securities were purchased and
classified as available for sale.
Securities held-to-maturity decreased $2.0 million, or 11.0%, to
$16.6 million at June 30, 2000, from $18.6 million at December 31, 1999. The
amortized cost and fair value of securities held-to-maturity as of June 30,
2000, and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
(IN THOUSANDS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Federal Reserve Stock................................ $ 405 $-- $ -- $ 405
U.S. Government securities........................... 3,026 3 29 3,000
U.S. Government agency securities.................... 1,500 -- 27 1,473
U.S. Government agency mortgage-backed securities.... 11,666 11 238 11,439
------- --- ---- -------
Total............................................ $16,597 $14 $294 $16,317
======= === ==== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
(IN THOUSANDS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Federal Reserve Stock................................ $ 439 $ -- $ -- $ 439
U.S. Government securities........................... 3,032 10 25 3,017
U.S. Government agency securities.................... 1,750 -- 31 1,719
U.S. Government agency mortgage-backed securities.... 13,418 -- 253 13,165
------- ---- ---- -------
Total............................................ $18,639 $ 10 $309 $18,340
======= ==== ==== =======
</TABLE>
59
<PAGE>
LOANS
The following table sets forth the amount of loans outstanding by category
and the percentage of each category to the total loan portfolio.
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- ---------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
(DOLLARS IN THOUSANDS) -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Commercial........................................... $ 94,378 73.28% $124,403 76.52%
Real estate secured.................................. 27,727 21.53 27,538 16.94
-------- ------ -------- ------
122,105 94.81 151,941 93.46
Equity lines of credit............................... 3,238 2.51 4,330 2.66
Other lines of credit................................ 1,628 1.26 4,689 2.88
Installment.......................................... 1,817 1.42 1,608 1.00
-------- ------ -------- ------
Gross loans.......................................... 128,788 100.00% 162,568 100.00%
Less:
Allowance for loan losses.......................... (7,276) (5,873)
Deferred loan fees, net............................ (161) (211)
-------- --------
Net loans........................................ $121,351 $156,484
======== ========
</TABLE>
Gross loans outstanding decreased by $33.8 million, or 20.8%, to
$128.8 million at June 30, 2000 compared to $162.6 at December 31, 1999. A
substantial portion of the decrease was due to the pay off of a single
$12.8 million loan. The table above indicates that the loan portfolio mix at
June 30, 2000 was relatively the same as December 31, 1999.
Commercial loans consist primarily of short to medium term financing for
small to medium sized health care-related companies and professionals located in
Southern California. The commercial loans are primarily concentrated in the same
sectors of the medical community from which Professional Bancorp's deposit base
is drawn and consists of medical practitioners, small group practices, large
single-specialty groups, multi-specialty medical groups and other outpatient
health care service companies. Approximately 74% and 77% of gross loans at
June 30, 2000 and December 31, 1999, respectively, were commercial loans which
were unsecured or collateralized by various business and personal property
assets, including equipment and accounts receivable, contracts, and the proceeds
thereof, including capitation payments. As a matter of policy, Professional
Bancorp's commercial loan borrowers are required to submit financial statements
and other financial data (for example, accounts receivable agings and enrollment
summaries) on a periodic basis, in conformity with loan policies and procedures
and regulatory guidelines, to loan officers for their review in monitoring the
financial position and cash flow trends of borrowers. Under this policy,
management generally gives a higher level of attention to borrowers failing to
submit the required financial information. Senior lending officers review
delinquency reports, overdrafts, borrowers' payment histories and periodic
financial data to monitor creditworthiness and identify potential problem loans.
In accordance with management's credit administration and regulatory policy,
loans are placed on nonaccrual status when the collection of principal or
interest is questionable. Generally, this means that loans are placed on
nonaccrual status when interest is 90 days or more past due, unless the loan is
well secured and in the process of collection or in the process of renewal.
Nonperforming loans and nonperforming assets do not include accruing loans
90 days or more past due where loan quality is not impaired, but rather the
renewal is in process pending receipt of the borrower's updated financial
information.
Credit administrative policies discourage the use of "short-term" extensions
while awaiting receipt of updated financial packages from borrowers. The policy
is aimed at facilitating timely credit renewals. However, as a result of this
policy, aggregate "past due" volumes will not necessarily be correlative to
absolute asset quality measurements.
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<PAGE>
LARGE LOANS
As of June 30, 2000, First Professional had 32 client relationships where
the total amount of loans outstanding and available credit from loan commitments
exceeds $2.0 million for any single borrower/ relationship, for a total of
$61.3 million in loans outstanding, representing 48.6% of gross loans and
$82.5 million of credit available to these relationships. Also, as of June 30,
2000, five relationships with loans outstanding totaling $12.0 million had
$11.1 million in loans outstanding which were on non-accrual status.
As of December 31, 1999, First Professional had $83.9 million in loans
outstanding, representing 51.6% of gross loans, and $21.5 million in credit
available to 35 relationships each of which exceeded $2.0 million. At the end of
1999, two relationships totaling $5.2 million in loans outstanding had
$3.3 million which were on non-accrual status.
In addition to the 35 client relationships discussed above, there were four
other large loan relationships which totaled $14.1 million. Approximately
$10.3 million of these loans were charged-off during 1999 leaving a loan balance
of $3.8 million being carried as non-accrual loans at June 30, 2000.
As of December 31, 1999, there were four client relationships, with loans
outstanding totaling $14.9 million, that had loan amounts outstanding and
available loan commitments that were in excess of First Professional's current
legal lending limit of $3.3 million and are therefore considered non-conforming
as defined in 12USC84. Regulations prohibit the further extension of credit of
any kind to these borrowers. The aggregate loans of the borrower are
"grandfathered" until any of the borrower's credit facilities mature at which
time First Professional must make every effort to bring the loans into
conformity with the reduced lending limits unless to do so would be inconsistent
with safe and sound banking practices.
Management is focusing its efforts on reducing the concentration and risk of
large loans. These efforts may include selling the entire loan, selling a
portion of the loans to other lending institutions and restructuring the loans
when appropriate. Additionally, First Professional has adopted a house limit,
which is lower than the legal lending limit, for evaluating any future lending
commitments.
DELINQUENCIES
Loans 30-89 days past due decreased $4.1 million, or 74.6%, to $1.4 million
as of June 30, 2000 from $5.5 million at December 31, 1999. Approximately
$3.7 million of this decrease migrated to nonaccrual status and $400,000 was
paid in full.
Loans over 90 days past due and still accruing decreased $2.7 million, or
93.1%, to $206,000 as of June 30, 2000 from $2.9 million at December 31, 1999.
The net decrease was comprised of $2.2 million of loans that were put on
nonaccrual status and five loans, totaling $200,000, that became 90 days past
due in the year 2000. Additionally, one loan in the amount of $655,000 was paid
in full.
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The following table sets forth information about nonperforming assets (which
include nonaccrual loans, other real estate owned and other repossessed assets),
accruing loans 90 days or more past due, and certain ratios.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(DOLLARS IN THOUSANDS) -------- ------------
<S> <C> <C>
Nonperforming loans......................................... $15,281 $8,412
Other repossessed assets.................................... 146 --
------- ------
Total nonperforming assets.............................. 15,427 8,412
------- ------
Accruing loans 90 days or more past due..................... $ 206 $2,891
======= ======
Allowance for loan losses as a percent of nonperforming
loans..................................................... 47.62% 69.82%
Nonperforming loans to gross loans(1)....................... 11.87 5.17
Nonperforming assets(1)
to gross loans............................................ 11.98 5.17
to gross loans, OREO and repossessed assets............... 11.96 5.17
to total assets........................................... 5.42 3.08
</TABLE>
------------------------
(1) Nonperforming loans and nonperforming assets do not include accruing loans
90 days or more past due.
Nonperforming assets increased to $15.4 million at June 30, 2000 from
$8.4 million at December 31, 1999. This increase was primarily due to four
borrowers with loans totaling $7.4 million being placed on nonaccrual status
during the first six months ended June 30, 2000.
The $206,000 of loans over 90 days or more past due and still accruing as of
June 30, 2000 were all in the process of being collected, renewed, paid off or
the credit quality was not impaired. Of the $2.9 million in loans over 90 days
or more past due and still accruing as of December 31, 1999, loans totaling
$2.2 million were placed on nonaccrual status and one loan in the amount of
$655,000 was cured during the six months ended June 30, 2000.
ALLOWANCE FOR LOAN LOSSES
Management's determination of the allowance for loan losses requires the use
of estimates and assumptions related to the actual and inherent risks in the
loan portfolio. Actual results may, however, differ significantly from such
estimates. In connection with the determination of the allowance for loan losses
where real estate secures the loan, management generally obtains independent
appraisals for all properties. Management believes its current appraisal policy
conforms to regulatory guidelines.
An evaluation of the overall quality of the portfolio is performed at least
quarterly to determine the level of the allowance for loan losses. This
evaluation takes into consideration the classification of loans and the
application of loss estimates attributable to these classifications.
Professional Bancorp classifies loans as pass, watch, special mention,
substandard, doubtful, or loss based on classification criteria believed by
management to be consistent with the criteria applied by regulatory agencies and
consistent with sound banking practices.
These classifications and loss estimates take into consideration all sources
of repayment, underlying collateral, the value of the collateral, current
economic conditions, trends and uncertainties and the historical accuracy of
specific reserves attached to loans with serious perceived weakness.
Additionally, Professional Bancorp utilizes "migration analysis" as another
means to assist management in estimating the level of the allowance for loan
losses. Migration analysis is a statistical method that examines historic
charge-off and classification trends prior to a charge-off to estimate potential
losses
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<PAGE>
inherent in the loan portfolio. In addition, Professional Bancorp utilizes a
comprehensive program that considers numerous variables, of which migration is
one, to determine the adequacy of the allowance for loan losses for reserves
nonspecific to certain credits.
This program is consistent with the methodologies in Banking Circular 201.
Amongst others, consideration is given to historical and current trends in past
due loans, charged-off loans, nonaccruals, the nature and mix of the loan
portfolio, and local, regional, industry, and national economic trends in
determining loan loss adequacy. Finally, credit administration, corresponding
loan polices and procedures, and timely problem loan identification are integral
to the sound determination of the allowance for loan losses. Based on
information available at June 30, 2000, management believes a $7.3 million
allowance for loan losses, which constitutes 5.65% of gross loans, was adequate
as an allowance against probable and estimable losses.
While Professional Bancorp's policy is to charge-off in the current period
those loans for which a loss is considered probable, there also exists the risk
of future losses which cannot be precisely quantified or attributed to
particular loans. As this risk continually changes in response to factors beyond
the control of Professional Bancorp, such as the state of the economy,
management's judgment as to the adequacy of the allowance for loan losses in
future periods, while approximate, is in part based on a reasonable methodology.
In addition, various regulatory agencies, as an integral part of their
examination process, review Professional Bancorp's allowance for loan losses.
Such agencies may require First Professional to record additions or deletions to
the allowance based on their judgments of information available to them at the
time of their examination.
The following table provides a summary of Professional Bancorp's allowance
for loan losses and charge-off and recovery activity during the six months ended
June 30, 2000, and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
2000 1999
(DOLLARS IN THOUSANDS) -------- --------
<S> <C> <C>
Balance at beginning of period.............................. $ 5,873 $ 2,200
Provision for loan losses................................... 1,743 1,172
-------- --------
7,616 3,372
-------- --------
Loans charged-off........................................... 752 1,636
Recoveries on loans previously charged-off.................. (412) (77)
-------- --------
Net charge-off (recoveries)............................... 340 1,559
-------- --------
Balance at end of period.................................... $ 7,276 $ 1,813
======== ========
Gross loans outstanding at end of period.................... $128,788 $143,962
Average gross loans outstanding during period............... 150,584 133,369
Net charge-off (recoveries) to average gross loans
outstanding............................................... 0.23% 1.17%
Allowance for loan losses:
to gross loans............................................ 5.65% 1.26%
to nonperforming loans(1)................................. 47.61% 78.79%
to nonperforming assets(1)................................ 47.16% 70.46%
</TABLE>
------------------------
(1) Nonperforming loans and nonperforming assets do not include accruing loans
90 days or more past due.
The allowance for losses on loans was $7.3 million at June 30, 2000 compared
to $1.8 million at June 30, 1999. The increase was primarily due to the increase
in nonperforming loans and an increase in
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<PAGE>
the provision for loan losses relating to identified weaknesses in a small
number of loans, of substantial dollar amounts, which may take an extended
period of time to resolve.
Loans charged-off for the six months ended June 30, 2000 decreased to
$752,000, compared to $1.6 million for the same period in 1999. Loans
charged-off during the first half of 1999 included a single loan of
$1.5 million.
Recoveries for the six months ended June 30, 2000 increased to $412,000 from
$77,000 for the same period in 1999. The increase was primarily due to the
recovery on three loans totaling $303,000.
Management considers a loan to be impaired when, based upon available
information and current events, it believes that it is probable Professional
Bancorp will be unable to collect all amounts due on a timely basis in
accordance with the contractual terms of the loan agreement. Impairment of a
loan is measured by the present value of expected future cash flows discounted
at the loan's effective interest rate, the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. Impairment
is recognized by the establishment of a valuation allowance equal to the excess
of Professional Bancorp's recorded investment in the loan over its measured
value.
Professional Bancorp had $15.5 million in impaired loans as of June 30,
2000. The carrying value of impaired loans for which there is a related
allowance for loan losses was $10.4 million, with the amount of specific
allowance for loan losses allocated to these loans of $2.3 million. There was
$5.1 million in impaired loans for which there were general allowances allocated
consistent with Professional Bancorp's allowance for loan loss methodology. The
average recorded investment in impaired loans during the second quarter of 2000
was approximately $13.2 million and there was no income recorded utilizing
either the cash basis or accrual basis method of accounting. Impaired loans at
June 30, 2000 included $15.3 million of nonaccrual loans.
Professional Bancorp had approximately $8.7 million in impaired loans as of
December 31, 1999. The carrying value of impaired loans for which there is a
related allowance for loan losses was $414,000, with the amount of specific
allowance for loan losses allocated to these loans of $134,000. There were
$8.3 million in impaired loans for which there was no related specific allowance
for loan losses. The average recorded investment in impaired loans during 1999
was $4.4 million and there was no income recorded utilizing either the cash
basis or accrual basis method of accounting. Impaired loans at December 31,
1999, included $8.4 million of nonaccrual loans.
DEPOSITS
Total deposits at June 30, 2000 were $250.7 million, a decrease of
$5.3 million or 2.1% from $256.0 million at December 31, 1999. Professional
Bancorp attracts deposits primarily from individuals and businesses related to
the health care services industry, as well as other professionals and
professional services firms. Professional Bancorp has no brokered deposits and
Professional Bancorp's practice is to not purchase brokered deposits.
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<PAGE>
The following table sets forth the amount of deposits by category and the
percentage of each category to total deposits as of June 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- ---------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
(DOLLARS IN THOUSANDS) -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing.......................... $116,322 46.40% $109,561 42.79%
Demand, interest-bearing............................. 16,644 6.64 16,033 6.26
Savings deposits..................................... 14,869 5.93 12,606 4.92
Money market deposits................................ 74,680 29.79 72,177 28.19
Time deposits under $100,000......................... 7,082 2.82 7,222 2.82
Time deposits of $100,000 and over................... 21,106 8.42 38,429 15.02
-------- ------ -------- ------
$250,703 100.00% $256,028 100.00%
======== ====== ======== ======
</TABLE>
At December 31, 1999, there was a $12.8 million time deposit which was
collateral for a loan of the same amount. The loan was paid off with this
deposit in April, 2000.
CAPITAL
The OCC, First Professional's primary regulator, has established minimum
leverage ratio guidelines for national banks. These guidelines provide for a
minimum Tier 1 capital leverage ratio (Tier 1 capital to adjusted average total
assets) of 3.0% for national banks that meet certain specified criteria,
including having the highest regulatory rating. All other national banks will
generally be required to maintain a minimum Tier 1 capital leverage ratio of
3.0% plus an additional cushion of 100 to 200 basis points.
The Federal Reserve Bank, as Bancorp's primary regulator, has similarly
established minimum leverage ratio guidelines for bank holding companies. These
guidelines also provide for a minimum Tier 1 leverage ratio of 3.0% for bank
holding companies that meet certain specified criteria, including having the
highest regulatory rating. All other bank holding companies will generally be
required to maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an
additional cushion of 100 to 200 basis points.
Federal banking agencies risk-based capital standards were implemented on
December 31, 1992. Since December 31, 1992, banking organizations have been
expected to meet a minimum ratio for qualifying total capital to risk-weighted
assets of 8.0%, 4.0% of which must be Tier 1 capital. A banking organization's
risk-based capital ratios are obtained by dividing its qualifying capital by its
total risk-adjusted assets and risk-weighted off-balance sheet items.
The Federal Deposit Insurance Act of 1991 contains "prompt corrective
action" provisions pursuant to which insured depository institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well-capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
The following table presents the capital ratios for Professional Bancorp and
First Professional, compared with the standards for "well-capitalized"
depository institutions (which standards do not apply to bank holding companies)
and the minimum required capital ratios to be deemed "adequately capitalized"
under applicable federal regulations, as of June 30, 2000.
65
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMPANY
Leverage (1)................................. $14,937 5.52% $10,827 4.00% $13,534 5.00%
Tier 1 Risk-Based............................ 14,937 9.29% 6,433 4.00% 9,650 6.00%
Total Risk-Based............................. 17,691 11.00% 12,867 8.00% 16,084 10.00%
BANK
Leverage..................................... 13,828 5.14% 10,756 4.00% 13,445 5.00%
Tier 1 Risk-Based............................ 13,828 8.66% 6,387 4.00% 9,581 6.00%
Total Risk-Based............................. 15,889 9.95% 12,775 8.00% 15,969 10.00%
</TABLE>
------------------------
(1) The minimum required by the Federal Reserve is 3%; for all but the most
highly rated bank holding companies, the Federal Reserve expects a leverage
ratio of 3% plus 100 to 200 basis points.
On May 29, 1998, Professional Bancorp gave notice of its call for partial
redemption of $2,625,000 principal amount of Professional Bancorp, Inc., 8.50%
Convertible Subordinated Reset Notes due March 1, 2004. As a result of this
call, approximately $2,552,000 of the notes converted to 200,955 shares of
common stock and $73,000 in notes were redeemed by the June 30, 1998 redemption
date. For the six months ended June 30, 2000, no notes were converted into
shares of common stock. The principal balance of notes outstanding at June 30,
2000 were $679,000.
REGULATORY AGREEMENTS
As First Professional's principal regulator, the OCC examines and evaluates
the financial condition, operations policies and procedures of nationally
chartered banks on a regular basis as part of its legally prescribed oversight
responsibilities. The OCC conducted an examination of First Professional in 1999
and determined that First Professional required special supervisory attention.
To implement this corrective action, the OCC and First Professional entered into
a formal agreement on March 22, 2000.
Pursuant to the formal agreement, First Professional is required to:
maintain certain regulatory capital levels; appoint a full time president and a
full time senior lending officer; establish a loan workout department; implement
an overdraft policy; improve the management of the loan portfolio; establish an
independent loan review system; immediately take action to protect First
Professional's interest in criticized assets; establish an organizational
structure with clear lines of authority for the CEO and President; develop a
conflict of interest policy which includes relationships with officers,
directors and consultants; develop a three year strategic plan; develop a profit
plan to improve and sustain earnings and a capital plan to meet and maintain a
well capitalized regulatory requirements. The agreement also establishes a
schedule for compliance and requires additional regulatory reporting by First
Professional.
In early November, the board hired Gene Gaines as Chief Executive Officer of
First Professional. Effective February 1, 2000, Mr. Gaines was also appointed as
the full time President and Chairman of the Board of First Professional and the
Chairman of the Board and the Chief Executive Officer of Professional Bancorp.
Following that hiring, current management and the boards of Professional Bancorp
and First Professional have implemented significant changes to the policies and
organization of First Professional and Professional Bancorp. In early
December 1999, First Professional established a loan workout department and
hired a senior vice president to review, develop and implement loan workout
policies. In April, 2000, First Professional hired a full time Senior Lending
Officer.
On February 15, 2000, the credit administration department revised and
implemented certain policies regarding extensions of credit. On March 1, 2000,
the board revised First Professional's organizational structure to clarify the
roles and responsibilities of First Professional's CEO and its President. On
March 6,
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<PAGE>
2000, the board authorized the 30-day notification for termination of the
consulting agreement with Network Health Financial Services, Inc.
In addition, First Professional prepared additional organizational and
policy revisions, and revised and expanded its loan portfolio management
program. First Professional also developed and implemented a three-year
strategic plan as well as profit and capital plans. As of the date of this proxy
statement/ prospectus, First Professional believes it has substantially complied
with the requirements of the Formal Agreement.
The formal agreement requires First Professional to achieve by
September 30, 2000 and to maintain (i) a tier 1 capital leverage ratio equal to
at least 5%, (ii) Tier 1 capital to risk weighted assets ratio equal to at least
6%, and (iii) a total capital to risk weighted assets of at least 10%.
The following table sets forth the capital ratio for First Professional as
of June 30, 2000 and the required ratios by September 30, 2000:
<TABLE>
<CAPTION>
REQUIRED BY THE
FORMAL EXCESS
ACTUAL AGREEMENT (DEFICIENCY)
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage............................... $13,828 5.14% $13,445 5.00% $ 383 0.14%
Tier 1 Risk Based............................. 13,828 8.92 9,581 6.00 4,247 2.66
Total Risk Based.............................. 15,889 9.95 15,969 10.00 (80) -0.05
</TABLE>
As of June 30, 2000, First Professional's Tier 1 leverage and Tier 1 risk
based capital ratios met the "well-capitalized" criteria and exceed the levels
imposed by the formal agreement. First Professional's total risk based capital
ratio has a deficiency of five basis points. Capital requirements of the federal
banking regulators, however, could limit Professional Bancorp's future growth if
Professional Bancorp were to rely solely on the retention of earnings to
generate additional capital or rapid growth.
As Professional Bancorp's principal regulator, the Federal Reserve Bank of
San Francisco examines and evaluates the financial condition, operations and
policies and procedures of bank holding companies on a regular basis as part of
its legally prescribed oversight responsibilities. The Federal Reserve conducted
an examination of Professional Bancorp in 2000 and determined that Professional
Bancorp required special supervisory attention. To implement this corrective
action, the Federal Reserve and Professional Bancorp entered into a Memorandum
of Understanding on April 26, 2000.
Pursuant to the Memorandum of Understanding, Professional Bancorp is
required to: obtain prior approval before declaring or paying any dividends,
increasing any borrowings or incurring any debt, repurchasing any of its stock,
engaging in new lending activities, engaging in any new line of business,
appointing a new director, or hiring or promoting any new senior executive
officer; submit an acceptable capital plan to improve and maintain required
capital levels and submit an acceptable plan to enhance the board's supervision
of operations and management of the consolidated organization, including the
policies and procedures related to credit administration. The agreement also
establishes a schedule for compliance and requires additional regulatory
reporting by Professional Bancorp.
LIQUIDITY
First Professional's primary sources of liquidity are federal funds sold to
other banks and the investment securities portfolio. For the three months ended
June 30, 2000, federal funds sold averaged $43.6 million, compared to
$1.4 million for the same period in 1999. In addition, securities in the
available-for-sale portfolio can be sold in response to liquidity needs or used
as collateral under reverse repurchase agreements. Securities held-to-maturity
are available for liquidity needs primarily as collateral for reverse repurchase
agreements. The fair value of securities available-for-sale and securities
held-to-maturity at June 30, 2000, were $45.5 million and $16.3 million,
respectively.
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<PAGE>
First Professional sells securities under agreements to repurchase.
Securities sold under repurchase agreements are recorded as short-term
obligations. During the six months ended June 30, 2000, there were no securities
sold under agreements to repurchase.
Under federal banking law, dividends declared by First Professional in any
calendar year may not, without the approval of the OCC, exceed its net earnings,
as defined, for that year combined with its retained net earnings for the
proceeding two years. Professional Bancorp's primary source of liquidity is
dividends from First Professional. Dividends by First Professional to
Professional Bancorp are subject to regulatory restrictions. At June 30, 2000,
Professional Bancorp had cash of $886,000. Under applicable law, First
Professional cannot currently, and for the next several years will probably not
be able to, pay dividends to Professional Bancorp with out the prior approval of
the OCC. No assurance can be given that the OCC will permit the payment of
dividends and the refusal to do so may require Professional Bancorp to look to
other sources of liquidity such as borrowings or the issuance of various types
of securities.
II._ YEAR ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
Professional Bancorp recorded a consolidated net loss of $8.4 million, or
$4.15 loss per share, for the year ended December 31, 1999, compared with net
earnings of $1.4 million, or $0.74 diluted earnings per share for 1998. For the
year ended December 31, 1997, Professional Bancorp recorded net earnings of
$1.6 million or $0.97 diluted earnings per share. Return on average assets for
the periods ended December 31, 1999, 1998 and 1997 were (3.13%), 0.57% and
0.61%, respectively. Return on average equity for the period ended December 31,
1999 was (33.63%) compared to 6.41% and 9.48% for the same respective periods in
1998 and 1997.
Total assets increased $13.8 million, or 5.3%, to $273.5 million at
December 31, 1999 from $259.7 million at December 31, 1998. Total cash and cash
equivalents increased $11.4 million, or 35.6% to $43.4 million from
$32.0 million at December 31, 1998.
Total investment securities decreased $41.3 million, or 39.3% to
$63.7 million at December 31, 1999 compared to $105.0 million at December 31,
1998. The decrease in securities was used to fund the growth in the loan
portfolio.
Gross loans increased $44.7 million, or 37.9%, to $162.6 million at
December 31, 1999 compared to $117.9 million at December 31, 1998. Commercial
loans increased $30.4 million, or 32.3% to $124.4 million from $94.0 million at
December 31, 1998. Real estate secured loans increased $15.8 million, or 135.0%,
to $27.5 million at December 31, 1999 compared to $11.7 million at December 31,
1998. The increase in loans was funded primarily through the sale of investment
securities.
At December 31, 1999, nonperforming loans totaled $8.4 million, or 5.17%, of
total loans compared with $1.4 million or 1.15% of total loans at December 31,
1998. The allowance for loan losses as a percent of nonperforming loans was
69.8% at December 31, 1999 compared to 161.9% and 205.5% at December 31, 1998
and 1997, respectively.
The net loss in 1999 was primarily due to increased provisions for loan
losses, increased noninterest expense and was partially offset by an increase in
net interest income. Professional Bancorp recorded provisions for loan losses of
$14.0 million in 1999 compared to $406,000 and $180,000 in 1998 and 1997,
respectively. The provisions in 1999 were due primarily to $10.5 million of
charged-off loans, increases in nonperforming assets and to identified
weaknesses in a small number of loans of substantial dollar amounts, which may
take an extended period of time to resolve. The growth in the loan portfolio,
changes in the healthcare industry and the increased complexity of the credits
extended to the industry also made increases in the loan loss provisions
prudent.
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<PAGE>
Total deposits increased $25.4 million, or 11.0%, to $256.0 million at
December 31, 1999 from $230.6 million at December 31, 1998.
Contributing to the net loss for 1999 was an increase in other operating
expense of $2.1 million, or 17.0%, to $14.3 million compared to $12.2 million in
1998. The increase was due primarily to higher staffing levels, increased legal
fees associated with the cancelled merger and loan workout activities.
NET INTEREST INCOME
Professional Bancorp's earnings depend primarily on net interest income,
which is the difference between the interest and fees earned on loans and
investments less the interest paid on deposits, borrowings and convertible
notes. Professional Bancorp's ability to generate profitable levels of net
interest income is largely dependent on its ability to maintain sound asset
quality and appropriate levels of capital and liquidity. Professional Bancorp's
inability to maintain strong asset quality, capital and liquidity may adversely
affect the ability to accommodate desirable borrowing customers and the ability
to attract a comparatively stable, lower cost of deposits.
Net interest income, when expressed as a percentage of average total
interest earning assets, is referred to as the net interest margin. Professional
Bancorp's net interest income is affected by the change in the amount and mix of
interest-earning assets and interest-bearing liabilities. It is also affected by
changes in yields earned on interest-earning assets and rates paid on deposits
and other borrowed funds. At December 31, 1999, approximately 74% of First
Professional's loan portfolio adjusts with the prime rate.
1999 COMPARED TO 1998. Net interest income increased $1.6 million, or
11.7%, for 1999 compared to 1998. This increase was primarily due to the
increase in average interest earning assets of $16.3 million, or 7.3%, to
$237.4 million for 1999 from $221.1 million in 1998. The average yield on
interest earning assets increased 5 basis points to 7.71% for 1999 from 7.66%
for 1998. Average interest bearing liabilities increased $4.3 million, or 3.2%,
to $137.0 million from $132.7 million for 1998. The average rate paid on
interest bearing liabilities decreased 25 basis points to 2.49% for 1999 from
2.74% for 1998. Average noninterest demand deposits for 1999 increased
$9.9 million, or 10.6%, to $103.2 million from $93.3 million for 1998.
Average federal funds sold decreased $11.7 million, or 35.2%, to
$21.5 million for 1999 from $33.2 million for 1998. The average yield on federal
funds decreased 19 basis points to 5.16% for 1999 from 5.35% for 1998.
Average total investment securities decreased $9.3 million, or 11.1%, to
$74.3 million for 1999 from $83.6 million during 1998. This was due primarily to
the sale of securities during the first quarter of 1999. The average yield on
securities increased slightly to 5.88% for 1999 from 5.85% for 1998.
Average loans increased $37.5 million, or 36.2%, to $141.2 million for 1999
from $103.7 million for 1998. While the volume of loans increased substantially,
the benefit was partially offset by a decline in the yield on loans of 86 basis
points to 9.04% for 1999 from 9.90% for 1998. The increase in loans was
primarily in commercial and real estate secured loans.
Average convertible notes decreased $2.3 million, or 72.7%, to $846,000 for
1999 from $3.1 million for 1998. There was a large decrease in the rate paid to
5.42% for 1999 from 8.29% for 1998. The conversion of notes into stock reduced
interest expense by $207,000 in 1999.
Average securities sold under agreements to repurchase increased to
$2.2 million for 1999 from $54,000 for 1998. These borrowings were used
primarily in the first quarter of 1999 to temporarily fund asset growth.
1998 COMPARED TO 1997. Average interest earning assets increased
$7.9 million, or 3.7%, to $221.1 million from $213.3 million for 1997. While the
volume of interest earning assets increased, the
69
<PAGE>
yield on those assets decreased to 7.66% in 1998 from 7.84% for 1997. The net of
the volume increase and the yield decrease resulted in a decrease in net
interest income of $435,000, or 3.4%, for 1998 compared to 1997. Average
interest bearing liabilities decreased $10.2 million, or 7.1%, to
$132.7 million for 1998 compared to $142.9 million for 1997. The average rate
paid on interest bearing liabilities increased 6 basis points to 2.74% for 1998
from 2.68% for 1997. Average noninterest demand deposits for 1998 increased
$11.9 million, or 14.7%, to $93.3 million from $81.4 million for 1997.
Average federal funds sold increased $11.7 million, or 54.4%, to
$33.2 million for 1998 from $21.5 million for 1997. The yield on average funds
decreased 4 basis points to 5.35% for 1998 from 5.39% for 1997.
Average total investment securities decreased $10.5 million, or 11.1%, to
$83.6 million for 1998 from $94.1 million during 1997. First Professional used
1998 to restructure the securities portfolio to meet its interest rate risk
goals and continued liquidity needs. First Professional purchased $65.1 million
of investment securities, sold $15.3 million and had $32.0 million of maturities
and principal payments during 1998. The average yield on securities decreased to
5.85% for 1998 from 6.20% for 1997.
Average loans increased $6.5 million, or 6.7%, to $103.7 million for 1998
from $97.2 million for 1997. While the volume of loans increased, this growth
was partially offset by a decrease in the yield on loans of 7 basis points to
9.90% for 1998 from 9.97% for 1997. The increase in the volume of loans was
primarily in commercial and other lines of credit.
Average convertible notes decreased $2.5 million, or 45.2%, to $3.1 million
for 1998 from $5.6 million for 1997. The rate paid on convertible notes
decreased to 8.29% for 1998 from 8.49% for 1997. The conversion of notes into
stock reduced interest expense by $220,000 in 1998. Average securities sold
under agreements to repurchase decreased to $54,000 for 1998 from $274,000 for
1997.
70
<PAGE>
ANALYSIS OF NET INTEREST INCOME
The following table presents the distribution of average assets, liabilities
and shareholders' equity as well as the total dollar amount of interest income
from average interest-earning assets and resultant yields, and the dollar
amounts of interest expense and average interest-bearing liabilities, expressed
both in dollars and rates for the three years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- -------------------------------- ---------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(2) RATE INTEREST BALANCE(2) RATE INTEREST BALANCE(2) RATE
(DOLLARS IN THOUSANDS) ---------- -------- -------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities................... $ 74,349 5.88% $ 4,375 $ 83,600 5.85% $ 4,890 $ 94,084 6.20%
Loans(1)..................... 141,153 9.04 12,762 103,718 9.90 10,265 97,197 9.97
Federal funds sold........... 21,493 5.16 1,109 33,161 5.35 1,773 21,510 5.39
Interest-earning deposits --
banks...................... 359 13.60 49 634 3.15 20 463 6.26
-------- -------- -------- ------- --------
Total interest-earning
assets................. 237,354 7.71 18,295 221,113 7.66 16,948 213,254 7.84
-------- -------- -------- ------- --------
Deferred loan fees............. (218) (107) (170)
Allowance for loan losses...... (3,020) (1,858) (2,157)
Nonearning assets:
Cash and due from banks...... 24,647 23,390 22,264
Premises and equipment....... 1,348 1,531 1,658
Accrued interest
receivable................. 2,187 1,188 1,152
Other assets................. 5,140 4,859 5,951
-------- -------- --------
Total assets............. $267,438 $250,116 $241,952
======== ======== ========
Liabilities and shareholders'
equity
Interest-bearing liabilities:
Interest-bearing deposits.... $ 14,073 0.72% $ 101 $ 14,325 0.94% $ 134 $ 12,887 0.84%
Savings and money market
deposits................... 86,969 2.02 1,758 84,273 2.14 1,800 94,755 1.92
Time deposits................ 32,952 4.24 1,399 30,993 4.65 1,440 29,377 4.79
Convertible notes............ 846 5.42 46 3,051 8.29 253 5,572 8.49
Repurchase agreements........ 2,166 5.02 109 54 5.56 3 274 5.84
-------- -------- -------- ------- --------
Total interest-bearing
liabilities............ 137,006 2.49 3,413 132,696 2.74 3,630 142,865 2.68
-------- -------- -------- ------- --------
Noninterest-bearing
liabilities:
Noninterest-bearing demand
deposits................... 103,214 93,306 81,379
Other liabilities............ 2,358 1,779 2,113
Shareholders' equity......... 24,860 22,335 15,595
-------- -------- --------
Total liabilities and
shareholders' equity... $267,438 $250,116 $241,952
======== ======== ========
Interest income as a percentage
of average earning assets.... 7.71% 7.66% 7.84%
Interest expense as a
percentage of average
interest-bearing
liabilities.................. 2.49 2.74 2.68
Net interest margin and income
(3).......................... 6.27% $ 14,882 6.02% $13,318 6.04%
======== =======
<CAPTION>
1997
--------
INTEREST
(DOLLARS IN THOUSANDS) --------
<S> <C>
Assets
Interest-earning assets:
Securities................... $ 5,834
Loans(1)..................... 9,686
Federal funds sold........... 1,160
Interest-earning deposits --
banks...................... 29
-------
Total interest-earning
assets................. 16,709
-------
Deferred loan fees.............
Allowance for loan losses......
Nonearning assets:
Cash and due from banks......
Premises and equipment.......
Accrued interest
receivable.................
Other assets.................
Total assets.............
Liabilities and shareholders'
equity
Interest-bearing liabilities:
Interest-bearing deposits.... $ 108
Savings and money market
deposits................... 1,821
Time deposits................ 1,408
Convertible notes............ 473
Repurchase agreements........ 16
-------
Total interest-bearing
liabilities............ 3,826
-------
Noninterest-bearing
liabilities:
Noninterest-bearing demand
deposits...................
Other liabilities............
Shareholders' equity.........
Total liabilities and
shareholders' equity...
Interest income as a percentage
of average earning assets....
Interest expense as a
percentage of average
interest-bearing
liabilities..................
Net interest margin and income
(3).......................... $12,883
=======
</TABLE>
------------------------------
(1) Nonaccrual loans are included in average balance calculations; however,
interest on such loans has been excluded in computing the average yields for
the periods.
(2) Average balances are primarily computed on daily balances during the period.
When such balances are not available, averages are computed on a monthly
basis.
(3) The net interest margin for a period is net interest income divided by
average interest-earning assets.
Professional Bancorp's net interest margin and income remains high due to
the continued significance of noninterest- bearing demand deposits relative to
total funding sources. Average noninterest-bearing deposits for 1999 was
$103.2 million, or 43.5% of total average deposits, compared to $93.3 million,
or 41.9% of total average deposits for 1998. While these deposits are not
interest bearing, they are not cost free. Courier service expenses are incurred
by First Professional and are classified in other operating expense. If courier
service were classified as interest expense, the reported net interest income
for 1999, 1998 and 1997 would have been reduced by $676,000, $721,000 and
$735,000, respectively. Similarly, this
71
<PAGE>
would create identical reductions in other noninterest expense. The net interest
margins for the years 1999, 1998 and 1997, would have decreased 28 basis points,
32 basis points and 34 basis points, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Professional Bancorp's net interest income is affected by changes in the
amount and mix of interest-earning assets and interest-bearing liabilities,
referred to as "volume change." It is also affected by changes in yields earned
on interest-earning assets and interest rates paid on interest-bearing deposits
and other borrowed funds, referred to as a "rate change." The following table
sets forth changes in interest income and interest expense for each major
category of interest-earning assets and interest-bearing liabilities, and the
amount of change attributable to volume and rate changes for the years
indicated. The changes due to rate and volume have been allocated to rate and
volume in proportion to the relationship between their absolute dollar amounts.
The effects of tax-equivalent yields have not been presented because they were
deemed to be immaterial.
<TABLE>
<CAPTION>
1999 COMPARED WITH 1998 1998 COMPARED WITH 1997
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
(IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Securities................................. $ (549) $ 26 $ (523) $(626) $(318) $(944)
Loans...................................... 3,705 (1,189) 2,516 646 (67) 579
Federal funds sold......................... (633) (41) (674) 623 (10) 613
Interest-bearing deposits -- banks......... (9) 37 28 9 (18) (9)
------ ------- ------ ----- ----- -----
2,514 (1,167) 1,347 652 (413) 239
Increase (decrease) in interest expense:
Interest-bearing demand deposits........... (2) (30) (32) 13 13 26
Savings and money market deposits.......... 60 (180) (120) (212) 191 (21)
Time deposits.............................. 86 (51) 35 78 (46) 32
Convertible notes.......................... (183) (24) (207) (209) (11) (220)
Repurchase agreements...................... 118 (11) 107 (12) (1) (13)
------ ------- ------ ----- ----- -----
79 (296) (217) (342) 146 (196)
------ ------- ------ ----- ----- -----
Change in net interest income................ $2,435 $ (871) $1,564 $ 994 $(559) $ 435
====== ======= ====== ===== ===== =====
</TABLE>
A changing interest rate environment may have a significant impact on
Professional Bancorp's net interest margin as measured against average
interest-earning assets. Management monitors Professional Bancorp's net interest
margin by utilizing an interest rate simulation model under various interest
rate scenarios. This process quantifies the impact of changes in interest rates
on Professional Bancorp's net interest margin. Interest rate scenarios are
increased and decreased up to 200 basis points in determining the impact on net
interest income. These results provide a basis for repricing loan and deposit
products after giving consideration to such factors as competition, the economic
environment and expected maturities in the loan, investment securities and
deposit portfolios.
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined by management based upon
Professional Bancorp's loan loss experience, the performance of loans in
Professional Bancorp's portfolio, the quality of loans in Professional Bancorp's
portfolio, evaluation of collateral for such loans, the economic conditions
affecting collectibility of loans, the prospects and financial condition of the
respective borrowers or guarantors and such other factors which in management's
judgment deserve recognition in the estimation of probable loan losses. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review Professional Bancorp's allowance for loan losses. Such
agencies may require Professional Bancorp to
72
<PAGE>
recognize additions to the allowance or to take charge-offs (reductions in the
allowance) in anticipation of losses.
Professional Bancorp recorded provisions for loan losses of $14.0 million in
1999 compared to $406,000 and $180,000 in 1998 and 1997, respectively. The
provisions in 1999 were due primarily to $10.5 million of charged-off loans,
increases in non-performing assets and to identified weaknesses in a small
number of loans, of substantial dollar amounts, which may take an extended
period of time to resolve. The growth in the loan portfolio, changes in the
health care industry and the increased complexity of the credits extended to the
industry also made increases in the loan loss provisions prudent. Net
charged-off loans to average outstanding loans increased to 7.31% for 1999,
compared to 0.01% for 1998 and 0.65% for 1997. The allowance for loan losses was
3.61% of total loans as of December 31, 1999, compared to 1.87% and 1.70% of
total loans as of December 31, 1998 and December 31, 1997, respectively. See
"Allowance for Loan Losses" below for further information on net charge-offs.
The OCC can direct First Professional to adjust its financial statements in
accordance with its findings. In 1999, the OCC directed First Professional to
charge-off $1.5 million in a single loan and record an additional provision for
loan losses for the six months ended June 30, 1999. First Professional recorded
an additional $1.0 million provision for loan losses and amended its earnings
and statement of condition and other disclosures to reflect this directive.
OTHER OPERATING INCOME
The following table sets forth information by category of other operating
income for the three years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Net gains (losses) on sale of securities
available-for-sale................................ $ 40 $ (6) $ --
Merchant discount................................... 291 208 273
Mortgage brokering fees............................. 34 163 106
Service charges on deposits......................... 940 918 791
Other income........................................ 547 452 623
------ ------ ------
Total other operating income:................. $1,852 $1,735 $1,793
====== ====== ======
</TABLE>
For 1999, other operating income increased $117,000, or 6.8%, to
$1.9 million from $1.7 million for 1998. This was primarily due to the gain on
sale of securities, increases in fees from merchant discounts, service charges
and fees for other miscellaneous services, partially offset by the decline in
mortgage brokerage fees. In November 1998, First Professional formed
Professional Bancorp Mortgage, a majority owned subsidiary, with a mortgage
broker. Due to a highly competitive marketplace the subsidiary ceased operation
as of January 1, 2000.
For 1998, other operating income decreased $57,000, or 3.2%, to
$1.7 million from $1.8 million in 1997. The net decrease was due to a decline in
both merchant discount fees and other income, partially offset by increases in
mortgage brokering fees and service charges on deposits.
OTHER OPERATING EXPENSES
For the year ended December 31, 1999, other operating expenses were
$14.3 million, compared to $12.2 million and $12.1 million for the years ended
December 31, 1998 and 1997, respectively. The ratios of operating expenses to
average assets for 1999, 1998 and 1997 were 5.35%, 4.89% and 5.01%,
respectively.
73
<PAGE>
The following table summarizes changes in other operating expenses for the
years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
---------------------
1999 1998 1997 1999/1998 1998/1997
(IN THOUSANDS) -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits................. $ 6,545 $ 5,987 $ 5,804 $ 558 $183
Occupancy...................................... 1,498 1,439 1,481 59 (42)
Legal fees, net of legal settlement............ 1,068 395 (106) 673 501
Furniture and equipment........................ 828 811 829 17 (18)
Professional services.......................... 1,463 1,146 1,346 317 (200)
Strategic planning and investor relations...... 60 148 375 (88) (227)
FDIC assessment................................ 56 25 27 31 (2)
Office supplies................................ 287 237 227 50 10
Other assessments.............................. 176 190 225 (14) (35)
Telephone...................................... 298 288 273 10 15
Audit, accounting and examinations............. 340 189 132 151 57
Postage........................................ 145 160 150 (15) 10
Messenger service.............................. 55 34 71 21 (37)
Imprinted checks............................... 10 43 91 (33) (48)
Donations...................................... 129 94 101 35 (7)
Meetings and business development.............. 211 191 163 20 28
Other.......................................... 1,131 850 936 281 (86)
------- ------- ------- ------ ----
Total other operating expenses........... $14,300 $12,227 $12,125 $2,073 $102
======= ======= ======= ====== ====
</TABLE>
Other operating expenses in 1999 increased $2.1 million, or 17.0%, to
$14.3 million from $12.2 million in 1998. The increase was primarily due to
increase in salaries and employee benefits, legal fees and professional
services. The increase in salaries and employee benefits of $558,000, or 9.6%
was primarily due to a higher staffing level, increased insurance. Legal fees
increased $673,000, or 170.4%, to $1.1 million. This increase was primarily due
to increased loan workout activity and to the cancelled merger in 1999. The
increase in professional services was due primarily to the merger activity and
other performance enhancement activities. The increase in audit and accounting
costs were related to the completion of the year end audit and annual report.
The increase in other expenses was due to the write-off of a repossessed asset.
Other operating expenses in 1998 increased $102,000, or 0.8%, to
$12.2 million from $12.1 million in 1997. Excluding a nonrecurring legal
settlement of $600,000 received in December 1997, operating expenses in 1998
actually decreased $498,000 or 3.9%. The decrease in 1998, is primarily the
result of lower costs associated with professional services and strategic
planning and investor relation expenses. In 1997, legal fees were reduced by an
insurance settlement of $600,000 for reimbursement of a portion of legal fees
related to a proxy contest in 1996.
Professional Bancorp and First Professional were parties to a consulting
agreement dated August 12, 1996 with Network Health Financial Services, Inc., a
Delaware corporation for which Melinda McIntyre-Kolpin serves as Chief Executive
Officer. The consulting agreement was terminated effective April 6, 2000.
Pursuant to the consulting agreement, Network Health provided consulting
services to Professional Bancorp and First Professional with respect to
personnel matters, operational procedures and client development and retention.
Network Health was paid its actual costs incurred in the performance of its
duties under the consulting agreement (including hourly rates for certain
specified Network Health personnel while they are performing consulting
services), plus an additional 25% of such costs.
74
<PAGE>
In addition, Professional Bancorp and First Professional paid flat monthly
rates for the services of Ms. McIntyre-Kolpin and Patti Derry. For 1999,
included in other professional fees, Professional Bancorp and First Professional
paid Network Health $641,000 pursuant to the consulting agreement compared to
$693,000 and $748,000 for 1998 and 1997, respectively. While it is anticipated
that professional service expenses will decrease as a result of the termination
of the consulting agreement, the total cost savings to Professional Bancorp will
be partially offset by the cost of providing some of the services previously
provided by Network Health.
INCOME TAXES
Professional Bancorp accounts for income taxes under SFAS No. 109. Under
this standard, financial statement tax benefits associated with income tax net
operating loss carryforwards ("NOL's") and future tax deductions for expenses
already incurred for financial statement purposes but not yet deducted for tax
return purposes (deferred tax assets) are allowed to be recognized when it is a
more likely than not expectation that such benefits will actually be utilized.
At December 31, 1999, Professional Bancorp had $3,212,000 of these deferred tax
assets and placed a valuation allowance against 11.5% of the assets.
Professional Bancorp recorded an income tax provision (benefit) of
($3.2 million), $990,000, and $892,000 in 1999, 1998 and 1997 respectively. The
effective tax rates in these years were 40.8%, 40.9% and 37.6%. For further
information, see Note 7 of Notes to Professional Bancorp Consolidated Financial
Statements.
DISTRIBUTION OF ASSETS AND LIABILITIES
The following table sets forth Professional Bancorp's consolidated average
balances of each principal category of assets, liabilities and shareholders'
equity and the percentage distribution of these items for each of the past two
fiscal years (dollars in thousands).
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
AVERAGE PERCENT AVERAGE PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks................................. $ 25,006 9.35 $ 24,024 9.61
Federal funds sold...................................... 21,493 8.04 33,161 13.26
Securities available-for-sale........................... 53,002 19.82 54,228 21.68
Securities held-to-maturity............................. 21,347 7.98 29,372 11.74
Loans, net.............................................. 137,915 51.57 101,753 40.68
Premises and equipment, net............................. 1,348 .50 1,531 0.61
Accrued interest receivable and other assets............ 7,327 2.74 6,047 2.42
-------- ------ -------- ------
Total assets...................................... $267,438 100.00 $250,116 100.00
======== ====== ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand, noninterest-bearing........................... $103,214 38.59 $ 93,306 37.30
Demand, interest-bearing.............................. 14,073 5.26 14,325 5.73
Savings and money market.............................. 86,969 32.52 84,273 33.69
Time deposits......................................... 32,952 12.32 30,993 12.39
Convertible notes....................................... 846 .32 3,051 1.22
Repurchase agreements................................... 2,166 .81 54 0.03
Accrued interest payable and other liabilities.......... 2,358 .88 1,779 0.71
-------- ------ -------- ------
Total liabilities................................... 242,578 90.70 227,781 91.07
Shareholders' equity.................................... 24,860 9.30 22,335 8.93
-------- ------ -------- ------
Total liabilities and shareholders' equity.......... $267,438 100.00 $250,116 100.00
======== ====== ======== ======
</TABLE>
75
<PAGE>
Professional Bancorp's total average assets increased $17.3 million to
$267.4 million, or 6.91%, in 1999, from $250.1 million in 1998. Professional
Bancorp's ratio of average interest-earning assets to average assets was 88.75%
for 1999 compared to 88.40% for 1998. The increase in total average assets
primarily occurred in the loan portfolio. Average gross loans outstanding for
the year ended December 31, 1999 increased $37.5 million to $141.2 million, or
36.16%, from $103.7 in 1998.
SECURITIES
Professional Bancorp's total investment securities decreased $35.4 million,
or 43.8% to $63.7 million at December 31, 1999 compared to $105.0 million at
December 31, 1998. This decrease was due primarily to the sales of
$27.1 million of securities during 1999 for a net gain of $40,000. Proceeds from
the sales were primarily used to fund the growth in loans. Professional
Bancorp's average balance in total investment securities for the year 1999 was
$74.3 million, a decrease of $9.3 million or 11.1% compared to $83.6 million for
the year 1998. The yield on total investment securities was 5.88% and 5.85% for
the years 1999 and 1998, respectively.
Professional Bancorp's investment securities are classified as either
available-for-sale or held-to-maturity. Securities available-for-sale was
$45.5 million at December 31, 1999, a decrease of $35.4 million or 43.8%,
compared to $80.9 million at December 31, 1998. The net unrealized loss on
securities available-for-sale was $2.7 million and $271,000 at December 31, 1999
and 1998, respectively. Securities held-to-maturity was $18.2 million at
December 31, 1999, a decrease of $5.9 million or 24.5%, compared to
$24.1 million at December 31, 1998.
The following table sets forth the carrying value of securities
available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
U.S. Government securities....................... $ -- $ -- $ 2,004
U.S. Government agency and mortgage-backed
securities..................................... 35,469 68,126 34,740
Small Business Administration securities......... 631 852 1,292
Municipal securities............................. 2,378 2,546 --
Federal reserve bank stock....................... 439 439 439
Collateralized mortgage obligations.............. 6,608 8,928 14,660
------- ------- -------
Total........................................ $45,525 $80,891 $53,135
======= ======= =======
</TABLE>
Total securities available-for-sale for the year ended 1999 decreased
$35.4 million, or 43.7% to $45.5 million from $80.9 million for the year ended
1998. This decrease was due primarily to the sales of $27.1 million of
securities during 1999 at a net gain of $40,000. Proceeds of the sales were used
to fund the growth in loans.
Total securities available-for-sale for the year ended 1998 increased
$27.7 million, or 52.2%, to $80.9 million from $53.1 million for 1997. During
1998, First Professional purchased $65.1 million of investment securities, sold
$15.3 million and had $32.0 million of maturities and principal payments during
1998.
76
<PAGE>
The amortized cost and fair value of securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
(IN THOUSANDS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government agency and mortgage-
backed securities.................. $37,393 $ -- $1,924 $35,469
Small Business Administration
securities......................... 647 -- 16 631
Municipal securities................. 2,551 -- 173 2,378
Federal Reserve Bank Stock........... 439 -- -- 439
Collateralized mortgage
obligations........................ 7,157 -- 549 6,608
------- ---- ------ -------
Total............................ $48,187 $ -- $2,662 $45,525
======= ==== ====== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
(IN THOUSANDS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government agency and Mortgage-
backed securities.................. $68,487 $153 $514 $68,126
Small Business Administration
securities......................... 858 1 7 852
Municipal securities................. 2,551 3 8 2,546
Federal Reserve Bank Stock........... 439 -- -- 439
Collateralized mortgage
obligations........................ 9,034 -- 106 8,928
------- ---- ---- -------
Total................................ $81,369 $157 $635 $80,891
======= ==== ==== =======
</TABLE>
The following table sets forth the maturities of securities
available-for-sale at December 31, 1999 and the weighted average yields of such
securities. Borrowers may have the right to prepay obligations with or without
prepayment penalties. This right may cause actual maturities to differ from the
contractual maturities summarized below. Collateralized mortgage obligations
often have stated maturities of over ten years but are subject to prepayments
which accelerate actual maturities.
See Notes 1 and 3 of Notes to Professional Bancorp Consolidated Financial
Statements for further information about the available-for-sale portfolio.
<TABLE>
<CAPTION>
MATURING
-------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITH THROUGH FIVE THROUGH AFTER
ONE YEAR YEARS TEN YEARS TEN YEARS
------------------- ------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Government agency and mortgage-backed
securities............................... $ -- --% $-- --% $ -- --% $37,393 6.20%
Small Business Administration securities... -- -- -- -- 109 6.43 538 7.20
Municipal securities....................... -- -- -- -- 1,434 4.14 1,117 4.40
Federal Reserve Bank stock................. 439 6.00 -- -- -- -- -- --
Collateralized mortgage obligations........ -- -- -- -- -- -- 7,157 6.32
---- ---- --- ---- ------- ---- ------- ----
Total...................................... $439 6.00% $-- --% $ 1,543 4.48% $46,205 6.18%
==== ==== === ==== ======= ==== ======= ====
<CAPTION>
MATURING
-------------------
TOTAL
-------------------
AMOUNT YIELD
(DOLLARS IN THOUSANDS) -------- --------
<S> <C> <C>
Securities Available-for-Sale:
U.S. Government agency and mortgage-backed
securities............................... $37,393 6.20%
Small Business Administration securities... 647 6.90
Municipal securities....................... 2,551 4.26
Federal Reserve Bank stock................. 439 6.00
Collateralized mortgage obligations........ 7,157 6.32
------- ----
Total...................................... $48,187 6.12%
======= ====
</TABLE>
77
<PAGE>
The following table sets forth the amortized cost of securities
held-to-maturity at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
U.S. Government securities....................... $ 3,032 $ 3,043 $ 3,054
U.S. Government Agency securities................ 1,750 2,250 3,189
U.S. Government Agency mortgage-backed
securities..................................... 13,418 18,788 28,857
------- ------- -------
Total........................................ $18,200 $24,081 $35,100
======= ======= =======
</TABLE>
The following table sets forth the maturities of securities held-to-maturity
at December 31, 1999 and the weighted average yields of such securities.
Borrowers may have the right to prepay obligations with or without call or
prepayment penalties. This right may cause actual maturities to differ from the
contractual maturities summarized below. Mortgage-backed securities generally
have stated maturities of over ten years but are subject to likely and
substantial prepayments which effectively accelerate actual maturities.
See Notes 1 and 3 of Notes to Professional Bancorp Consolidated Financial
Statements for further information about the held-to-maturity portfolio.
<TABLE>
<CAPTION>
MATURING
-------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN THROUGH THROUGH AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
------------------- ------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Held-to-Maturity:
U.S. Government securities................ $ -- --% $3,032 6.20% $ -- --% $ -- --%
U.S. Government Agency securities......... -- -- 1,750 5.65 -- -- -- --
U.S. Government Agency.................... -- -- -- -- -- -- -- --
mortgage-backed securities................ -- -- 249 6.63 9,141 8.04 4,028 6.28
------ ------ ------ ---- ------ ---- ------ ----
Total..................................... $ -- --% $5,031 6.04% $9,141 8.04% $4,028 6.28%
====== ====== ====== ==== ====== ==== ====== ====
<CAPTION>
MATURING
-------------------
TOTAL
-------------------
AMOUNT YIELD
(DOLLARS IN THOUSANDS) -------- --------
<S> <C> <C>
Securities Held-to-Maturity:
U.S. Government securities................ $ 3,032 6.20%
U.S. Government Agency securities......... 1,750 5.65
U.S. Government Agency.................... -- --
mortgage-backed securities................ 13,418 7.47
------- ----
Total..................................... $18,200 7.09%
======= ====
</TABLE>
LOAN PORTFOLIO
First Professional focuses its lending activities in three principal areas:
commercial loans, lines of credit and installment loans. Commercial loans
include commercial loans supported by the operating cash flow and secured by the
business assets of the borrower, and to a lesser extent real estate, and
unsecured commercial loans. Lines of credit include equity lines, overdraft
protection lines and other secured, collateralized and unsecured lines of
credit. Installment loans include automobile and boat loans and other loans for
personal and corporate use. The interest rates charged for the loans made by
First Professional vary with the degree of risk, the size and maturity of the
loan, the borrowers' depository relationships with First Professional, and
prevailing market rates.
78
<PAGE>
The following table sets forth the amounts of loans outstanding by type of
credit extension as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
(DOLLARS IN THOUSANDS) ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................................ $124,403 77% $ 93,952 80% $ 86,243 82% $ 73,577 79%
Real estate secured....................... 27,538 17 11,698 10 10,512 10 10,079 11
Equity lines of credit.................... 4,330 2 5,931 5 6,288 6 6,202 7
Other lines of credit..................... 4,689 3 4,817 4 1,524 1 1,832 2
Installment............................... 1,608 1 1,482 1 1,253 1 1,375 1
Lease financing........................... -- -- 32 -- 37 -- 68 --
-------- --- -------- --- -------- --- -------- ---
Gross loans........................... 162,568 100% 117,912 100% 105,857 100% 93,133 100%
Less: allowance for loan losses........... (5,873) (2,200) (1,802) (2,253)
Less: deferred loan fees, net............. (211) (193) (155) (121)
-------- -------- -------- --------
Net loans................................. $156,484 $115,519 $103,900 $ 90,759
======== ======== ======== ========
Fixed rate................................ $ 42,194 26% $ 16,784 14% $ 6,935 7% $ 7,075 8%
Variable rate............................. 120,374 74 101,128 86 98,922 93 86,058 92
-------- --- -------- --- -------- --- -------- ---
Gross loans........................... $162,568 100% $117,912 100% $105,857 100% $ 93,133 100%
======== === ======== === ======== === ======== ===
<CAPTION>
DECEMBER 31,
-------------------
1995
(DOLLARS IN THOUSANDS) -------------------
<S> <C> <C>
Commercial................................ $ 77,012 77%
Real estate secured....................... 13,241 13
Equity lines of credit.................... 6,070 6
Other lines of credit..................... 1,997 2
Installment............................... 1,625 2
Lease financing........................... 140 --
-------- ---
Gross loans........................... 100,085 100%
Less: allowance for loan losses........... (1,070)
Less: deferred loan fees, net............. (71)
--------
Net loans................................. $ 98,944
========
Fixed rate................................ $ 11,240 11%
Variable rate............................. 88,845 89
-------- ---
Gross loans........................... $100,085 100%
======== ===
</TABLE>
There was no category of loans exceeding 10% of total loans which was not
otherwise disclosed as a distinct line item in the above table.
First Professional generally seeks to underwrite loans on the basis of
historic, current and pro forma cash flows, and looks to supporting collateral
as a secondary source of repayment in most extensions. In the opinion of
management, First Professional's loan policies conform with applicable
regulatory lending standards.
COMMERCIAL LOANS
At December 31, 1999 Professional Bancorp's commercial loans totaled
$124.4 million, or 76.5%, of total loans compared to $94.0 million, or 79.7%, of
total loans at December 31, 1998.
Commercial loans consist primarily of short to medium term financing for
small to medium sized health care-related companies and professionals located in
Southern California. The commercial loans are primarily concentrated in the same
sectors of the medical community from which Professional Bancorp's deposit base
is drawn and consists of sole medical practitioners, small groups practices,
large single-specialty groups, multi-specialty medical groups and other
outpatient health care service companies. Approximately 77% of total loans at
December 31, 1999 were commercial loans which were unsecured or collateralized
by various business and personal property assets, including equipment and
accounts receivable, contracts, and the proceeds thereof, including capitation
payments. As a matter of policy, Professional Bancorp's commercial loan
borrowers are required to submit financial statements and other financial data
(for example, accounts receivable agings and enrollment summaries) on a periodic
basis, in conformity with loan policies and procedures and regulatory
guidelines, to loan officers for their review in monitoring the financial
position and cash flow trends of borrowers. Under this policy, management
generally gives a higher level of attention to borrowers failing to submit the
required financial information. Senior lending officers review delinquency
reports, overdrafts, borrowers' payment histories and periodic financial data to
monitor creditworthiness and identify potential problem loans.
REAL ESTATE SECURED LOANS
At December 31, 1999 Professional Bancorp's real estate secured loans
totaled $27.5, or 16.9% of total loans compared to $11.7 million, or 9.9% of
total loans at December 31, 1998.
79
<PAGE>
Real estate secured loans generally consist of short to medium term
financing to healthcare related companies as well as to borrowers outside the
healthcare industry. These loans include transactions which are underwritten
based on cash flow adequacy, the source of which may be the underlying business/
borrower for commercial purpose loans, or the property's generated cash flow for
real estate purpose transactions such as purchases or refinances. Generally, the
real estate property collateral is viewed as the secondary source of repayment,
however, the underwriting additionally considers other assets and net worth
available to support repayment when recourse is applicable. Loan to value ratios
on commercial loans secured by real estate generally range from 30% to 80% at
origination. Maturities typically range between one to five years and
amortization schedules are usually no longer than 20 years. These loans are
classified by Professional Bancorp as real estate loans.
EQUITY LINES OF CREDIT
At December 31, 1999 and 1998, equity lines of credit aggregated
approximately $4.3 million, or 2.7% of total loans, and $5.9 million, or 5.0% of
total loans, respectively. Loan-to-appraised value ratios at the loan
origination date generally do not exceed 85% and all such loans have variable
rate structures. A majority of these lines of credit are secured by junior trust
deeds on residential real estate and require monthly principal payments. Equity
lines generally have a five year maturity and are subject to an annual review of
the financial condition of the borrower.
OTHER LINES OF CREDIT
At December 31, 1999 and 1998, other lines of credit aggregated
approximately $4.7 million or 2.9% of total loans, and $4.8 million, or 4.1% of
total loans, respectively. Other lines of credit are generally unsecured and
include overdraft protection facilities and revolving lines of credit. Overdraft
lines are attached to checking accounts to cover short-term shortfalls in cash
flow.
INSTALLMENT LOANS
At December 31, 1999 and 1998, installment loans aggregated approximately
$1.6 million and $1.5 million, respectively. This loan category primarily
includes automobile loans. Loan-to-appraised value ratios at the loan
origination date range up to 100% for automobile installment loans with maturity
and amortization generally up to 60 months.
The following table shows the maturity distribution of Professional
Bancorp's loans outstanding at December 31, 1999, and is based on the remaining
scheduled repayments of principal, as due within the periods indicated.
<TABLE>
<CAPTION>
AFTER ONE AFTER
THROUGH FIVE
THROUGH ONE YEAR FIVE YEARS YEARS TOTAL
(IN THOUSANDS) ---------------- ---------- -------- --------
<S> <C> <C> <C> <C>
Commercial....................................... $57,097 $60,468 $6,838 $124,403
Real estate secured.............................. 6,862 19,175 1,501 27,538
Equity lines of credit........................... 187 4,143 -- 4,330
Other lines of credit............................ 493 2,896 1,300 4,689
Installment...................................... 86 1,460 62 1,608
------- ------- ------ --------
Gross loans.................................. $64,725 $88,142 $9,701 $162,568
======= ======= ====== ========
Fixed rate....................................... 6,790 32,486 2,918 42,194
Variable rate.................................... 57,935 55,656 6,783 120,374
------- ------- ------ --------
Gross Loan................................... $64,725 $88,142 $9,701 $162,568
======= ======= ====== ========
</TABLE>
80
<PAGE>
LOAN COMMITMENTS
In the normal course of business, there are various commitments outstanding
to extend credit that are not reflected in the consolidated financial
statements. These financial instruments include commitments to extend credit for
working capital, tenant improvements, other term purposes and include standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk. Professional Bancorp's exposure to credit loss in
the event of nonperformance by the other party to commitments to extend credit
and standby letters of credit is represented by the contractual notional
(principal) amount of those instruments. At December 31, 1999 and 1998, First
Professional had commitments to extend credit of approximately $46.7 million and
$49.9 million, respectively, and obligations under standby letters of credit of
approximately $5.6 million and $6.5 million, respectively.
Standby letters of credit are commitments issued by First Professional to
support the performance of a client to a third party. Those standby letters of
credit are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, lease arrangements and
similar transactions. All such standby letters of credit are extended for a
period of two years or less. In making commitments and issuing letters of
credit, Professional Bancorp uses credit policies similar to those used in
connection with extension of credit to all customers with creditworthiness
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by Professional Bancorp upon extension of credit, is based on a credit
evaluation of the customer.
Collateral held varies but may include cash, accounts receivable, inventory,
property, plant and equipment, contract, contract rights and income-producing
commercial real estate.
LARGE LOANS
As of December 31, 1999, First Professional had 35 client relationships
where the total amount of loans outstanding and available credit from loan
commitments exceeds $2.0 million for any single borrower/relationship, for a
total of $83.9 million in loans outstanding, representing 51.6% of gross loans,
and $21.5 million in credit available to these 35 relationships. At the end of
1999, two relationships totaling $5.2 million in loans outstanding had
$3.3 million which were on nonaccrual status.
In addition to the 35 client relationships discussed above, there were four
other large loan relationships which totaled $14.1 million. $10.3 million of
these loans were charged off during 1999 leaving a loan balance of $3.8 million
being carried as non-accrual loans at December 31, 1999.
As of December 31, 1998, First Professional had $47.6 million of loans
outstanding and $17.7 million in credit available to 23 clients where the loan
outstanding and credit available exceeded $2.0 million. At the end of 1998, a
total of $3.0 million of these relationships had $810,000 of loans on
non-accrual status.
As of December 31, 1999, there were four client relationships, with loans
outstanding totaling $14.9 million, that had loan amounts outstanding and
available loan commitments that were in excess of First Professional's current
legal lending limit of $3.3 million and are therefore considered non-conforming
as defined in 12USC84. Regulation prohibits the further extension of credit of
any kind to these borrowers. The aggregate loans of the borrower are
"grandfathered" until any of the borrower's credit facilities mature at which
time First Professional must make every effort to bring the loans into
conformity with the reduced lending limits unless to do so would be inconsistent
with safe and sound banking practices.
Management is focusing its efforts on reducing the concentration and risk of
large loans. These efforts may include selling the entire loan, selling a
portion of the loans to other lending institutions and restructuring the loans
when appropriate. Additionally, First Professional has adopted a house limit,
which is lower than the legal lending limit, for evaluating any future lending
commitments.
81
<PAGE>
NONPERFORMING ASSETS
The table below sets forth information about nonperforming assets, which
includes nonaccrual loans and other real estate owned ("OREO"), and accruing
loans 90 days or more past due and certain ratios:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS:(1)
Nonperforming loans......................................... $8,412 $1,359 $ 877 $1,521 $4,173
Other real estate owned (OREO).............................. -- -- -- -- 90
Other repossessed assets.................................... -- 272 272 272 --
------ ------ ------ ------ ------
Total nonperforming assets.............................. $8,412 $1,631 $1,149 $1,793 $4,263
====== ====== ====== ====== ======
Accruing loans 90 days or more past due..................... $2,891 $ 100 $ 17 $ 507 $ 632
====== ====== ====== ====== ======
Nonperforming loans to gross loans(1)....................... 5.17% 1.15% 0.83% 1.63% 4.18%
Nonperforming assets(1)
to gross loans............................................ 5.17 1.38 1.09 1.93 4.27
to gross loans, OREO and repossessed assets............... 5.17 1.38 1.08 1.92 4.26
to total assets........................................... 3.08 0.63 0.45 0.68 1.32
</TABLE>
------------------------
(1) Nonperforming loans and nonperforming assets do not include accruing loans
90 days or more past due where the loan is well secured and in the process
of collection.
ALLOWANCE FOR LOAN LOSSES
Management's determination of the allowance for loan losses requires the use
of estimates and assumptions related to both actual and inherent risks in the
loan portfolio. Actual results may, however, differ significantly from such
estimates. In connection with the determination of the allowance for loan losses
where real estate secures the loan, management generally obtains independent
appraisals for all properties. Management believes its current appraisal policy
conforms to regulatory guidelines.
An evaluation of the overall quality of the portfolio is performed at least
quarterly by management to determine the level of the allowance for loan losses.
This evaluation takes into consideration the classification of loans and the
application of loss estimates attributable to these classifications.
First Professional classifies loans as pass, watch, special mention,
substandard, doubtful, or loss based on classification criteria believed by
management to be consistent with the criteria applied by regulatory agencies and
consistent with sound banking practices. These classifications and loss
estimates take into consideration all sources of repayment, underlying
collateral, the value of such collateral, current economic conditions, trends,
and uncertainties and the historical accuracy of specific reserves attached to
loans with serious perceived weakness. Additionally, First Professional utilizes
"migration analysis" as another means to assist management in estimating the
level of the allowance for loan losses. Migration analysis is a statistical
method which examines historic charge-off and classification trends prior to
charge-off to estimate potential losses inherent in the loan portfolio.
The above processes provide management with a reasonable basis to estimate
the risk both actual and inherent in the portfolio. In addition, First
Professional utilizes a comprehensive program that considers numerous variables,
of which migration is one, to determine the adequacy of the allowance for loan
losses. This program is consistent with methodologies in Banking Circular 201.
Among others, consideration is given to historical and current trends in past
due loans, charged-off loans, nonaccruals, and the nature and mix of the loan
portfolio; and local, regional, industry, and national economic trends in
determining loan loss adequacy. Finally, credit administration, corresponding
loan policies and procedures, and timely problem loan identification are
integral to a sound determination of the allowance for loan losses. Based on
information available at December 31, 1999, management was of the opinion that a
$5.9 million allowance for loan losses, which constitutes 3.6% of total loans,
was adequate as an allowance against probable and estimated losses.
82
<PAGE>
While First Professional's policy is to charge-off in the current period
those loans for which a loss is considered probable, there also exists the risk
of future losses which cannot be precisely quantified or attributed to
particular loans. As this risk is continually changing in response to factors
beyond the control of First Professional, such as the state of the economy,
management's judgment as to the adequacy of the allowance for loan losses in
future periods, while approximate, is in part based on a reasonable methodology.
In addition, various regulatory agencies, as an integral part of their
examination process, review First Professional's allowance for loan losses. Such
agencies may require First Professional to record additions or deletions to the
allowance based on their judgments of information available to them at the time
of their examination.
The following tables provide a summary of First Professional's allowance for
loan losses and charge-off and recovery activity.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
(DOLLARS IN THOUSANDS) 1999 1998
---------------------- -------- --------
<S> <C> <C>
Balance at beginning of period.......................... $ 2,200 $ 1,802
Provision for loan losses............................... 13,992 406
-------- --------
16,192 2,208
-------- --------
Loan charge-offs:
Commercial............................................ 10,384 208
Other lines of credit................................. 68 61
-------- --------
Total loan charge-offs.............................. 10,452 269
-------- --------
Recoveries on loans previously charged-off.............. (133) (261)
-------- --------
Net charge-offs..................................... 10,319 8
-------- --------
Balance at end of period................................ $ 5,873 $ 2,200
======== ========
Loans outstanding at end of period...................... $162,568 $117,912
Average loans outstanding during period................. 141,153 103,718
Net charge-offs to average loans outstanding............ 7.31% 0.01%
Allowance for loan losses:
to total loans........................................ 3.61 1.87
to nonperforming loans(1)............................. 69.82 161.88
to nonperforming assets(1)............................ 69.82 134.89
</TABLE>
------------------------
(1) Nonperforming loans and nonperforming assets do not include accruing loans
90 days or more past due.
In 1999, First Professional charged-off $10.5 million of loans. During 1999,
three large relationships had $7.3 million of loans charged-off and still have
$2.4 million of loans on non-accrual status. Recoveries for 1999 were $133,000
compared to $261,000 for 1998. In 1998, First Professional charged-off $269,000
of loans.
83
<PAGE>
The following table shows the historical allocation of First Professional's
allowance for loan losses and the percent of loans in each category to gross
loans for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
ALLOCATED % OF ALLOCATED % OF ALLOCATED % OF ALLOCATED % OF
(DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------------------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial....................... $3,944 79% $ 878 80% $ 683 82% $1,584 79%
Real estate secured.............. 823 17 76 10 104 10 237 11
Equity lines of credit........... 94 2 34 5 111 6 150 7
Other lines of credit............ 17 1 335 4 43 1 24 2
Installment...................... 50 1 173 1 177 1 5 1
Unallocated...................... 945 -- 704 -- 684 -- 253 --
------ --- ------ --- ------ --- ------ ---
$5,873 100% $2,200 100% $1,802 100% $2,253 100%
====== === ====== === ====== === ====== ===
<CAPTION>
1995
--------------------
ALLOCATED % OF
(DOLLARS IN THOUSANDS) AMOUNT LOANS
---------------------- --------- --------
<S> <C> <C>
Commercial....................... $ 711 77%
Real estate secured.............. 46 13
Equity lines of credit........... 118 6
Other lines of credit............ 7 2
Installment...................... 5 2
Unallocated...................... 183 --
------ ---
$1,070 100%
====== ===
</TABLE>
First Professional had approximately $8,708,000 in impaired loans as of
December 31, 1999. The carrying value of impaired loans for which there is a
related allowance for loan losses was $414,000, with the amount of specific
allowance for loan losses allocated to these loans of $134,000. There were
$8,294,000 in impaired loans for which there was no related specific allowance
for loan losses. The average recorded investment in impaired loans during 1999
was $4,436,000. Impaired loans at December 31, 1999 included $8,412,000 of
nonaccrual loans.
First Professional had approximately $1,836,000 in impaired loans as of
December 31, 1998. The carrying value of impaired loans for which there is a
related allowance for loan losses was $153,000, with the amount of specific
allowance for loan losses allocated to these loans of $41,000. There were
$1,683,000 in impaired loans for which there was no related specific allowance
for loan losses. The average recorded investment in impaired loans during 1998
was $1,131,000. Impaired loans at December 31, 1998 included $1,359,000 of
nonaccrual loans.
CREDIT MANAGEMENT
Management believes that the objective of sound credit policy is to extend
loans to qualified customers while managing risks which could affect
shareholders' returns. The loan committee, made up of outside members of the
board of directors of First Professional and executive management, approve
credit policy, review asset quality, and determine compliance to credit policy
and procedure. Management periodically reviews loan quality and monitors the
progress of watch list loans, some of which may require an action plan for
rehabilitation or refinancing. In addition, credit underwriting guidelines are
periodically reviewed and adjusted to reflect current economic conditions,
industry practices and regulatory guidelines.
In accordance with management's credit administration and regulatory policy,
loans are placed on nonaccrual status when collection of principal or interest
is questionable. Generally, this means that loans are put on nonaccrual status
when interest is 90 days or more past due, unless the loan is well secured and
in the process of collection.
84
<PAGE>
DEPOSITS AND SHORT-TERM BORROWINGS
First Professional attracts deposits primarily from individuals and
businesses related to the health care services industry. First Professional has
no brokered deposits and its current practice is to not purchase brokered
deposits. First Professional has no known foreign deposits. The average daily
amount of deposits and interest rates paid on deposits is summarized below for
the year ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE RATE BALANCE RATE BALANCE RATE
---------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing transaction accounts......... $103,214 --% $ 93,306 --% $ 81,379 --%
Interest-bearing transaction accounts............ 14,073 0.72 14,325 0.94 12,887 0.84
Savings and money market accounts................ 86,969 2.02 84,273 2.14 94,755 1.92
-------- ---- -------- ---- -------- ----
204,256 0.91 191,904 1.01 189,021 1.02
-------- ---- -------- ---- -------- ----
Time deposits:
Less than $100,000............................... 7,033 4.11 8,273 4.65 8,737 4.48
More than $100,000............................... 25,919 4.28 22,720 4.65 20,640 4.93
-------- ---- -------- ---- -------- ----
Total time deposits............................ 32,952 4.24 30,993 4.65 29,377 4.79
-------- ---- -------- ---- -------- ----
Total deposits............................... $237,208 1.37 $222,897 1.52 $218,398 1.53
======== ==== ======== ==== ======== ====
</TABLE>
Time deposits of $100,000 or more are generally received from First
Professional's medical and professional client base. The impact on First
Professional's liquidity from the potential withdrawal of these deposits is
considered in First Professional's asset/liability management policies, which
anticipates First Professional's liquidity needs through the management of
investments, federal funds sold, and/or by generating additional deposits.
The table below sets forth the components of time deposits of $100,000 or
more relative to the maturity period as of December 31:
<TABLE>
<CAPTION>
1999
--------------
(IN THOUSANDS)
<S> <C>
Three months or less........................................ $34,787
Over three through six months............................... 1,789
Over six through twelve months.............................. 1,853
Over twelve months.......................................... --
-------
Total..................................................... $38,429
=======
</TABLE>
In addition to the time deposits of $100,000 or more, a significant amount
of First Professional's deposits are in accounts with balances in excess of
$100,000. At December 31, 1999, there were 401 such deposit accounts with
balances totaling $137,756,000. These accounts are reviewed for purposes of
monitoring First Professional's liquidity. While increased volatility to First
Professional's deposit base may be present in this group of accounts, the
investment management practices of First Professional consider such potential
volatility.
First Professional also uses repurchase agreements from time to time as an
additional source of funds. On December 31, 1999 and 1998, there were no
repurchase agreements outstanding.
85
<PAGE>
The following table sets forth certain information with respect to First
Professional's repurchase agreements for the year ended December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997
---------------------- -------- -------- --------
<S> <C> <C> <C>
Maximum daily amount outstanding................... $25,000 $5,000 $8,000
Average amount outstanding......................... 2,166 55 274
Average interest rate.............................. 5.03% 5.50% 5.77%
</TABLE>
First Professional had no repurchase agreements outstanding at December 31,
1999, 1998, or 1997, respectively.
CAPITAL RESOURCES
The OCC, First Professional's primary regulator, has established minimum
leverage ratio guidelines for national banks. These guidelines provide for a
minimum Tier 1 capital leverage ratio (Tier 1 capital to adjusted average total
assets) of 3.0% for national banks that meet certain specified criteria,
including having the highest regulatory rating. All other national banks will
generally be required to maintain a minimum Tier 1 capital leverage ratio of
3.0% plus an additional cushion of 100 to 200 basis points.
The Federal Reserve, as Professional Bancorp's primary regulator, has
similarly established minimum leverage ratio guidelines for the bank holding
companies. These guidelines also provide for a minimum Tier 1 leverage ratio of
3.0% for bank holding companies that meet certain specified criteria, including
having the highest regulatory rating. All other bank holding companies will
generally be required to maintain a minimum Tier 1 capital leverage ratio of
3.0% plus an additional cushion of 100 to 200 basis points. The FRB has not
advised Professional Bancorp of any specific minimum Tier 1 capital leverage
ratio applicable to it.
Risk-based capital standards were implemented on December 31, 1992. Since
December 31, 1992, banking organizations have been expected to meet a minimum
ratio for qualifying total capital to risk-weighted assets of 8.0%, 4.0% of
which must be Tier 1 capital. A banking organization's risk-based capital ratios
are obtained by dividing its qualifying capital by its total risk-adjusted
assets and risk-weighted off-balance-sheet items.
Professional Bancorp completed a $5.75 million convertible note offering in
May 1994. The interest rate is 8.00% to March 2000 at which time the rate resets
at 150 basis points over the 5 year Constant Maturity Treasury Index. The
conversion price of the notes is $12.6984 per share and is scheduled to mature
in March 2004.
Of the proceeds, $3.6 million was invested in First Professional in order to
increase First Professional's regulatory capital ratios and allow First
Professional to grow, within the bounds of safety and soundness. $930,000 of the
proceeds were used to retire Professional Bancorp's remaining indebtedness as
required by a stock repurchase agreement.
86
<PAGE>
Information concerning Professional Bancorp's and First Professional's
capital adequacy at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ---------------------- ----------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PROFESSIONAL BANCORP
Leverage................. $14,972 5.21% $11,494 4.00% $14,368 5.00%
Tier 1 Risk-Based........ 14,972 8.97 6,675 4.00 10,013 6.00
Total Risk-Based......... 17,784 10.66 13,350 8.00 16,688 10.00
FIRST PROFESSIONAL
Leverage................. $13,786 4.81% $11,457 4.00% $14,321 5.00%
Tier 1 Risk-Based........ 13,786 8.18 6,741 4.00 10,112 6.00
Total Risk-Based......... 15,939 9.46 13,482 8.00 16,853 10.00
</TABLE>
WARRANTS
In connection with a private placement of common stock (the "Private
Placement"), Professional Bancorp issued (i) a warrant to Robert H. Leshner,
principal of the placement agent, to purchase 110,250 shares of common stock
(the "Leshner Warrant") and (ii) warrants to each of Andrew E. Haas and Curtis
Swindal to purchase 13,781 shares of common stock, each at a purchase price of
$12.70 per share exercisable in full on or after December 31, 1994 and before
December 31, 2002. Professional Bancorp agreed to grant the holders of the
shares issued upon exercise of the warrant ("Warrant Shares") the right, on two
occasions during the five-year period beginning December 31, 1994, to require
Professional Bancorp to register (the "Demand Registration") the Warrant Shares
under the Act. Professional Bancorp will pay the expenses of one Demand
Registration.
Under the terms of the Leshner Warrant, if Joel W. Kovner, former Chairman
of the Board and Chief Executive Officer of Professional Bancorp, dies before
December 31, 2002 (Mr. Kovner died on September 22, 2000), then Professional
Bancorp, at the option of Mr. Leshner, will purchase some or all of the warrants
and/or Warrant Shares then owned by Mr. Leshner, provided that (i) the maximum
aggregate purchase price paid by Professional Bancorp would be not more than
$1,000,000 and (ii) the funds to purchase such warrants and/or Warrant Shares
would come solely from the proceeds of the key person insurance policy on the
former executive. Since such life insurance is in excess of the cash value
recognized on Professional Bancorp's balance sheet, there would be no net
reduction in capital nor any impact on liquidity. Furthermore, if at any time
prior to December 31, 2002, Mr. Leshner wishes to sell some or all of the
warrants and/or Warrant Shares to a third party, Mr. Leshner must offer to sell
such warrants and/or Warrant Shares to Professional Bancorp on the same terms
and conditions being offered to such third party.
Another term of the Leshner Warrant restricts Professional Bancorp's ability
to issue certain types of preferred stock which would entitle the holders
thereof to receive dividends or distributions of assets which vary in amount
with Professional Bancorp's performance.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or can experience an interest rate change. As
interest rate sensitive assets and liabilities have various repricings and
maturities, changes in interest rates may increase or decrease First
Professional's net interest income. This exposure to changes in interest rates
is measured among other methodologies by an institutions "gap," or the
difference between interest rate sensitive assets and interest rate sensitive
liabilities within specified periods of time.
87
<PAGE>
An excess of maturing or repricing assets over maturing or repricing
liabilities during a given period will serve to increase net interest income in
a rising rate environment and decrease net interest income when interest rates
decline. In a rising interest rate environment, the assets will reprice at
current interest rates earlier than the liabilities thus increasing First
Professional's net interest margin. Conversely, when maturing or repricing
liabilities exceed maturing or repricing assets during a given period, a rising
interest rate environment generally will reduce First Professional's net
interest margin.
The following table sets forth the distribution of Professional Bancorp's
interest rate sensitive assets and liabilities as of December 31, 1999. The
table also sets forth the time period in which assets and liabilities will
mature or reprice in accordance with their contractual terms. Mortgage-backed
securities provide cash flows on a monthly basis; however, this analysis does
not include prepayment assumptions. Prepayment assumptions are utilized in an
interest rate simulation model, which is routinely used by Professional Bancorp
in evaluating the impact of changes in interest rates on Professional Bancorp's
net interest income.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------------------------------------------------
AFTER THREE AFTER ONE
NEXT DAY MONTHS YEAR AFTER
THROUGH THREE THROUGH 12 THROUGH FIVE FIVE
(DOLLARS IN THOUSANDS) IMMEDIATELY MONTHS MONTHS YEARS YEARS TOTAL
---------------------- ----------- ------------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans(1)................... $118,592 $1,804 $6,635 $32,619 $ 2,918 $162,568
Investment securities...... -- 439 -- 5,136 58,149 63,724
Federal funds sold......... 27,000 -- -- -- -- 27,000
Due from banks............. 697 -- -- -- -- 697
-------- ------ ------ ------- -------- --------
Total interest-earning
assets................. $146,289 $2,243 $6,635 $37,755 $ 61,067 $253,989
======== ====== ====== ======= ======== ========
Interest-bearing
transaction Accounts..... $ 16,033 -- -- -- -- 16,033
Savings accounts........... 84,783 -- -- -- -- 84,783
Time deposits.............. 45,651 -- -- -- -- 45,651
Convertible notes.......... -- -- -- -- 679 679
-------- ------ ------ ------- -------- --------
Total interest-bearing
liabilities............ $146,467 $ 0 $ 0 $ 0 $ 679 $147,146
======== ====== ====== ======= ======== ========
Interest sensitive Gap..... $ (178) $2,243 $6,635 $37,755 $ 60,388
Effect of interest rate
swaps.................... -- -- -- -- --
-------- ------ ------ ------- --------
Hedged Gap................. $ (178) $2,243 $6,635 $37,755 $ 60,388
Hedged Gap as a percentage
of earning assets........ (.12)% 100% 100% 100% 99%
Cumulative hedged Gap...... $ (178) $2,065 $8,700 $46,455 $106,843
Cumulative hedged Gap as a
percentage of earning
assets................... (.12)% .92% 1.31% 1.23% 1.75%
</TABLE>
------------------------
(1) Nonaccrual loans of $8,412 are included in average balances and rate
calculations.
88
<PAGE>
LIQUIDITY
Adequate liquidity and maintenance of an appropriate balance between
interest rate sensitive earning assets and interest rate sensitive liabilities
are the principal imperatives associated with the asset/liability management
function of a financial institution. Liquidity management involves the ability
to meet the cash flow requirements of clients who may be depositors desiring to
withdraw funds or borrowers requiring assurance that sufficient funds will be
available to meet their credit needs. Aside from asset/liability management,
First Professional maintains short-term sources of funds to meet periodic
planned and unplanned increases in loan demand and deposit withdrawals and
maturities.
The initial source of liquidity is the excess funds sold daily to other
banks in the form of federal funds. In addition to cash and cash equivalents,
First Professional maintains a large percentage of its assets in investment
securities. These securities include both securities available-for-sale and
securities held-to-maturity. Securities available-for-sale can be sold in
response to liquidity needs or used as collateral under reverse repurchase
agreements. Securities held-to-maturity are available for liquidity needs solely
as collateral for reverse repurchase agreements. First Professional had no
reverse repurchase agreements as of December 31, 1999 and 1998. As evidence of
First Professional's high level of liquidity at December 31, 1999, cash and cash
equivalents totaled $43.4 million, while securities available for reverse
repurchase agreements totaled approximately $63.7 million.
The combined amount of $107.1 million represents approximately 39% of First
Professional's total assets. Management is of the opinion that the existing
level of liquidity and borrowing capacity is sufficient to insulate First
Professional against unforeseen liquidity demands.
On a stand-alone basis, Professional Bancorp's primary source of liquidity
is dividends from First Professional. Dividends by First Professional to
Professional Bancorp are subject to regulatory restrictions. As of December 31,
1999, Professional Bancorp had cash of $432,000. Under applicable law, First
Professional cannot currently, and for the next several years will probable not
be able to, pay dividends to Professional Bancorp with out the prior approval of
the OCC. No assurance can be given that the OCC will permit the payment of
dividends and the refusal to do so may require Professional Bancorp to look to
other sources of liquidity such as borrowings or the issuance of various types
of securities. For further information on First Professional's dividend
restrictions, see "Supervision and Regulation--Restrictions on Dividends and
Other Distributions" and Note 11 of Notes to Professional Bancorp Consolidated
Financial Statements.
89
<PAGE>
INTEREST RATE SENSITIVITY
The table below provides information about First Professional's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps. Investment securities
and loans are presented based upon contractual maturity and related weighted
average interest rates by expected maturity dates.
<TABLE>
<CAPTION>
THERE FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS(1)
SECURITIES
U.S. government securities
Fixed............................... $ -- $1,012 $2,020 $ -- $ -- $ -- $ 3,032 $ 3,017
Weighted average interest rate.... -- 6.81% 5.89% -- -- -- 6.20%
U.S. government agency and Mortgage-
backed securities
Fixed............................... -- -- -- 1,750 229 35,581 37,560 35,590
Weighted average interest rate.... -- -- -- 5.65% 7.07% 6.88% 6.82%
Variable............................ -- -- -- -- -- 15,000 15,000 14,761
Weighted average interest rate.... -- -- -- -- -- 5.71% 5.71%
Municipal securities
Fixed............................... -- -- -- -- -- 2,551 2,551 2,377
Weighted average interest rate.... -- -- -- -- -- 4.27% 4.27%
Small Business Administration
securities
Variable............................ -- -- -- -- -- 647 647 631
Weighted average interest rate.... -- -- -- -- -- 6.90% 6.90%
Collateralized mortgage securities
Fixed............................... -- -- -- -- -- 7,157 7,157 6,608
Weighted average interest rate.... -- -- -- -- -- 6.32% 6.32%
Variable............................ -- -- -- -- -- --
Weighted average interest rate.... -- -- -- -- -- -- % --
Federal Reserve Bank Stock
Fixed............................... 439 -- -- -- -- -- 439 439
Weighted average interest rate.... 6.00% -- -- -- -- -- 6.00%
LOANS
Fixed............................... 6,790 15,109 4,638 3,695 9,044 2,918 42,194 41,833
Weighted average interest rate.... 7.73% 5.98% 8.10% 8.02% 8.16% 7.99% 7.33%
Variable............................ 57,935 12,568 10,041 11,519 19,342 8,969 120,374 120,456
Weighted average interest rate.... 9.85% 9.41% 9.75% 9.64% 9.65% 8.98% 9.67%
</TABLE>
90
<PAGE>
The table below provides information about Professional Bancorp's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including rate interest swaps. Certificates of
deposit and convertible notes are presented based upon contractual maturity and
related weighted average interest rates by expected maturity dates. For interest
rate swaps and caps, the table presents notional amounts and weighted average
interest rates by contractual maturity dates.
<TABLE>
<CAPTION>
THERE FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES (1)
DEPOSITS
Noninterest-bearing transaction
accounts................................ $109,560 $ $ $ $ $ $109,560 $109,560
Weighted average interest rate........ .25% .25%
Interest-bearing transaction accounts..... 16,033 16,033 16,033
Weighted average interest rate........ .72% -- -- -- -- -- .72%
Savings and money market accounts......... 84,783 -- -- -- -- -- 84,783 84,783
Weighted average interest rate........ 2.22% -- -- -- -- -- 2.22%
Certificates of deposit and other time
deposits
Fixed................................... 45,650 1 -- -- -- -- 45,651 45,666
Weighted average interest rate........ 4.18% 4.25% -- -- -- -- 4.18%
CONVERTIBLE NOTES......................... -- -- -- -- -- 679 679 679
Weighted average interest rate........ -- -- -- -- -- 5.42% 5.42%
OFF-BALANCE SHEET ASSETS
Interest rate swaps....................... -- -- -- -- -- -- --
Weighted average interest rate--pay... --% -- -- -- -- -- % --
Weighted average interest
rate--receive....................... --% -- -- -- -- -- % --
</TABLE>
------------------------------
(1) Professional Bancorp used certain assumptions to estimate fair values and
expected maturities. For loans, expected maturities are contractual
maturities adjusted for estimated prepayments of principal based on market
indicators. Investment securities are at quoted market rates and stated
maturities. For loan fair value computations, Professional Bancorp used a
discounted cashflow model with discount rates based upon prevailing market
rates for similar types of loans, incorporating adjustments for credit risk.
For deposit liabilities, fair values were calculated using discounted
cashflow models based on market interest rates for different product types
and maturity dates for which the deposits are held.
EXCHANGE RATE SENSITIVITY
All of Professional Bancorp's derivative financial instruments and other
financial instruments are denominated in US dollars. Professional Bancorp does
not have, or anticipate having, any foreign currency exchange rate exposure.
91
<PAGE>
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
First Community, Professional Bancorp and their respective subsidiaries. This
summary is qualified in its entirety by such statutes and regulations.
GENERAL. First Community and Professional Bancorp are registered bank
holding companies under the Bank Holding Company Act of 1956, as amended, and as
such are subject to regulation by the Board of Governors of the Federal Reserve
System. A bank holding company is required to file with the Federal Reserve
annual reports and other information regarding its business operations and those
of its subsidiaries. A bank holding company and its subsidiary banks are also
subject to examination by the Federal Reserve.
The Bank Holding Company Act requires every bank holding company to obtain
the prior approval of the Federal Reserve before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any voting
shares of any bank or bank holding company, if, after such acquisition, it would
own or control, directly or indirectly, more than five percent of the voting
shares of such bank or bank holding company.
In approving acquisitions by bank holding companies or companies engaged in
banking-related activities, the Federal Reserve considers whether the
performance of any such activity by a subsidiary of the holding company
reasonably can be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effect, such as overconcentration of resources, decrease of
competition, conflicts of interest, or unsound banking practices.
In addition, bank holding companies are restricted in, and subject to,
limitations regarding transactions with subsidiaries and other affiliates.
DIVIDEND REGULATION. The ability of First Community and Professional
Bancorp to obtain funds for the payment of dividends and for other cash
requirements is largely dependent on the amount of dividends which may be
declared by their subsidiaries. Rancho Santa Fe and First Professional are
federally chartered commercial banks, or "national banks." First Community Bank
of the Desert is a state chartered commercial bank organized under the laws of
the State of California.
Pursuant to 12 U.S.C. Section 56, no national bank may pay dividends from
its capital. All dividends must be paid out of net profits, after deducting
losses and bad debts. The payment of dividends out of net profits of national
banks is further limited by 12 U.S.C. Section 60(a), which prohibits a bank from
declaring a dividend on its shares of common stock until the surplus fund equals
the amount of capital stock or if the surplus fund does not equal the amount of
capital stock, until one-tenth of a bank's net profits for the preceding half
year in the case of quarterly or semi-annual dividends or the preceding two half
years in the case of an annual dividend, are transferred to the surplus fund.
Pursuant to 12 U.S.C. Section 60(b), the approval of the OCC is required
prior to the payment of dividends if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its retained net profits
for that year combined with its net profits for the two preceding years, less
any required transfers to surplus or a fund for the retirement of any preferred
stock. Further, the OCC also has authority to prohibit the payment of dividends
by a national bank when it determines such payment to be an unsafe and unsound
banking practice. A bank may, upon approval by OCC, be able to undergo a
"quasi-reorganization," which would allow the bank to ignore accumulated losses
before the quasi-reorganization. Similarly, California law limits dividends that
may be paid by a state-chartered bank.
GOVERNMENT POLICIES. The policies of regulatory authorities, including the
OCC, Federal Reserve and the FDIC, have had a significant effect on the
operating results of commercial banks in the past and are expected to do so in
the future. An important function of the Federal Reserve System is to regulate
92
<PAGE>
aggregate national credit and money supply through such means as open market
dealings in securities, establishment of the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
Policies of these agencies may be influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and fiscal policies of the United State government.
In July 1995, the federal banking agencies adopted uniform guidelines
establishing standards for safety and soundness. The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits and
asset quality and earnings. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan.
The bank regulatory agencies are focusing greater attention on compliance
with consumer protection laws and their implementing regulations. Examination
and enforcement have become more intense in nature, and insured institutions
have been advised to carefully monitor compliance with various consumer
protection laws and their implementing regulations.
FINANCIAL SERVICES MODERNIZATION LEGISLATION. On November 12, 1999,
President Clinton signed into law the Financial Services Modernization Act. The
Financial Services Modernization Act repeals provisions of Section 20 of the
Glass-Steagall Act which restricted the affiliation of Federal Reserve member
banks with firms "engaged principally" in specified securities activities. It
also repeals provisions of Section 32 of the Glass-Steagall Act, which restricts
officer, director, or employee interlocks between a member bank and any company
or person "primarily engaged" in specified securities activities. In addition,
the Financial Services Modernization Act contains provisions that expressly
preempt any state law restricting the establishment of financial affiliations,
primarily related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the Bank Holding Company Act framework to permit a holding company
system to engage in a full range of financial activities through a new entity
known as a Financial Holding Company. "Financial activities" is broadly defined
to include not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
- repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
- provides a uniform framework for the functional regulation of the
activities of banks, saving institutions, and their holding companies;
- broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
- provides an enhanced framework for protecting the privacy of consumer
information;
- adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the Federal
Home Loan Bank system;
- modifies the laws governing the implementation of the Community
Reinvestment Act; and
93
<PAGE>
- addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the Bank Holding Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also have policies and
procedures to assess financial subsidiary risk and protect the bank from such
risks and potential liabilities.
The provisions of the Financial Services Modernization Act are numerous and
become effective at various times between the date of enactment and the middle
of 2001 and beyond. Additionally, various federal regulatory authorities have
only started to promulgate the regulations and interpretations required by the
Financial Services Modernization Act. Furthermore, procedures for the
coordination of information among regulators, both state and federal, have yet
to be formulated. First Community cannot estimate with any degree of certainty
the effect that the Financial Services Modernization Act, future regulations and
future regulatory information sharing will have on the financial condition,
results of operations or future prospects of First Community after the merger.
OTHER LEGISLATIVE DEVELOPMENTS. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 has resulted in major changes in the
regulation of insured financial institutions, including significant changes in
the authority of government agencies to regulate insured financial institutions.
Virtually all federal deposit insurance activities were consolidated under the
FDIC, including insuring deposits of federal savings associations, state
chartered savings and loans and other depository institutions determined to be
operated in substantially the same manner as a savings association. Since 1994,
the FDIC has assessed deposit insurance premiums pursuant to a risk-based
assessment system, under which an institution's premium assessment is based on
the probability that the deposit insurance fund will incur a loss with respect
to the institution, the likely amount of such loss, and the revenue needs of the
deposit insurance fund.
Future legislation is also likely to impact First Community's business.
Consumer legislation has been proposed in Congress which may require banks to
offer basic, low-cost, financial services to meet minimum consumer needs.
Further, the regulatory agencies have proposed and may propose a wide range of
regulatory changes, including the calculation of capital adequacy and limiting
business dealings with affiliates. These and other legislative and regulatory
changes may have the impact of increasing the cost of business or otherwise
impacting the earnings of financial institutions. However, the degree, timing
and full extent of the impact of these proposals cannot be predicted.
94
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF PROFESSIONAL BANCORP
CERTAIN BENEFICIAL OWNERS
The following table lists the holdings of the only persons (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended) known by Professional Bancorp to be the beneficial owners
of more than five percent (5%) of Professional Bancorp's outstanding common
stock as of September 29, 2000, based upon 2,030,754 shares outstanding on that
date.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
Moses Marx .............................................. 140,000(1) 6.90%
United Equities Company
160 Broadway
New York, New York 10038
George J. Budig ......................................... 138,000(2) 6.80%
George E. Fern Co.
1100 Gest Street
Cincinnati, Ohio 45203
Banc Fund III L.P. ...................................... 137,650(3) 6.78%
Bank Fund III Trust
Banc Fund IV L.P.
Banc Fund IV Trust
Banc Fund V L.P.
208 S. LaSalle Street
Chicago, Illinois 60604
Robert H. Leshner ....................................... 117,416(4) 5.48%(5)
312 Walnut Street
Suite 2100
Cincinnati, Ohio 45202
</TABLE>
------------------------
(1) As reported in a Schedule 13G filed with the SEC on June 16, 2000.
(2) As reported in a Schedule 13D filed with the SEC on July 14, 2000.
(3) As reported in Amendment No. 1 to a Schedule 13D filed with the SEC on
November 5, 1998.
(4) As reported in Amendment No. 3 to Schedule 13D filed with the SEC on
November 12, 1996. 110,250 of the reported shares are related to a presently
exercisable warrant.
(5) Warrants convertible into shares of common stock held by Mr. Leshner which
are exercisable within 60 days after September 29, 2000, are treated as
outstanding for the purpose of computing the percentage of outstanding
common stock owned by Mr. Leshner, but not for the purpose of computing the
percentage of common stock owned by any other person.
MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of Professional Bancorp's outstanding common stock as of
September 29, 2000, by each director and executive officer of
95
<PAGE>
Professional Bancorp and First Professional, and by all directors and executive
officers of Professional Bancorp and First Professional as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE PERCENT
OF BENEFICIAL OF
NAME/TITLE OWNERSHIP(1) CLASS(2)
---------- ------------- --------
<S> <C> <C>
Richard A. Berger, Director................................. 24,571(3) 1.17%
Ronald L. Katz, M.D., Director.............................. 16,836(4) *
Lynn O. Poulson, Director and Secretary..................... 9,210(5) *
Gene F. Gaines, Chairman of the Board, Chief Executive
Officer, President and Director............................. 50,000(6) 2.34%
Robert J. Margolis, M.D., Director.......................... 49 *
William C. Walbrecher, Jr., Director........................ 1,500 *
Larry Patapoff, Senior Vice President and Chief Financial
Officer of Professional Bancorp and Executive Vice
President, Chief Financial Officer and Chief Operating
Officer of First Professional............................... 15,000(7) *
Jae Souverielle, Senior Vice President, Strategic Planning
and Development of First Professional....................... 3,167(8) *
Robert Dyck, Senior Vice President, Credit Administration of
First Professional.......................................... 1,667(9) *
Sharon A. Schmidt, Senior Vice President and Chief
Operations Officer of First Professional.................... 1,667(9) *
Nancy Ferretti-Foster, Senior Vice President and Chief
Information Officer of First Professional................... 1,677(9) *
Patricia Derry, Senior Vice President and Senior Loan
Officer of First Professional............................... 2,333(10) *
All Directors and Executive Officers........................ 127,677(11) 5.86%
</TABLE>
------------------------
* Less than 1% of the shares outstanding.
(1) Unless otherwise indicated, the persons named herein have sole voting and
investment power over the shares reported.
(2) Convertible notes and options and warrants to purchase shares of common
stock held by directors, executive officers and other persons that were
exercisable or convertible within 60 days after September 29, 2000 are
treated as outstanding for the purpose of computing the number and
percentage of outstanding securities of the class owned by such persons,
but not for the purpose of computing the percentage of the class owned by
any other person.
(3) Includes 1,874 exercisable option shares.
(4) Includes 1,874 exercisable option shares.
(5) Includes 1,874 exercisable option shares. Mr. Poulson has shared voting and
investment power over these shares.
(6) Includes 50,000 exercisable option shares.
(7) Includes 15,000 exercisable option shares.
(8) Includes 3,167 exercisable option shares.
(9) Includes 1,667 exercisable option shares.
(10) Includes 2,333 exercisable option shares.
(11) Includes the shares owned by the current directors and named executive
officers (12 in number) as a group, and includes 79,456 exercisable option
shares.
96
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF FIRST COMMUNITY
CERTAIN BENEFICIAL OWNERS
The following table lists the holdings of the only persons (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act)
known by First Community to be the beneficial owners of more than five
percent (5%) of First Community's outstanding common stock as of September 30,
2000, based upon 3,958,416 shares outstanding on that date.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
John M. Eggemeyer, III(1)....................... 1,138,079 28.0%
6051 El Tordo
Rancho Santa Fe, California
Castle Creek Capital Partners Fund I, LP........ 602,870 15.4%
6051 El Tordo
Rancho Santa Fe, California
Franklin Mutual Advisers, LLC................... 439,765 11.3%
51 John F. Kennedy Parkway
Short Hills, New Jersey
Castle Creek Capital Partners Fund IIa, LP...... 218,989 5.6%
6051 El Tordo
Rancho Santa Fe, California
</TABLE>
------------------------
(1) Mr. Eggemeyer has direct beneficial ownership of 123,703 shares of First
Community Common Stock, options to purchase 100,000 shares of First
Community Common Stock has or shares voting power and/or investment power,
through Castle Creek Capital Partner's Fund I, LP ("Fund I"), of which he is
a principal, with respect to 602,870 shares, has or shares voting power
and/or investment power, through Castle Creek Capital Partner's Fund IIa, LP
("Fund IIa"), of which he is a principal, with respect to 218,989 shares and
has or shares voting power and/or investment power, through Castle Creek
Capital Partner's Fund IIb, LP ("Fund IIb"), of which he is a principal,
with respect to 92,517 shares. These totals do not include 16,307 shares
held in First Community's Deferred Compensation Plan.
97
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of First Community's outstanding common stock as of September 30,
2000, by each director and executive officer of First Community, and by all
directors and executive officers of First Community as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE PERCENT
OF BENEFICIAL OF
NAME/TITLE OWNERSHIP CLASS
---------- ------------- --------
<S> <C> <C>
John M. Eggemeyer, III,(1) Director...................... 1,138,079 28.0%
William T. Powers(2), Director & Executive Officer....... 65,025 1.6%
Robert A. Schoellhorn,(3) Director....................... 135,000 3.4%
Dale E. Walter,(4) Director.............................. 47,206 1.2%
David S. Williams,(5) Director........................... 38,810 0.8%
James A. Boyce,(6) Director & Executive Officer.......... 79,503 2.0%
Robert E. Herrmann, Director............................. 46,300 1.2%
Paul I. Stevens, Director................................ 400 *
Robert A. Stine,(7) Director............................. 3,000 0.1%
Robert M. Borgman, Executive Officer..................... 0 *
Arnold C. Hahn, Executive Officer........................ 0 *
Matthew P. Wagner, Executive Officer..................... 0 *
All Directors and Executive Officers..................... 1,564,001 37.1%
</TABLE>
------------------------
(1) Mr. Eggemeyer has direct beneficial ownership of 123,703 shares of First
Community Common Stock, options to purchase 100,000 shares of First
Community Common Stock, has or shares voting power and/or investment power,
through Castle Creek Capital Partner's Fund I, LP ("Fund I"), of which he is
a principal, with respect to 602,870 shares, has or shares voting power
and/or investment power, through Castle Creek Capital Partner's Fund IIa, LP
("Fund IIa"), of which he is a principal, with respect to 218,989 shares and
has or shares voting power and/or investment power, through Castle Creek
Capital Partner's Fund IIb, LP ("Fund IIb"), of which he is a principal,
with respect to 92,517 shares. These totals do not include 16,307 shares
held in First Community's Deferred Compensation Plan.
(2) Mr. Powers beneficially owns 15,525 shares of First Community Common Stock
and options to purchase 49,500 shares of First Community Common Stock.
(3) Mr. Schoellhorn beneficially owns 132,000 shares of First Community Common
Stock and options to purchase 3,000 shares of First Community Common Stock.
(4) Mr. Walter beneficially owns 44,206 shares of First Community Common Stock
and options to purchase 3,000 shares of First Community Common Stock.
(5) Mr. Williams beneficially owns 27,490 shares of First Community Common Stock
and options to purchase 4,320 shares of First Community Common Stock.
(6) Mr. Boyce beneficially owns 25,503 shares of first Community Common Stock
and options to purchase 54,000 shares of First Community Common Stock.
(7) Mr. Stine's totals do not include 3,172 shares held in First Community's
Deferred Compensation Plan.
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<PAGE>
REMUNERATION OF PRINCIPAL OFFICERS
The following table sets forth the aggregate annualized remuneration paid or
to be accrued for services to be rendered during 2000 to principal officers of
First Community with aggregate remuneration exceeding $100,000.
<TABLE>
<CAPTION>
ANNUALIZED TARGET OTHER ANNUAL ALL OTHER
NAME OF INDIVIDUAL 2000 SALARY BONUS COMPENSATION* COMPENSATION
------------------ ----------- -------- ------------- ------------
<S> <C> <C> <C> <C>
William T. Powers(a).......................... $136,000 $ 68,000 -- --
James A. Boyce(b)............................. $175,000 $ 85,500 -- --
Arnold C. Hahn(c)............................. $125,000 $ 62,500 -- --
Robert M. Borgman(d).......................... $125,000 $ 62,500 -- --
Matthew P. Wagner(e).......................... $200,000 $100,000 -- --
Gene F. Gaines(f)............................. $200,000 $100,000
</TABLE>
(*) All executive officers receive a car allowance or use of a company car. It
is estimated that the value of the personal use of these vehicles should not
exceed $10,000.
------------------------
(a) President and Chief Executive Officer of First Community Bank of the Desert
and Director.
(b) President and Chief Executive Officer of Rancho Santa Fe National Bank and
Director, President and Chief Executive Officer of First Community through
August 2000.
(c) Executive Vice President, Chief Financial Officer and Assistant Secretary.
(d) Executive Vice President and Chief Credit Officer.
(e) President and Chief Executive Officer since September 2000.
(f) Chief Executive Officer, Chairman and President of First Professional Bank,
N.A.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
OF FIRST COMMUNITY
DIRECTORS
The following table sets forth information relating to each of the persons
who will serve as a director of First Community and its subsidiaries after the
merger.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR
APPOINTED
NAME OCCUPATION AGE DIRECTOR POSITION
---------------------- ------------------------------------ -------- ---------- ----------------------
<S> <C> <C> <C> <C>
William T. Powers President and Chief Executive 60 2000 President, Chief
Officer of First Community Bank Executive Officer of
President, Chief Executive Officer First Community Bank
of First Community Bank of the of the Desert and
Desert and Director of the Desert, Director
October 1993 to present; Senior Vice
President and Regional Branch
Administrator, El Dorado Bank,
September 1989 to October 1993.
Robert A. Schoellhorn Chairman and Chief Executive 72 2000 Director
Officer, Marathon Coach, Inc.,
January 1993 to present; Chairman
and Chief Executive Officer, Abbott
Laboratories, retired August 31,
1990.
Dale E. Walter Retired; President and Chief 66 2000 Director
Executive Officer, Guardian Bank,
October 1994 to February 1995;
Chairman, President and Chief
Executive Officer, Commerce Bank,
January 1993 to August 1994;
President and Chief Executive
Officer, Bank of Industry, August
1980 to June 1992.
David S. Williams President, Williams Plumbing, Inc. 58 2000 Director
James A. Boyce President and Chief Executive 62 2000 President and Chief
Officer of Rancho Santa Fe Executive Officer of
Rancho Santa Fe
National Bank and
Director National Bank
Since 1982.
John M. Eggemeyer, III Chairman of the Board of Rancho 54 2000 Chairman of the Board
Santa Fe National Bank since 1995; and Director
Founder and Chief Executive of
Castle Creek Capital, LLC and Belle
Plaine Financial, LLC, two companies
which together form a merchant
banking organization serving the
banking industry exclusively; serves
as a director of Western Bancorp,
The Enterprise Fund, TCF Financial
and TCF Bank Illinois FSB.
Robert E. Herrmann Retired attorney; Real Estate 74 2000 Secretary and Director
Investor.
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR
APPOINTED
NAME OCCUPATION AGE DIRECTOR POSITION
---------------------- ------------------------------------ -------- ---------- ----------------------
<S> <C> <C> <C> <C>
Paul I. Stevens Chairman and CEO of Stevens 85 2000 Director
International, Inc.; Chairman, CEO
and President of Stevens Industries.
Robert A. Stine President and CEO of Tejon Ranch, 53 2000 Director
Inc. since May 1996; Independent
Consultant from March 1995 to April
1996; President and CEO of Collins
Development Co. from June 1986 to
March 1995.
Gene F. Gaines Chairman and Chief Executive Officer 59 2000 Director
of Professional Bancorp (since
February 2000); Chief Executive
Officer (since October 1999),
Chairman and President (since
February 2000) of First
Professional; Senior Vice President
of SunAmerica Retirement Markets,
Inc. from January 1998 to August
1999; Senior Vice President of
Fidelity and Guaranty Life Insurance
Company from March 1993 to January
1998.
</TABLE>
EXECUTIVE OFFICERS
The following table sets forth information relating to each of the persons
who will serve as executive officers of First Community or its subsidiaries
after the merger.
<TABLE>
<CAPTION>
YEAR HIRED TO
NAME AGE POSITION COMPANY
---- -------- ------------------------------------- -------------
<S> <C> <C> <C>
Robert M. Borgman.................... 52 Executive Vice President and Chief 2000
Credit Officer
Arnold C. Hahn....................... 48 Executive Vice President and Chief 2000
Financial Officer
James A. Boyce....................... 62 President and Chief Executive Officer 1982
of Rancho Santa Fe National Bank
William T. Powers.................... 60 President and Chief Executive Officer 1993
of First Community Bank of the Desert
Matthew P. Wagner.................... 44 President and Chief Executive Officer 2000
Gene F. Gaines....................... 59 Chief Executive Officer, Chairman and 2000
President of First Professional
</TABLE>
ROBERT M. BORGMAN is currently an Executive Vice President and the Chief
Credit Officer of First Community. Prior to joining the Company, Mr. Borgman was
Executive Vice President and Chief Credit Officer of Western Bancorp since 1997.
Prior to joining Western in August 1997, Mr. Borgman was the founder, President
and Chief Executive Officer of National Business Finance, Inc., a national
commercial finance and factoring organization headquartered in Denver, Colorado
from 1987 to 1997. During the
101
<PAGE>
period from 1978 to 1987, Mr. Borgman held the position of Senior Vice President
and Manager of Commercial Lending at First Interstate Bank of Denver.
ARNOLD C. HAHN has served as Executive Vice President and Chief Financial
Officer of First Community since January 2000. Prior to joining First Community,
Mr. Hahn was Executive Vice President and Chief Financial Officer of Western
Bancorp since November 1996. Prior to joining Western, Mr. Hahn spent six years
as a Senior Vice President of Finance of U.S. Bancorp in Minneapolis, Minnesota.
Prior to joining U.S. Bancorp, Mr. Hahn was a partner with Ernst & Young L.L.P.
MATTHEW P. WAGNER is the President and Chief Executive Officer of the
Company. Prior to joining First Community in September 2000, Mr. Wagner was
President and Chief Executive Officer of Western Bancorp. In February 1997,
Mr. Wagner was appointed to the post of President of Western, and in
December 1997 he was appointed to the additional post of Chief Executive Officer
of Western. Prior to joining the Western in 1996, Mr. Wagner was an Executive
Vice President with U.S. Bancorp in Minneapolis, Minnesota since 1991 and a
Senior Vice President since 1985.
JAMES A. BOYCE is the President and Chief Executive Officer of Rancho Santa
Fe National Bank, a position he has held since 1982.
WILLIAM T. POWERS is the President and Chief Executive Officer of First
Community Bank of the Desert, a position he has held since 1993. Prior to
joining First Community Bank of the Desert, he was Senior Vice President and
Regional Branch Administrator of El Dorado Bank from 1989 to 1993.
GENE F. GAINES is Chairman and Chief Executive Officer of Professional
Bancorp, a position he has held since February 2000. He is also Chairman and
President (since February 2000) and Chief Executive Officer (since
October 1999) of First Professional. Prior to joining Professional Bancorp and
First Professional, he was Senior Vice President of SunAmerica Retirement
Markets, Inc. from January 1998 until August 1999. Prior to joining SunAmerica
Retirement Markets, Mr. Gaines was Senior Vice President of Fidelity Guaranty
Life Insurance Company from 1993 to 1998.
102
<PAGE>
THE SPECIAL MEETING OF PROFESSIONAL
BANCORP SHAREHOLDERS
INTRODUCTION
These proxy materials are furnished in connection with the solicitation by
the board of directors of Professional Bancorp of proxies to be voted at the
special meeting of shareholders and at any adjournment or postponement thereof.
You are invited to attend the special meeting of shareholders on December 12,
2000 at 4:30 p.m., Pacific Time. The meeting will be held at First Professional
Bank, 606 Broadway, Santa Monica, California. These proxy materials are first
being mailed to shareholders on or about November , 2000.
THE PROXY
PROXY
Your vote is important. The board of directors solicits proxies so that each
shareholder has the opportunity to vote on the proposal to be considered at the
meeting. A form of proxy for voting your shares at the meeting is enclosed. When
you properly execute and return your proxy, the shares it represents will be
voted at the meeting in accordance with your instructions on the proxy. If no
instruction is specified on the proxy with respect to the proposal to be acted
upon, the shares represented by your executed proxy will be voted in favor of
the merger with First Community. The proxy will be voted at the discretion of
the holders of the proxy, in accordance with the recommendations of the board,
on any other business matter that may properly be presented at the meeting,
including any matters which Professional Bancorp did not have notice of a
reasonable time before the printing and mailing of this proxy statement.
REVOCABILITY OF PROXIES
You may revoke your proxy at any time before it is exercised by (1) filing
with the Secretary of Professional Bancorp a written notice of revocation of
your proxy; (2) submitting a duly executed proxy bearing a later date; or
(3) voting in person at the meeting.
PERSONS MAKING THE SOLICITATION
The board of directors of Professional Bancorp is making this solicitation
of proxies. The expense of preparing, assembling, printing and mailing this
proxy statement and the materials used in the solicitation of proxies will be
borne by Professional Bancorp. It is contemplated that proxies will be solicited
principally through the use of the mail, but officers, directors and employees
of Professional Bancorp and its wholly owned subsidiary, First Professional
Bank, may solicit proxies personally or by telephone or facsimile, for which no
compensation will be paid. Although there is no formal agreement to do so,
Professional Bancorp may reimburse banks, brokerage houses and other custodians,
nominees and fiduciaries for their reasonable expenses in forwarding these proxy
materials to shareholders whose shares of Professional Bancorp's common stock
are held of record by such entities.
RECORD DATE
The board of directors has fixed the close of business on November 2, 2000
as the record date for determining the shareholders entitled to notice of and to
vote at the special meeting. There were [ ] shares of Professional
Bancorp common stock issued and outstanding on the record date.
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<PAGE>
VOTING
You are entitled to one vote for each share of common stock you owned of
record on the books of Professional Bancorp as of the record date on any matter
submitted to a shareholder vote at the special meeting.
CONFIDENTIALITY OF VOTING
Professional Bancorp has adopted a policy of encouraging shareholder
participation in corporate governance by ensuring the confidentiality of
shareholder votes. Proxies, ballots and voting tabulations that identify the
vote of a shareholder are kept confidential from the directors, officers and
employees of Professional Bancorp except in certain specific and limited
circumstances, such as a contested election, when required to meet legal
requirements or in cases where shareholders write comments or questions on their
proxy cards. Professional Bancorp has designated an independent third party,
U.S. Stock Transfer Corporation, Professional Bancorp's transfer agent, to be
the inspector of election and to receive and tabulate shareholder proxy and
ballot votes.
VOTE REQUIRED
Approval of the merger requires the affirmative vote of a majority of the
votes cast at the special meeting by shareholders represented at the meeting and
entitled to vote.
QUORUM REQUIREMENT
The presence, in person or by proxy, of the holders of a majority of the
shares of common stock entitled to vote at the meeting is necessary to
constitute a quorum at the special meeting.
METHOD OF COUNTING VOTES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If you do not attend the special meeting and do not return the
signed proxy card, your shares will not be voted. You are urged to mark the box
on the proxy card to indicate how you wish your shares represented by the proxy
card to be voted. If you return a signed proxy card but do not indicate how your
shares are to be voted, such shares will be voted "FOR" the merger. In addition,
brokers who hold common stock as nominees will not have discretion to vote your
shares for or against the merger in the absence of written instructions from
you.
VOTING RESULTS
U.S. Stock Transfer Corporation, the inspector of election duly appointed by
the board, will count the votes on each matter and announce the results at the
special meeting.
DISSENTING SHAREHOLDERS' RIGHTS
The rights of dissenting shareholders of Professional Bancorp are governed
by the Pennsylvania Business Corporation Law. For discussion of dissenters'
rights see "THE MERGER--Dissenters' Rights". A copy of the applicable statute is
set forth in Annex C hereto.
SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
If the merger with First Community Bancorp is approved by shareholders and
consummated, Professional Bancorp will not hold any further annual shareholder
meetings. If the merger is not approved or is not consummated for any reason,
the 2001 Annual Meeting of Shareholders is currently scheduled for May 7, 2001.
Any shareholder who wishes a proposal to be considered for inclusion in
Professional Bancorp's proxy statement for the next annual meeting must submit
the proposal to Professional Bancorp
104
<PAGE>
on or before January 20, 2001. Proposals should be addressed to Gene F. Gaines,
Chairman of the Board, Professional Bancorp, Inc., 606 Broadway, Santa Monica,
California 90401. Any such proposal must satisfy the conditions for shareholder
proposals established by the Securities and Exchange Commission in Rule 14a-8 of
the Securities Exchange Act.
Any shareholder who intends to directly present a proposal at the 2001
Annual Meeting of Shareholders (outside of the Rule 14a-8 process) must notify
Professional Bancorp of the proposal on or before April 5, 2001. If Professional
Bancorp is not notified by such date, Professional Bancorp will have the right
to exercise discretionary voting authority with respect to such proposal, if
presented at the meeting, without including information regarding such proposal
in its proxy materials. Notices of intention to present proposals at the 2001
Annual Shareholders meeting should be addressed to Gene F. Gaines, Chairman of
the Board, Professional Bancorp, Inc., 606 Broadway, Santa Monica, California
90401.
OTHER MATTERS
Professional Bancorp's board of directors does not know of any matters to be
presented at the special meeting other than the proposed merger with First
Community. However, if other matters come before the special meeting, it is the
intention of the persons named in the accompanying proxy to vote said proxy in
accordance with the recommendations of Professional Bancorp's board of directors
on such matters, and discretionary authority to do so is included in the proxy.
105
<PAGE>
THE MERGER
THE DETAILED TERMS OF THE MERGER ARE CONTAINED IN THE MERGER AGREEMENT
ATTACHED AS ANNEX A TO THIS DOCUMENT. THE FOLLOWING DISCUSSION AND THE
DISCUSSION UNDER "THE MERGER AGREEMENT" DESCRIBE THE MORE IMPORTANT ASPECTS OF
THE MERGER AND ALL OF THE MATERIAL TERMS OF THE MERGER AGREEMENT. THESE
DESCRIPTIONS ARE QUALIFIED BY REFERENCE TO THE MERGER AGREEMENT, WHICH IS
ATTACHED AS ANNEX A. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT CAREFULLY.
BACKGROUND OF THE MERGER
Since its formation in 1981, Professional Bancorp and its wholly-owned
subsidiary, First Professional, have served the needs of the health care
services sector, emphasizing superior service and relationships. Professional
Bancorp recognized that significant changes were taking place in the banking
industry and believed that it could utilize its existing holding company
structure to improve the delivery of financial services through non-bank
subsidiaries. Professional Bancorp believed that sharing management and
resources would enable it and its operating subsidiaries to survive the
competitive pressures of an industry dominated by large banks and holding
companies.
In late 1996, after Professional Bancorp had a change in management, it
entered an alliance with Network Health Financial Services whereby Network
Health would provide management services to Professional Bancorp on a consulting
basis. Consistent with its strategic plan, and as one possible means of
providing value to its shareholders, throughout 1997-1998 Professional Bancorp
sought to acquire Network Health as an operating subsidiary of First
Professional to supplement the services being provided to First Professional's
customers.
In January of 1998, Professional Bancorp retained Endicott Financial
Advisors, L.L.C. to provide strategic planning and valuation services and to
advise the board of directors on the possible impact on shareholder value of a
transaction between Professional Bancorp and Network Health. Endicott presented
its findings in a formal presentation to the board of directors on October 28,
1998. Endicott's engagement by Professional Bancorp ended with that formal
presentation to the board of directors. In the end, Professional Bancorp was
unable to acquire Network Health, although Network Health continued to provide
services as a consultant until April 2000.
In late 1998, the board of directors of Professional Bancorp engaged Hovde
Financial, LLC to assist it in exploring strategic options available to it to
enable First Professional to more fully develop its niche. The options
considered included the possible sale or merger of Professional Bancorp.
Beginning in November 1998, Hovde contacted 39 sale or merger prospects. Of the
parties contacted, 13 organizations executed a confidentiality agreement and
received a confidential offering memorandum. During this marketing process, the
board received four expressions of interest to acquire 100 percent of the issued
and outstanding shares of Professional Bancorp. Throughout early 1999, Hovde
maintained an active dialogue with the interested parties and management hosted
numerous due diligence visits with prospective acquirers.
As a result of these discussions and based upon its own due diligence, First
Federal Financial offered to acquire 100 percent of Professional Bancorp's
issued and outstanding shares at a price of $23.50 per share, subject to
additional due diligence and the execution of a definitive agreement. During the
First Federal transaction, Endicott was again retained by the Company in June of
1999 to provide the board of directors with independent financial advice
regarding the consideration to be received in the merger. This engagement ended
with a formal presentation to Professional Bancorp's Board of Directors on
June 21, 1999. On June 28, 1999, Professional Bancorp's board accepted First
Federal's conditional offer and issued with First Federal a joint announcement
of the letter of intent. The parties then began negotiating a definitive
agreement while First Federal and Professional Bancorp continued to exchange
information as part of First Federal's continuing due diligence review. In early
August 1999, First Federal made a more detailed review of First Professional's
loan portfolio. At the end of August, First Federal advised
106
<PAGE>
Professional Bancorp that it would not be in a position to continue to offer
$23.50 per share and indicated that it might be unable to establish any fixed
price until immediately prior to the closing of a merger.
In early September, it became clear to Professional Bancorp's board that
there was a significant risk that the merger would not be completed at all, and
that even if a merger could take place, it would not be at a price in the best
interests of Professional Bancorp's shareholders. Thus, on September 7, 1999,
Professional Bancorp and First Federal announced the termination of the letter
of intent.
Following termination of negotiations with First Federal, the board
reevaluated its options and elected to continue discussions with other
interested parties. Although the board had terminated formal discussions with
First Federal, Hovde, at the board's request, contacted First Federal's
management to ascertain a price at which First Federal might be prepared to
proceed. During the conversations, First Federal indicated that they might be
prepared to offer a price approximating book value but reiterated that any such
bid would be subject to a new round of due diligence. Based upon the strength of
other possible alternatives and expressions of interest, and other factors, the
board elected to focus efforts on other interested parties.
In September and October of 1999, the board of directors of Professional
Bancorp recognized its weak stock performance and its failure to meet its
financial performance targets. In October 1999, the board of directors hired
Gene F. Gaines as chief executive officer of First Professional. In February and
March of 2000, Mr. Gaines was appointed Chairman and President of First
Professional and Chairman and Chief Executive Officer of Professional Bancorp.
At the same time, the OCC, the primary regulator of First Professional, began
its regular annual examination. Based on management's internal review and the
OCC's examination, Professional Bancorp downgraded a number of large loans and
made substantial additions to its loan loss reserves. As a result Professional
Bancorp recorded a loss for 1999 of $(8.4) million. In the first half of 2000,
Professional Bancorp has made downgrades and provisions resulting in a loss of
$(35,000) for the six months ending June 30. In March and April of 2000, First
Professional and Professional Bancorp entered into oversight agreements with
their primary regulators, the OCC and the Federal Reserve Bank, respectively.
On February 11, 2000, Professional Bancorp retained Endicott to provide
additional strategic planning services and to provide assessments on the
strategic alternatives for Professional Bancorp, including a potential
recapitalization or merger with another banking organization. During 2000, the
board of directors reviewed with Endicott the potential to recapitalize
Professional Bancorp and the dilutive impact of a recapitalization on the
existing shareholders of Professional Bancorp. Endicott also discussed with the
board the potential impact of merging Professional Bancorp with another company.
The board discussed, among other things, the advantages that expanded operations
would have toward product innovation and technological development for
Professional Bancorp. The board believed that the need to raise additional
capital and the oversight agreements with the OCC and Federal Reserve had an
adverse impact on the Company's ability to leverage its management, operational
structure and customer base.
Throughout late 1999 and into the spring of 2000, Hovde maintained active
dialogue with three prospective purchasers. One of these parties had provided
the board with a written expression of interest which contemplated the payment
of a purchase price well in excess of current market prices and Professional
Bancorp's book value, subject to due diligence and the execution of a definitive
agreement. After completion of extensive due diligence, this party submitted an
updated proposal materially different from the terms of its previous expression
of interest, including a purchase price substantially below Professional
Bancorp's book value per share and, alternatively, a proposed recapitalization
that would have resulted in substantial dilution to Professional Bancorp's
current shareholders. After considering these proposals, the board rejected them
and notified this party of its intent to commence discussions with alternate
purchasers.
In late April 2000, another prospective purchaser submitted an expression of
interest with a price in excess of book value. In early May 2000, this party
completed its due diligence and concluded that it would
107
<PAGE>
not be able to complete a transaction under terms contained in the letter of
interest. During this same period, Professional Bancorp also maintained an
active dialogue with First Community, an affiliate of one of the earlier
bidders, and resolicited an offer based upon the delivery of new information. On
April 17, 2000 First Community expressed its interest to acquire Professional
Bancorp.
On May 4, 2000 and June 10, 2000, Endicott and Hovde made formal
presentations to Professional Bancorp's board of directors regarding the
potential impact on shareholder value of various recapitalization strategies and
the offer of First Community. On July 12, 2000, Professional Bancorp retained
Endicott to provide valuation and transaction services regarding a potential
merger transaction with First Community. At a series of special meetings of
Professional Bancorp's board of directors held in July and August, the board
continued to focus on the best alternative to maximize shareholder value. At a
July 18, 2000 meeting of the board of directors, the board determined that, due
to difficulty in successfully completing a recapitalization of Professional
Bancorp, the dilutive impact that a recapitalization would have on existing
Professional Bancorp shareholders, new competitors entering the industry,
financial reform legislation, increasing technology requirements, poor
historical performance trends of Professional Bancorp and their impact on
shareholder value, and other factors, remaining independent was no longer a
viable option for Professional Bancorp. The board of directors resolved to
pursue a merger transaction with First Community.
The board of directors authorized the management team of Professional
Bancorp to assist First Community in its due diligence investigation of the
Company and to negotiate, with the advice of its financial advisor and legal
counsel, the terms and conditions of a definitive agreement. A draft agreement
was proposed by First Community, the details of which were discussed at great
length at various meetings of the board of directors held between July 18, 2000
and August 2, 2000 for the specific purpose of considering whether to approve
and execute the definitive agreement. First Community completed its due
diligence review of Professional Bancorp and formalized its offer of, at the
election of each holder of Professional Bancorp, either $8.00 in cash or 0.55
shares of First Community, subject to a maximum aggregate limitation on the
amount of First Community shares to be issued of 50% to be received by the
holders of Professional Bancorp common stock.
During this period representatives of Professional Bancorp and Endicott
completed a due diligence review of First Community, including meetings with
senior management. Endicott presented detailed analyses of the financial terms
and conditions, including valuation comparisons with recent transactions of a
similar nature. Counsel assisted the board of directors with an analysis of the
terms and conditions of the proposed definitive agreement and the legal
implications of the transaction. In addition, management of Professional Bancorp
and a representative of Endicott discussed the results of their due diligence
review of First Community.
On July 25, 2000, Hovde advised the board of an unsolicited offer for a cash
acquisition of Professional Bancorp by a bank holding company headquartered
outside of California with significant operations within California. As
Professional Bancorp was engaged in discussions with First Community, the board
believed it was critical to pursue more specific discussions with the potential
acquiror to determine whether their terms might be competitive with those being
discussed with First Community. While discussions were ongoing with First
Community to reach a definitive merger agreement, the potential acquiror was
invited to complete a due diligence review of Professional Bancorp. The board
and its advisors maintained active dialogue and negotiations with both potential
purchasers through the early part of August 2000. From July 25, 2000 through
August 2, 2000 the board of directors met several times to consider updated
offers from both First Community and the potential acquiror. Professional
Bancorp's counsel and Hovde and Endicott, its financial advisors, attended these
meetings to review with the board the other potential financial and strategic
benefits of the transaction, the financial valuation analyses, and the terms and
conditions of the First Community definitive agreement. At these meetings, the
board reviewed in great detail both proposals and in the end deemed the First
Community transaction to be superior to the transaction proposed by the other
potential acquiror. On July 27, 2000, the board of
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Professional Bancorp instructed management to ask representatives of First
Community to have preliminary discussions with its primary regulators regarding
a potential acquisition of Professional Bancorp. These discussions were
completed on July 31, 2000. At the same time and at Professional Bancorp's
request, the other potential acquiror's counsel prepared a draft definitive
agreement which was received and reviewed on August 2, 2000.
After reviewing the draft agreements submitted by both First Community and
the other potential acquiror and having extensive discussions covering the
factors described below and telephone conversations with First Community and its
counsel to negotiate certain modifications, the board of directors unanimously
approved the agreement with First Community, following presentation by Endicott
of its oral opinion that the merger consideration was fair to Professional
Bancorp's shareholders from a financial point of view. The board of directors
also unanimously approved and adopted the voting agreement which was a part of
the agreement. The parties executed the Agreement and Plan of Merger on
August 7, 2000.
STRUCTURE OF THE MERGER
GENERAL. The merger agreement provides that, after approval by Professional
Bancorp shareholders and the satisfaction or waiver of the other conditions to
the merger, Professional Bancorp will merge with and into First Community. The
Articles of Incorporation and Bylaws of First Community, as in effect
immediately prior to the merger, will be the Articles of Incorporation and
Bylaws of First Community after the merger. The directors and officers of First
Community immediately prior to the merger will be the directors and officers of
First Community after the merger until they resign or until their respective
successors are duly elected and qualified. After the merger, First Community has
agreed to appoint Gene F. Gaines, who currently serves as CEO and President of
Professional Bancorp, to the board of directors of First Community. In addition,
First Community will appoint an advisory board composed of the current members
of the board of directors of Professional Bancorp.
CONVERSION OF PROFESSIONAL BANCORP SHARES. At the completion of the merger,
each issued and outstanding share of Professional Bancorp common stock, other
than shares held by dissenters, will convert into the right to receive 0.55
shares of First Community common stock (subject to adjustment based on the
average market price of First Community Stock) or $8.00 in cash, subject in each
case to proration.
On [ ], 2000 the price of a share of First Community common stock was
$[ ] and the price of a share of Professional Bancorp common stock was
$[ ]. Because shareholders of Professional Bancorp electing to receive
stock consideration will receive 0.55 shares of First Community common stock for
each share of Professional Bancorp common stock, based on the stock prices on
[ ] 2000, Professional Bancorp shareholders would receive the equivalent of
$[ ] for each share of Professional Bancorp common stock.
Each Professional Bancorp shareholder's election may be subject to proration
depending on the elections of other Professional Bancorp shareholders. The
proration will ensure the consideration for the outstanding shares of
Professional Bancorp common stock will allow First Community tax counsel to
provide First Community with an opinion that the merger will be treated as a
reorganization within Section 368 of the Internal Revenue Code. If too many
Professional Bancorp shareholders elect to receive stock, those holders will
receive cash for some of their Professional Bancorp shares notwithstanding their
election. If too many Professional Bancorp shareholders elect to receive cash,
those holders will receive shares of First Community common stock for some of
their Professional Bancorp shares notwithstanding their election.
In addition, the exchange ratio for Professional Bancorp common stock is
subject to reduction if the average market price of First Community common stock
is greater than $16.67 during a prescribed measurement period shortly before the
merger. If the average market price during the measurement period is greater
than $16.67, the exchange ratio will be reduced so that the value of the stock
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consideration received by Professional Bancorp shareholders based on the average
market price of First Community common stock is no greater than $9.17.
If the average market price of First Community common stock is less than
$12.32 during the measurement period, Professional Bancorp will have the option
to terminate the merger unless First Community agrees to increase the exchange
ratio so that the value of the stock consideration received by Professional
Bancorp shareholders based on the average market price of First Community common
stock is no less than $6.78.
The average market price of First Community common stock will be determined
based on the volume weighted average sales price of First Community common stock
on the NASDAQ National Market for a 15-day period ending on the 5th business day
prior to completion of the merger.
First Community will not issue fractional shares. Instead, Professional
Bancorp shareholders will receive an amount of cash based on the closing price
of First Community common stock on the NASDAQ National Market on the day prior
to the merger. First Community will not pay interest on any cash in lieu of
fractional shares received.
First Community will pay cash instead of fractional shares of First
Community common stock in an amount equal to such fraction multiplied by the
closing price of First Community stock on the NASDAQ National Market the trading
day before the day the merger becomes effective. The merger will become
effective the day on which the respective merger filings are made with the
California Secretary of State and the Department of State of the Commonwealth of
Pennsylvania, unless otherwise agreed by First Community and Professional
Bancorp.
Assuming that the holders of Professional Bancorp stock options exercise
their options before the merger, First Community will issue approximately
558,457 shares of First Community common stock in the merger.
If First Community changes the number of outstanding shares of First
Community common stock before the merger through any stock split or other
combination, or if First Community declares a stock dividend, then First
Community will adjust the exchange ratio appropriately.
FUNDING. First Community has issued approximately $8 million in trust
preferred securities to finance substantially all of the cash portion of the
purchase price for the acquisition of Professional Bancorp. These trust
preferred securities are Tier 1 capital for regulatory purposes.
REASONS FOR THE MERGER
First Community believes that one of the potential benefits of the merger is
the estimated $4 million in cost savings and revenue enhancements that may be
realized as a result of the merger. First Community currently expects to reduce
expenses by consolidating external data-processing costs and by combining
accounting, data processing, retail and lending support and other functions
after the merger, which will enable First Community to eventually eliminate
duplicative positions. Promptly following the completion of the merger, which is
expected to occur early in the first quarter of 2001, First Community plans to
begin the process of eliminating redundant functions, such as external data
processing, and duplicative personnel.
First Community believes that it will achieve cost savings based on the
assumption that it will be able to:
- reduce salaries and employee benefits;
- reduce professional and other services; and
- achieve other savings through reduction or elimination of miscellaneous
items such as insurance premiums, travel and automobile expenses, and
investor relations expenses.
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We have based these assumptions on our present assessment of where savings
could be realized based upon present independent operations of the two
companies. Actual savings in some or all of these areas could be higher or lower
than we currently expect.
The companies have prepared financial statements that show the combined
operations and financial condition of the two companies as if the merger had
occurred as of the periods presented. These are known as "pro forma" financial
statements. The pro forma financial statements are set forth beginning on
page 13. The pro forma financial statements do not reflect the fact the First
Community believes the merger will create significant opportunities for
increasing its revenues through mortgage, commercial and consumer loan growth.
First Community has not quantified the increase in revenues that it hopes to
achieve; thus, we cannot predict what effect it will have on our post-merger
results of operations.
The pro forma financial statements show that the merger would have caused a
"dilution" (reduction) in First Community's earnings per share in 1999 and for
the six months ended June 30, 2000 and an "accretion" (increase) in Professional
Bancorp's earnings per share in 1999 and a dilution to earnings per share for
the six months ended June 30, 2000. At December 31, 1999 and June 30, 2000 pro
forma book value per share is accretive to First Community and dilutive to
Professional Bancorp. This is reflected in the pro forma financial statements
and can be seen in the section labeled.
Each of the First Community board of directors and Professional Bancorp
board of directors believes the merger is in the best interest of their
respective institutions, shareholders and banking customers. The parties also
anticipate that the merger will present revenue enhancement opportunities for
the combined entity. These opportunities result from, among other factors, an
increased ability to offer a wider variety of banking products and services
which will result in the potential to increase overall market share in the
communities presently served by First Community and Professional Bancorp These
expected revenue enhancements have not been quantified.
RECOMMENDATION OF THE PROFESSIONAL BANCORP BOARD OF DIRECTORS
In determining whether to approve the merger, the Professional Bancorp board
of directors considered a number of factors, including the following principal
factors:
(1) the potential dilutive impact of a recapitalization transaction on the
existing shareholders of Professional Bancorp weighed against the need of
Professional Bancorp to raise additional capital to meet its regulatory
requirements and enhance the risk profile of the bank;
(2) the merger consideration to be received by the shareholders of
Professional Bancorp in the merger and the board of directors' view of
the likelihood that the merger would deliver value to the shareholders of
Professional Bancorp exceeding the value that could be expected in
connection with continued independence and a potential recapitalization
transaction;
(3) the oral presentation of Endicott, followed by written confirmation, of
its determination as to the fairness of the merger, from a financial
point of view, to Professional Bancorp's shareholders, and the analyses,
methodologies and conclusions underlying such determination (see "THE
MERGER--Opinion of Professional Bancorp's Financial Advisor");
(4) the premium of $4.1875 per share or approximately 110%, which represents
the difference between the merger consideration and the last reported
sale price of the common stock as reported by the American Stock Exchange
on August 3, 2000 ($3.8125 per share), the last day the stock traded
prior to the August 7, 2000 announcement of the merger;
(5) the historical and recent earnings performance of Professional Bancorp
and the trading prices of its common stock;
(6) Professional Bancorp's future prospects and uncertainties in the
business in which Professional Bancorp engages;
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(7) conditions in the banking industry, including increased competition and
consolidation in that industry;
(8) comparisons to the prices and multiples of valuations in recent
acquisitions of companies deemed to be similar in certain respects to
Professional Bancorp (see "THE MERGER--Opinion of Professional Bancorp's
Financial Advisor");
(9) the likelihood that the merger could be consummated, noting the timing
of and conditions to the merger, and the expected effect of the
announcement of the merger on relationships with Professional Bancorp's
customers, employees, servicers and suppliers; and
(10) the terms and conditions set forth in the Agreement and Plan of Merger,
including, but not limited to, the provisions in the Agreement and Plan
of Merger permitting the board of directors to consider and respond to
unsolicited bona fide third-party offers to acquire Professional Bancorp,
subject to certain limitations (see, "THE MERGER--Certain Covenants").
The description of the information and factors considered by the board of
directors of Professional Bancorp above is not meant to be exhaustive but is
believed to include all material factors considered by the board of directors of
Professional Bancorp. The board of did not quantify or attach any particular
weight to the various factors that it considered in reaching its determination
that the merger is advisable, and in the best interest of, the shareholders of
Professional Bancorp. Rather, the board of directors made its determination
based on the total mix of information available to it; the judgments of
individual directors may have been influenced to a greater or lesser degree by
different factors. In considering the recommendation of the board of directors
of Professional Bancorp with respect to the merger, shareholders of Professional
Bancorp should be aware that the interests of certain directors and executive
officers with respect to the merger are or may be different from or in addition
to the interest of the shareholders of Professional Bancorp generally. The board
of directors was aware of these interests and took them into account in making
its recommendation. See "THE MERGER--Interests of Certain Persons in the
Merger."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS ADOPTION OF THE AGREEMENT AND
PLAN OF MERGER BY THE SHAREHOLDERS OF PROFESSIONAL BANCORP.
OPINION OF PROFESSIONAL BANCORP'S FINANCIAL ADVISOR
The terms of the merger, including the merger consideration, were determined
by arms-length negotiation between Professional Bancorp and First Community. The
board of directors of Professional Bancorp retained Endicott to render an
opinion to it as to the fairness of the merger consideration to Professional
Bancorp's shareholders. At the July 25, 2000 meeting of Professional Bancorp's
board of directors, at which the board of directors reviewed and considered the
terms of the merger, Endicott made a presentation discussing the factors that it
considered in evaluating the proposed terms of the transaction and delivered its
oral opinion that the merger consideration was fair to holders of common stock
of Professional Bancorp from a financial point of view. The presentation
included a discussion of the basis for, and the methodologies used by, Endicott
to reach its oral opinion. Endicott subsequently delivered to Professional
Bancorp's board of directors its written opinion, dated as of August 7, 2000,
confirming its oral opinion to the effect that, as of that date and based upon
and subject to the various considerations described therein, the merger
consideration of either $8.00 in cash or 0.55 shares of First Community, subject
to a maximum aggregate limitation on the amount of First Community shares to be
issued of 50% to be received by the holders of Professional Bancorp common stock
pursuant to the Agreement and Plan of Merger is fair to such shareholders from a
financial point of view. As set forth in its opinion, Endicott assumed and
relied upon, without independent verification, the accuracy and completeness of
the information reviewed by it for the purposes of its opinion. Endicott did not
make or obtain an independent evaluation or appraisal of the assets or
liabilities of Professional Bancorp.
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THE FULL TEXT OF ENDICOTT'S OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED AND MATTERS CONSIDERED IN, AND THE LIMITATIONS ON, THE
REVIEW UNDERTAKEN IN CONNECTION WITH ITS OPINION, IS ATTACHED AS ANNEX B. THE
SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THE OPINION. The opinion was provided for the information
and assistance of Professional Bancorp's board of directors in connection with
its consideration of the transaction contemplated by the Agreement and Plan of
Merger and the opinion does not constitute a recommendation as to how holders of
Professional Bancorp's common stock should vote with respect to the merger.
In connection with the opinion, Endicott reviewed, among other things, the
following:
(i) The Agreement and Plan of Merger, including the director and officer
voting agreement, and other exhibits and schedules;
(ii) audited consolidated financial statements and management's discussion
and analysis of the financial condition and results of operations for
Professional Bancorp for the three fiscal years ended December 31,
1999;
(iii) audited consolidated financial statements and management's discussion
and analysis of the financial condition and results of operations for
First Community for the three fiscal years ended December 31, 1999;
(iv) unaudited consolidated financial statements and management's discussion
and analysis of the financial condition and results of operations for
each of Professional Bancorp and First Community for the quarters ended
March 31, 2000 and June 30, 2000;
(v) financial analyses and forecasts for Professional Bancorp and for First
Community;
(vi) the views of senior management of Professional Bancorp and First
Community of their respective past and current business operations,
results thereof, financial condition and future prospects;
(vii) certain reported price and trading activity for Professional Bancorp,
including a comparison of certain financial and stock market
information with similar information for certain other companies the
securities of which are publicly traded;
(viii) the financial terms of recent business combinations in the banking
industry;
(ix) the pro forma impact of the transaction on First Community;
(x) the current market environment generally and the banking environment in
particular; and
(xi) such other information, financial studies, analyses and investigations
and financial, economic and market criteria as Endicott considered
relevant.
Endicott also held discussions with members of senior management of
Professional Bancorp and First Community regarding the rationale for the merger
and the past and current business operations, financial condition and future
prospects. In preparing the opinion, Endicott performed a variety of financial
and comparative analyses and made assumptions in conjunction with Professional
Bancorp with respect to assets, financial conditions and other matters, many of
which are beyond the control of Professional Bancorp. The estimates of value
arrived at by Endicott based on such analyses and the valuation results
determined from any particular analysis are not necessarily indicative of actual
values or predictive of future results or values, and are inherently subject to
substantial uncertainty.
The following paragraphs summarize the most significant quantitative and
qualitative analyses performed by Endicott in arriving at its opinion and
reviewed by Professional Bancorp's board of directors.
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DISCOUNTED CASH FLOW ANALYSIS
Endicott performed a discounted cash flow analysis of future income streams
of Professional Bancorp, based on management's internal projections of net
income for 2000, 2001 and 2002 assuming three different recapitalization
transactions of $5 million, $7.5 million and $10 million, respectively. For each
transaction, new common shares were raised at $4.50 per share and offering
expenses were $500,000. The three transactions resulted in Professional Bancorp
issuing new common shares of 1,111,111 shares, 1,666,667 shares, and 2,222,222
shares, in each transaction, respectively. Professional Bancorp management and
the board agreed that a successful recapitalization of Professional Bancorp was
necessary to meet the regulatory requirements of the oversight agreements signed
with the OCC and the Federal Reserve in March and April of 2000 and enhance
Professional Bancorp's risk profile. In discussions with Professional Bancorp
management, the Professional Bancorp board concluded that a recapitalization
transaction would require at least $7.5 million of new capital to meet
Professional Bancorp's needs. This analysis assumed Professional Bancorp was not
acquired but remained independent for three years.
Based on these assumptions, Endicott determined the theoretical value of a
share of Professional Bancorp common stock at the end of the three year period
by applying terminal multiples representative of historical multiples paid in
commercial bank acquisitions (ranging from 15x to 20x earnings and 150% to 200%
of tangible book value) and discount rates (ranging from 15% to 30%) that
Endicott viewed as appropriate for a company with Professional Bancorp's
particular risk characteristics.
The following table sets forth the ownership dilution calculated under each
recapitalization and the imputed valuation ranges that Endicott calculated for
Professional Bancorp's common stock using these discounted cash flow analyses:
<TABLE>
<CAPTION>
IMPUTED VALUATION RANGE BASED ON:
OWNERSHIP -------------------------------------
RECAPITALIZATION TRANSACTION DILUTION EARNINGS TANGIBLE BOOK VALUE
---------------------------- --------- --------------- -------------------
<S> <C> <C> <C>
$5 Million......................... (35%) $7.43 - $15.08 $5.42 - $11.06
$7.5 Million....................... (45%) $6.53 - $13.25 $5.06 - $10.34
$10 Million........................ (52%) $5.85 - $11.88 $4.81 - $9.83
</TABLE>
PRO FORMA ANALYSIS
Endicott performed pro forma merger analyses that combined Professional
Bancorp's and First Community's current and projected income statements and
balance sheets based on earnings forecasts through 2002 of Professional Bancorp
and First Community management, respectively. For Professional Bancorp, Endicott
assumed no recapitalization transaction, but noted that after the Professional
Bancorp merger, First Community would need to raise approximately $2 to
$4 million of new capital to maintain "well capitalized" status under regulatory
guidelines. To accomplish this, First Community informed Endicott that it had a
facility already in place with a major national banking organization.
Assumptions and analyses of the accounting treatment, acquisition adjustments,
operating efficiencies and other adjustments were made to arrive at a base case
pro forma analysis to determine the effect of the transaction on both
Professional Bancorp and First Community. Endicott noted that based on the $8.00
merger consideration for each share of Professional Bancorp common stock, the
merger will be accretive to First Community's book value per share at closing
and accretive to First Community's earnings per share during the first full year
of combined pro forma operations. Endicott then determined the theoretical value
to a shareholder of Professional Bancorp common stock of receiving $4.00 in cash
today and .275 shares of First Community stock at the end of the three year
period by applying terminal multiples of 10 times earnings and 150% of tangible
book value and discount rates (ranging from 10% to 20%) that Endicott viewed as
appropriate for a company with First Community's particular risk
characteristics. Endicott calculated that the present value of the proposed
merger consideration based on a terminal multiple of 10x earnings and discount
rates between 10% to 20% was $10.03 to $8.73 per share. Endicott calculated that
the present value of the proposed merger consideration based on a terminal
multiple of 150% of tangible book value and discount rates between 10% to 20%
was $7.83 to $7.03 per share.
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ADJUSTED BOOK VALUE ANALYSIS
Endicott performed an adjusted book value analysis that calculated book
value per share based upon transaction adjustments and additional contributions
to the loan loss reserves. For purposes of its analysis, the transaction
adjustments were held constant which reduced book value by $3.6 million. Then
Endicott varied the amount to be added to the loan loss reserves from $0 to
$15 million and calculated adjusted book value per share which ranged from $5.60
assuming $0 additions to the loan loss reserves to $0.68 assuming a $15 million
addition to the loan loss reserves. Based upon the $8.00 per share merger
consideration, Endicott calculated ranges for price-to-adjusted book value per
share and the implied core deposit premium to adjusted book value. The ranges
are summarized in the table below:
<TABLE>
<CAPTION>
ADJUSTED BOOK $8.00 PRICE TO IMPLIED CORE DEPOSIT
VALUE ADJUSTED BOOK PREMIUM TO
ADDITIONAL LOAN LOSS RESERVES PER SHARE VALUE PER SHARE ADJUSTED BOOK VALUE
----------------------------- ------------- --------------- --------------------
<S> <C> <C> <C>
$0 million...................... $5.60 143% 2.20%
$5 million...................... $4.28 187% 3.41%
$10 million..................... $2.97 270% 4.62%
$15 million..................... $0.68 1181% 6.72%
</TABLE>
COMPARABLE COMPANIES ANALYSIS
Endicott analyzed publicly available information to compare selected
financial and market information for three groups of peer companies that
Endicott selected and deemed to be relevant for this purpose. The comparative
companies had total assets between $200 million and $500 million. The three peer
groups were:
1. Western Commercial Banks--28 companies.
2. National Commercial Banks with a Return on Equity greater than 15%--22
companies.
3. National Commercial Banks with non-performing assets / (Loans & OREO)
greater than 2.5%--7 companies.
The financial information Endicott analyzed included book value, tangible
book value, earnings, asset quality ratios, loan loss reserve levels,
profitability and capital adequacy for Professional Bancorp and the median value
for each of the peer groups for each year since 1995. Endicott calculated median
stock market valuation multiples for Professional Bancorp and each of the groups
using price-to-earnings, price-to-book value and price-to-tangible book value.
It should be noted that because Professional Bancorp had net losses of ($4.15)
per share in 1999, and ($0.02) in the six months ending June 30, 2000,
calculating a value based upon price-to-earnings multiples is not meaningful. It
should also be noted that the non-performing assets ("NPA's") to total assets
ratio for Professional Bancorp was significantly above the median for the groups
and the reserves to non-performing assets ratio was significantly below the
median for groups one and two and in line with group three. The results of this
analysis are summarized in the following table:
STOCK MARKET VALUATION MULTIPLES (PER SHARE)
<TABLE>
<CAPTION>
PROFESSIONAL
BANCORP GROUP 1 GROUP 2 GROUP 3
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
Price-to-Earnings........................ Not Meaningful 10.29x 11.29x 12.24x
Price-to-Book Value...................... 62.24% 129.90% 177.18% 129.53%
Price-to-Tangible Book Value............. 62.24% 168.21% 179.96% 156.04%
NPA's to Total Assets.................... 3.43% 0.38% 0.21% 1.99%
Reserves to NPA's........................ 70.66% 212.90% 255.54% 64.20%
</TABLE>
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ANALYSIS OF SELECTED MERGER TRANSACTIONS
Endicott reviewed merger and acquisition transactions announced since
January 1, 1990 involving publicly traded commercial banks and thrifts each as
acquirees and having transaction value over $5 million. Among those reviewed
were transactions involving four groups of commercial banks in 1999 and 2000:
1. California Commercial Banks with less than $500 million in Assets
announced in 1999 and 2000.
2. National Commercial Banks with less than $500 million in Assets
announced in 1999.
3. National Commercial Banks with less than $500 million in Assets
announced in 2000.
4. National Commercial Banks with less than $500 million in Assets and
non-performing assets/total assets greater than 4% announced in 1999 and
2000.
For each of the transactions in the four groups, Endicott calculated, among
other things, the multiples of the transaction value to book value, tangible
book value and last twelve months net income. Endicott also calculated the core
deposit premium (defined as the transaction value minus tangible book value
divided by core deposits, excluding certificates of deposit with balances equal
to or greater than $100,000). Endicott's computations yielded the following
multiples:
<TABLE>
<CAPTION>
PRICE-TO-
COMMERCIAL PRICE-TO- TANGIBLE CORE
BANK NUMBER OF BOOK BOOK PRICE-TO- DEPOSIT PREMIUM
GROUPS TRANSACTIONS VALUE VALUE EARNINGS PREMIUM TO MARKET
---------- ------------ --------- --------- --------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
1 38 249% 249% 20.76x 16.51% 20.15%
2 166 226% 233% 20.73x 15.17% 30.02%
3 48 228% 238% 20.76x 16.21% 23.18%
4 4 141% 141% 15.15x 9.05% Not Meaningful
</TABLE>
Endicott then applied these ranges of multiples derived from these analyses
to comparable data for Professional Bancorp. It should be noted that since
Professional Bancorp had net losses of ($4.15) per share in 1999, and ($0.02) in
the six months ending June 30, 2000, calculating an Imputed Valuation Range
based on earnings multiples is not meaningful. Imputed Valuation Ranges are as
follows:
<TABLE>
<CAPTION>
PRICE-TO- PREMIUM
PRICE-TO- TANGIBLE PRICE-TO- CORE DEPOSIT TO
GROUP BOOK VALUE BOOK VALUE EARNINGS PREMIUM MARKET
----- ---------- ---------- --------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1.................... $18.37 $18.34 Not Meaningful $24.88 $5.41
2.................... $16.69 $17.18 Not Meaningful $23.45 $5.85
3.................... $16.78 $17.57 Not Meaningful $24.56 $5.54
4.................... $10.43 $10.43 Not Meaningful $16.97 Not Meaningful
</TABLE>
No company or transaction, however, used in this analysis is identical to
Professional Bancorp, First Community or the merger. Accordingly, an analysis of
the foregoing is not mathematically precise; rather it involves complex
considerations and judgments concerning differences in the financial and
operating characteristics of the companies and other factors that affect the
public trading values of the companies or company to which they are being
compared.
Endicott has served as financial advisor to Professional Bancorp in varying
capacities since June of 1998 pursuant to the terms of various retainer
agreements between the parties. As required by the terms of the most recent
Endicott retainer agreement, Professional Bancorp paid Endicott a fee of
$100,000 for rendering the fairness opinion. In addition, and pursuant to the
terms of the most recent Endicott retainer agreement, Professional Bancorp will
pay Endicott a transaction fee equal to $25,000 payable upon the consummation of
the merger.
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Professional Bancorp has also agreed to reimburse Endicott for its
reasonable out-of-pocket expenses in connection with its engagement and to
indemnify Endicott and its affiliates and their respective partners, directors,
officers, employees, agents and controlling persons against certain expenses and
liabilities, including liabilities under securities laws. In addition, during
the year 2000, Professional Bancorp will pay Endicott retainer fees totaling
$60,000 for its strategic planning and advisory services.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following section describes the material U.S. federal income tax
consequences of the merger to Professional Bancorp shareholders who hold their
shares as a capital asset within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended. This section does not apply to special classes
of taxpayers, such as:
- financial institutions,
- insurance companies,
- tax-exempt organizations,
- dealers in securities or currencies,
- traders in securities that elect to use a mark to market method of
accounting,
- persons that hold Professional Bancorp common stock as part of a straddle
or conversion transaction,
- persons who are not citizens or residents of the United States, and
- stockholders who acquired their shares of Professional Bancorp common
stock through the exercise of an employee stock option or otherwise as
compensation.
The following discussion is based upon the Internal Revenue Code, its
legislative history, existing and proposed regulations thereunder and published
rulings and decisions, all as currently in effect as of the date hereof, and all
of which are subject to change, possibly with retroactive effect. Tax
considerations under state, local and foreign laws are not addressed.
Determining the actual tax consequences of the merger to you may be complex.
They will depend on your specific situation and on factors that are not within
our control. You should consult with your own tax advisor as to the tax
consequences of the merger in your particular circumstances, including the
applicability and effect of the alternative minimum tax and any state, local or
foreign and other tax laws and of changes in those laws.
TAX OPINION CONDITION TO THE MERGER.
The respective obligations of First Community and Professional Bancorp to
consummate the merger is conditioned upon:
1. Professional Bancorp receiving an opinion of its special counsel,
Jeffer, Mangles Butler & Mamaro LLP, dated the effective date of the merger,
to the effect that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368 of the
Internal Revenue Code; that First Community and Professional Bancorp will
each be a party to that reorganization within the meaning of Section 368 of
the Internal Revenue Code, and that, except to the extent of any cash
received, no gain or loss will be recognized by the Professional Bancorp
shareholders who exchange their shares for shares of First Community common
stock pursuant to the merger; and
2. First Community receiving an opinion of its counsel, Sullivan &
Cromwell, dated the effective date of the merger, to the effect that the
merger will be treated for federal income tax
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purposes as a reorganization within the meaning of 368 of the Internal
Revenue Code and that First Community and Professional Bancorp will each be
a party to that reorganization.
In rendering their opinions, counsel may require and rely upon
representations contained in letters and certificates to be received from First
Community, Professional Bancorp and others. These tax opinions will not be
binding on the Internal Revenue Service and there can be no assurance that the
Internal Revenue Service will not contest the conclusions expressed therein.
Neither First Community nor Professional Bancorp intends to request any ruling
from the Internal Revenue Service as to the U.S. federal income tax consequences
of the merger.
Like other conditions to the merger, the merger agreement allows us to waive
this condition. However, if the receipt of the legal opinion is waived and there
is a material difference in the tax consequences to you from what is described
in this section, we will recirculate revised proxy materials and resolicit the
vote of shareholders.
TAX TREATMENT OF THE MERGER.
As provided in the opinion of Jeffer, Mangles Butler & Mamaro LLP, special
counsel to Professional Bancorp, assuming the representations described above
under the heading "--Tax Opinions Condition to Merger" are true and complete as
of the effective time of the merger and the merger is completed in accordance
with the merger agreement and pursuant to the laws of California and
Pennsylvania, for U.S. federal income tax purposes:
1. the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code;
2. each of First Community and Professional Bancorp will be a party to
that reorganization within the meaning of Section 368(b) of the Internal
Revenue Code;
3. no gain or loss will be recognized by shareholders of Professional
Bancorp who receive solely shares of First Community common stock in
exchange for shares of Professional Bancorp common stock (the treatment of
cash received in lieu of fractional shares is discussed below);
4. shareholders that receive part cash and part First Community common
stock in exchange for their shares of Professional Bancorp common stock
(other than cash received in lieu of fractional shares) will recognize gain,
but not loss, in the amount equal to the lesser of:
(1) the excess, if any, of:
(x) the sum of the fair market value at the date of the merger of
the First Community common stock and the cash received, over
(y) the shareholder's tax basis in the shares of Professional
Bancorp surrendered in the merger; and
(2) the amount of the cash received.
Any such gain will generally be capital gain, subject to Section 302 of
the Internal Revenue Code, and will be long-term capital gain if, as of the
date of the merger, the holding period for the shareholder's Professional
Bancorp shares is greater than one year. Long-term capital gain of a
non-corporate holder is generally subject to maximum federal tax rate of
20%.
5. shareholders that receive solely cash in exchange for their shares
of Professional Bancorp common stock in the merger will recognize capital
gain or loss equal to the difference between the amount of cash received and
the holder's tax basis in the shares. This gain or loss will generally be
capital gain or loss and will be long-term capital gain or loss, if as of
the date of the merger, the
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holding period for such shares is greater than one year. Long-term capital
gain of a non-corporate holder is generally subject to maximum federal tax
rate of 20%.
6. the holding period of First Community common stock received in
exchange for shares of Professional Bancorp common stock will include the
holding period of the Professional Bancorp common stock for which it is
exchanged; and
7. the basis of the First Community common stock received in the merger
will be the same as the basis of the Professional Bancorp common stock for
which it is exchanged, decreased by the amount of cash received and
increased by the amount of gain recognized (less any basis attributable to
fractional shares of common stock for which cash is received).
CASH RECEIVED IN LIEU OF FRACTIONAL SHARES. Professional Bancorp
shareholders that receive cash in the merger in lieu of a fractional share of
First Community common stock will be treated as having received the fractional
share pursuant to the merger and then as having exchanged the fractional share
for cash in a redemption by First Community subject to Section 302 of the Code.
As a result, a Professional Bancorp shareholder will generally recognize gain or
loss equal to the difference between the amount of cash received and the portion
of the basis of the shares of First Community common stock allocable to his or
her fractional interest. This gain or loss will generally be capital gain or
loss, and will be long-term capital gain or loss if, as of the date of the
exchange, the holding period for such shares is greater than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Unless an exemption applies
under applicable law and regulations, payments of cash to a non-corporate holder
in exchange for their Professional Bancorp shares pursuant to the merger will be
subject to information reporting. In addition, backup withholding at a rate of
31% of the cash payable to the non-corporate holder will apply unless the holder
furnishes its taxpayer identification number, certifies that such number is
correct, certifies as to no loss of exemption from backup withholding, and meets
certain other conditions. Any amounts withheld from payments to a holder under
the backup withholding rules will be allowed as a refund or credit against the
holder's U.S. federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
REGULATORY APPROVAL
The closing of the merger is conditioned upon the receipt of all approvals
of regulatory authorities required for the merger without the imposition of any
conditions or requirements that would materially and adversely impact the
economic or business benefits to First Community or Professional Bancorp of the
transactions contemplated by the merger agreement. Under the merger agreement,
First Community and Professional Bancorp have agreed to use their commercially
reasonable efforts to obtain all necessary actions or nonactions, extensions,
waivers, consents and approvals from any governmental authority necessary;
proper or advisable to consummate the transactions contemplated by the merger
agreement. Such approvals include the approval of the Federal Reserve Board.
First Community filed with the Federal Reserve Board an application for approval
to acquire Professional Bancorp on September 19, 2000.
RESALE OF FIRST COMMUNITY COMMON STOCK
The shares of First Community common stock to be issued to Professional
Bancorp shareholders in the merger will be registered under the Securities Act.
These shares may be traded freely and without restriction by those shareholders
not deemed to be "affiliates" of Professional Bancorp An affiliate of a
corporation, as defined by the Securities Act, is a person who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, that corporation. Any subsequent transfer by an
affiliate of Professional Bancorp must be one permitted by the resale provisions
of Rule 145 promulgated under the Securities Act or as otherwise permitted under
the Securities Act.
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Professional Bancorp has delivered to First Community an agreement to be
signed by each affiliate of Professional Bancorp that such person will not
dispose of any First Community common stock in violation of the Securities Act.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering the recommendations of Professional Bancorp board of
directors, you should be aware that certain directors and executive officers of
Professional Bancorp have interests in the merger that may differ from, or
conflict with, your interests as a shareholder. The board of directors
recognized these interests when it approved the merger and the merger agreement,
and determined that they did not negatively affect the benefits of the merger.
First Community has agreed to appoint Gene F. Gaines as a director of First
Community upon the closing of the merger. Mr. Gaines (age 59) has served as the
chairman of the board and chief executive officer of Professional Bancorp since
February, 2000, the chairman of the board and president of First Professional
since February, 2000, and chief executive officer of First Professional since
October, 1999. Mr. Gaines received $9,090 in 1999 from Professional Bancorp in
consulting fees prior to when he became an employee. Professional Bancorp, First
Professional and Mr. Gaines are parties to an Employment Agreement effective
October 21, 1999, as amended effective February 1, 2000. Pursuant to the
Employment Agreement, Mr. Gaines is entitled to receive (i) an annual base
salary of $200,000 and (ii) an annual bonus of up to 50% of his annual base
salary based upon the attainment of specific corporate or individual objectives
to be set by the board. In addition, Mr. Gaines was granted options to purchase
100,000 shares of Professional Bancorp's common stock at an exercise price of
$7.50 per share, which expire on February 1, 2010. Of these options, options to
purchase 50,000 shares vested in February 2000, options to purchase 25,000
shares shall vest on February 1, 2001 and options to purchase 25,000 shares
shall vest on February 1, 2002. Pursuant to the Employment Agreement,
Mr. Gaines will be paid a severance equal to one-year's base salary if he is
terminated at will (not for cause) or he terminates the agreement for good
reason (failure of Professional Bancorp or First Professional to cure any
material breach by them of the agreement within 15 days after written notice by
Mr. Gaines specifying the breach). The initial one-year term of the Agreement
will expire on October 20, 2000. The agreement automatically renews for
additional one-year terms unless either party terminates it by giving written
notice of termination to the other party at least 90 days prior to the
expiration of the then current term. During 1999, Mr. Gaines received a total
salary of $28,134 from Professional Bancorp and First Professional. Mr. Gaines
has been a customer of and has had banking transactions with First Professional,
which includes extensions of credit during 1999. In First Professional
management's opinion, all loans and commitments to lend included in transactions
with Mr. Gaines were made in the ordinary course of business and in compliance
with applicable laws on substantially the same terms, including interest rates,
collateral and repayment terms, as those prevailing at the time for comparable
transactions with other persons. As of the date of this proxy
statement/prospectus, no loans were outstanding.
Upon completion of the merger, First Community will create an advisory board
composed of such Professional Bancorp directors as agree to serve thereon.
Each non-officer director of Professional Bancorp will enter into a one-year
non-competition agreement with First Community for Los Angeles County.
Following the merger, First Community will indemnify and provide liability
insurance to the officers and directors of Professional Bancorp, Inc.
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DISSENTERS' RIGHTS
The rights of dissenting shareholders of Professional Bancorp are governed
by Subchapter D of Chapter 15 of the Pennsylvania Business Corporation Law of
1988, as amended. Subchapter D provides holders of Professional Bancorp common
shares with the right to dissent from the merger and obtain payment of the "fair
value" of such shares in cash in the event that the merger is consummated. The
term "fair value" means the value of a share of Professional Bancorp's common
shares immediately before consummation of the merger taking into account all
relevant factors, but excluding any appreciation or depreciation in anticipation
of the merger. We cannot assure you as to the methodology a court would use to
determine fair value or how a court would select which elements of value are to
be included in such a determination. Any such judicial determination of the fair
value of Professional Bancorp common shares could be based upon factors other
than, or in addition to, the price per Professional Bancorp common share to be
paid in the merger or the market value of Professional Bancorp shares. The value
so determined could be more or less than the price per Professional Bancorp
share to be paid in the merger. A copy of the applicable statute is set forth in
Annex C hereto. The following summary of such provisions is qualified in its
entirety by reference to Annex C.
A Professional Bancorp shareholder desiring to exercise dissenters' rights
must satisfy all of the following conditions. The shareholder must (i) prior to
the vote upon the merger at the Special Meeting submit a written notice to
Professional Bancorp of the shareholder's intention to demand payment of the
fair value of the shareholder's shares if the merger is effectuated;
(ii) effect no change in the beneficial ownership of the shares from the date of
the written notice to demand payment of fair value continuously through the date
of the consummation of the merger; and (iii) refrain from voting the shares for
approval of the merger agreement. The written notice referred to in clause (i)
must be in addition to and separate from voting against, abstaining from voting,
or failing to vote on approval of the merger agreement. Voting against,
abstaining from voting or failing to vote on approval of the merger agreement
will not constitute written notice of an intent to demand payment for
Professional Bancorp common shares within the meaning of Subchapter D. Any
written notice or demand which is required in connection with the exercise of
dissenters' rights must include the name, address and telephone number of the
shareholder and must be sent to: Gene F. Gaines, Professional Bancorp, Inc., 606
Broadway, Santa Monica, California 90401.
In the event that after filing a written notice to demand payment of fair
value a shareholder votes for approval of the merger agreement, or delivers a
proxy in connection with the Special Meeting (unless the proxy specifies a vote
against, or an abstention from voting on, approval of the merger agreement), the
shareholder will have waived the dissenters' rights and will have nullified any
written notice of an intent to demand payment submitted by such holder. However,
failure to submit a proxy specifying a vote against or abstention from voting on
the merger after filing a written notice to demand payment of fair value does
not waive a shareholder's dissenters' rights.
A Professional Bancorp shareholder may assert dissenters' rights as to less
than all of the shares registered in such holder's name only if such record
holder dissents with respect to all shares owned by any one beneficial owner and
discloses the name and address of each person on whose behalf such holder
dissents. The rights of a partial dissenter are determined as if the shares as
to which the record holder dissents and record holder's remaining shares were
registered in the names of different shareholders. A beneficial owner may assert
dissenters' rights as to shares held on such owner's behalf only if such owner
submits to Professional Bancorp the record holder's written consents to the
dissent no later than the time the beneficial owner asserts his or her
dissenters' rights. A beneficial owner may not dissent with respect to less than
all shares of the same class or series owned by the beneficial owner, whether or
not the shares owned by such beneficial owner are registered in such beneficial
owner's name.
If the merger agreement is approved, Professional Bancorp will deliver a
dissenters' notice to all holders who have satisfied the foregoing requirements.
Such notice will instruct the holder on the procedure for obtaining payment and
will include a copy of Subchapter D. Failure to strictly follow the
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procedures set forth in Subchapter D regarding perfection of dissenters' rights
may result in a loss of the right to payment.
The foregoing is only a summary of the rights of a dissenting shareholder of
Professional Bancorp. Any shareholder who intends to dissent from the merger
should carefully review the applicable provisions of Subchapter D and should
also consult with his or her attorney. The failure of a shareholder to follow
precisely the procedures summarized above may result in loss of dissenters'
rights. No further notice of the events giving rise to dissenters' rights or any
steps associated therewith will be furnished to Professional Bancorp
shareholders, except as indicated above or otherwise required by law.
ACCOUNTING TREATMENT OF MERGER
First Community will account for the merger using the purchase method of
accounting in accordance with the provisions of Accounting Principles Board
Opinion No. 16 "Business Combinations." Accordingly, First Community will record
at its cost the acquired assets less liabilities assumed, with the excess of
such cost over the estimated fair value of such net assets reflected as
goodwill. Additionally, certain costs directly related to the acquisition will
be reflected as additional purchase price in excess of the net assets acquired.
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THE MERGER AGREEMENT
THE MERGER
The merger agreement was entered into between First Community and
Professional Bancorp on August 7, 2000. Pursuant to the merger agreement,
Professional Bancorp will merge with and into First Community with First
Community continuing as the surviving corporation. After the merger, the
separate corporate existence of Professional Bancorp will cease.
CASH/STOCK ELECTION
CONVERSION OF PROFESSIONAL BANCORP COMMON STOCK. Upon completion of the
merger, each share of Professional Bancorp common stock issued and outstanding
(other than shares with respect to which dissenters' rights shall have been
perfected in accordance with Pennsylvania Business Corporation Law) will be
converted automatically into the right to receive either 0.55 shares of First
Community common stock (subject to certain adjustments described below) or $8.00
cash, subject in each case to proration described below. Each share of First
Community common stock outstanding immediately prior to the completion of the
merger will remain outstanding after the merger as one share of First Community
common stock.
PROFESSIONAL BANCORP SHAREHOLDERS WILL HAVE THE RIGHT TO MAKE ONE OF THE
FOLLOWING ELECTIONS AND RECEIVE THE PER SHARE CONSIDERATION INDICATED BELOW:
<TABLE>
<CAPTION>
ELECTION CONSIDERATION TO BE RECEIVED PER SHARE
-------- ---------------------------------------------
<S> <C>
Stock........................................ - 0.55 shares of First Community common
stock.
- If the First Community average market price
is below $12.32 then the number of shares
received will increase so that the value of
First Community common stock received based
on the average market price is at least
$6.78.
- If the First Community average market price
is above $16.67 then the number of shares
received will decrease so that the value of
First Community common stock based on the
average market price received is $9.17.
Cash......................................... - $8.00 in cash.
No Election.................................. - Form of consideration received determined
by elections of other shareholders.
First Community average market price......... - Volume weighted average sales price of
First Community common stock on the NASDAQ
National Market for a 15-day period ending
on the 5th business day prior to completion
of the merger.
</TABLE>
ELECTION AND ALLOCATION PROCEDURES. Prior to the time of the merger,
Professional Bancorp shareholders will receive an election form to use to
indicate their preference to receive First Community common stock or cash for
their shares of Professional Bancorp common stock. Alternatively, Professional
Bancorp shareholders may decide to make no election, in which case the form of
consideration received will be determined by the elections of other Professional
Bancorp shareholders. After the deadline for submitting election forms has
passed, an exchange agent chosen by First Community will allocate the
consideration to comply with the requirement that in the aggregate 50% of the
outstanding shares of Professional Bancorp
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common stock will be converted into First Community common stock and the other
50% will be converted into cash.
Each Professional Bancorp shareholder's election may be subject to proration
depending on the elections of other Professional Bancorp shareholders. The
proration will ensure that 50% of the outstanding shares of Professional Bancorp
common stock will be exchanged for First Community common stock. If too many
Professional Bancorp shareholders elect to receive stock, those holders will
receive cash for some of their Professional Bancorp shares notwithstanding their
election. If too many Professional Bancorp shareholders elect to receive cash,
those holders will receive shares of First Community common stock for some of
their Professional Bancorp shares notwithstanding their election. In each case,
the allocations will be made on a pro rata basis.
EFFECTIVE TIME AND EFFECTIVE DATE
The parties have agreed that the closing of the merger will occur early in
the first quarter of 2001, assuming satisfaction or waiver of all conditions to
the merger agreement and after all regulatory approvals have been obtained,
unless another date is agreed to by First Community and Professional Bancorp.
EXCHANGE OF STOCK CERTIFICATES
At or prior to the completion of the merger, First Community will deposit
with U.S. Stock Transfer, acting as the exchange agent, certificates
representing shares of First Community common stock to which holders of
Professional Bancorp common stock are entitled under the terms of the merger
agreement and cash equal to the total cash consideration. Promptly after the
completion of the merger, First Community will instruct U.S. Stock Transfer to
send to each holder of Professional Bancorp common stock transmittal materials
for use in exchanging all of their certificates representing shares of
Professional Bancorp common stock for a certificate or certificates representing
shares of First Community common stock and/or cash and a check for any
fractional share interest. The transmittal material will contain information and
instructions with respect to the surrender of certificates of shares of
Professional Bancorp common stock in exchange for certificates representing
shares of First Community common stock and/or cash.
Following the completion of the merger and upon surrender of all of the
certificates representing shares of Professional Bancorp common stock registered
in the name of Professional Bancorp common stock shareholders, or a satisfactory
indemnity if any such certificates are lost, stolen or destroyed, together with
a properly completed letter of transmittal, U.S. Stock Transfer will mail to
each holder a certificate or certificates representing the number of shares of
First Community common stock to which they are entitled, together with all
undelivered dividends or distributions, less the amount of any withholding taxes
which may be required for the shares and, as applicable, a check in the amount
of cash to which they are entitled for their shares and cash to be paid in lieu
of fractional shares.
DIVIDENDS
Declaration of dividends by First Community after the completion of the
merger will include dividends on all First Community common stock issued in the
merger, but no dividend or other distribution payable to the holders of record
of First Community common stock at or as of any time after the completion of the
merger will be paid to holders of Professional Bancorp common stock until they
physically surrender all certificates as described above. After the completion
of the merger, the stock transfer books of Professional Bancorp will close and
there will be no transfers on the transfer books of Professional Bancorp
NO FRACTIONAL SHARES
First Community will not issue fractional shares. Instead, Professional
Bancorp shareholders will receive an amount of cash based on the closing price
of First Community common stock on the NASDAQ
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National Market on the day prior to the merger. First Community will not pay
interest on any cash in lieu of fractional shares received.
CONDUCT OF BUSINESS PRIOR TO COMPLETION OF THE MERGER
The merger agreement provides that, during the period from the date of the
merger agreement to the completion of the merger, First Community and
Professional Bancorp will conduct their businesses only in the normal and
customary manner in accordance with sound banking practices. First Community
will not take any action that would prevent the merger from qualifying under
Section 368 of the Internal Revenue Code or which impedes consummation of the
merger. Professional Bancorp will not, without prior written consent of First
Community, take any of the following actions:
- issue any securities except pursuant to the exercise of options
outstanding as of the date of the merger agreement;
- declare, set aside or pay any dividend;
- amend its articles of incorporation, articles of association or bylaws or
those of its subsidiaries;
- grant any general or uniform increase in the rate of pay of employees or
employee benefits, except in the ordinary course of business and
consistent with past practice;
- grant any increase in salary, incentive compensation or employee benefits
or pay any bonus to any person, except any increases in the ordinary
course of business and consistent with past practice;
- make any capital expenditure in excess of $10,000 per project or $50,000
in the aggregate, except for ordinary repairs, renewals and replacements;
- compromise, settle or adjust any claim, action or proceeding against it
for an amount in excess of $25,000;
- adopt or amend any employment agreement or employee benefit or other
benefit plan or arrangement of any type except such amendments as are
required by law;
- make any change to any policies and practices with respect to accounting,
except such changes as may be required by generally accepted accounting
principles or by applicable governmental authorities;
- make any acquisitions, other than in the satisfaction of debts or in the
ordinary course of business;
- amend, modify or terminate, except in accordance with its terms, any
contract or enter into any material agreement or contract that calls for
aggregate annual payments of $25,000 or more and which does not terminate
at will on 60 days' notice;
- sell, lease or otherwise dispose of any assets or release any claims,
except in the ordinary course of business consistent with past practice;
- settle any claim or proceeding involving any material liability;
- incur any indebtedness; or
- except as required by law, knowingly take or cause to be taken any action
which would change or modify any existing federal or California tax
accounting methods of Professional Bancorp.
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CERTAIN COVENANTS
In addition, from the date the merger agreement was signed, through the date
on which the merger will be completed, each of First Community and Professional
Bancorp will:
- use its best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all things necessary, proper or advisable under the
applicable laws and regulations to consummate the transactions
contemplated by the merger agreement as promptly as practical; and
- obtain the consent of the other before it issues any press release or
makes any public statement with respect to the merger agreement or the
transactions contemplated thereby.
Under the terms of the merger agreement, Professional Bancorp has agreed not
to solicit, encourage or engage in any negotiating, discussions concerning, or
provide any confidential information in connection with any competing
transaction, except to the extent that may be required by law.
Each option to purchase Professional Bancorp common stock issued and
outstanding immediately prior to the completion of the merger and all
obligations of Professional Bancorp under Professional Bancorp stock option
plans will, on and after the completion of the merger, be assumed by and be
deemed to be options granted by First Community to purchase that number of
shares of First Community common stock equal to the number of shares of
Professional Bancorp common stock multiplied by the exchange ratio subject to
the option rounded down to the nearest whole number of First Community common
stock. The per share exercise price for the shares of First Community common
stock issuable upon exercise of such Professional Bancorp option will be
determined by dividing the exercise price immediately prior to the completion of
the merger by the exchange ratio.
CONDITIONS TO THE MERGER
The obligation of First Community and Professional Bancorp to consummate the
merger is subject to the satisfaction or waiver on or before the completion of
the merger of many conditions, including the following:
- the merger agreement must receive all required approvals of governmental
authorities;
- the merger must receive the required approval of the shareholders of
Professional Bancorp;
- no judgment, decree, injunction, order or proceeding will be outstanding
or threatened by any governmental authority which prohibits or restricts
or threatens to invalidate or set aside the merger;
- the First Community common stock issuable to Professional Bancorp
shareholders shall have been approved for quotation on the NASDAQ National
Market.
The obligation of First Community to consummate the merger is also subject
to fulfillment of other conditions, including the following:
- Professional Bancorp will perform all obligations required of it by the
merger agreement prior to the merger;
- Professional Bancorp remains capitalized so that the sum of its common
stock (excluding option shares issued after the date of the merger
agreement), additional paid-in capital, accumulated deficit and treasury
stock is not less than the sum of $17,250,000 and an amount equal to
$200,000 times the number of months elapsed between April 1, 2000 and the
day the merger is completed (for purposes of this provision only,
allocations to the loan loss reserves and certain charges related to the
merger transaction, such as legal and accounting fees, broker and
consultant fees, severance payments and the expenses related to the
discontinuance of First Professional's data processing operation, are not
treated as expenses or charges against monthly earnings);
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- Professional Bancorp's asset quality is such that the specified product of
certain percentages and loans plus net charge-offs since May 31, 2000 is
not greater than $19,000,000; and
- First Community will have received an opinion of Sullivan & Cromwell that
the merger will be treated as a reorganization within the meaning of
Section 368.
The obligations of Professional Bancorp to consummate the merger are also
subject to the fulfillment of certain other conditions, including the following:
- First Community will perform all the obligations required of it by the
merger agreement prior to the merger; and
- Professional Bancorp will have received an opinion of from its tax advisor
that the merger will be treated as a reorganization within the meaning of
Section 368 of the Code.
Additionally, the completion of the merger is subject to the performance of
covenants, the delivery of documents, the accuracy of representations and
warranties and the receipt of other documents. If these and other conditions are
not satisfied or waived, First Community or Professional Bancorp may terminate
the merger agreement.
Subject to applicable law, any provision of the merger agreement may be
amended or waived by First Community or Professional Bancorp prior to closing if
the parties mutually agree in writing to the amendment. In addition, either
First Community or Professional Bancorp may waive the other party's performance
of covenants or conditions to the merger agreement.
First Community has made an application to list the shares of First
Community common stock to be issued in the merger on the NASDAQ National Market.
The stock must be authorized for listing on the NASDAQ National Market for the
merger to proceed.
TERMINATION
The merger agreement may be terminated at any time prior to the completion
of the merger:
- by mutual consent of First Community and Professional Bancorp;
- by Professional Bancorp or First Community immediately on the failure of
the shareholders of Professional Bancorp to approve the merger Agreement;
- by First Community or Professional Bancorp if any material breach or
default by the other party is not cured within 30 days after written
notice thereof;
- by First Community or Professional Bancorp if any governmental or
regulatory authority denies or refuses to grant any approval, consent or
authorization required to be obtained to consummate the transactions
contemplated by the merger Agreement; or
- by Professional Bancorp or First Community if we have not completed the
merger before April 1, 2001.
EXPENSES
First Community and Professional Bancorp will pay their own fees, costs and
expenses incurred in connection with the merger.
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THE SHAREHOLDER AGREEMENTS
First Community has entered into agreements with each non-officer director
of Professional Bancorp These directors have agreed to vote all shares of
Professional Bancorp common stock which they own or have the right to vote in
favor of the approval of the merger agreement. As of the record date,
Professional Bancorp directors own or have the right to vote approximately [ ]%
of the outstanding shares of Professional Bancorp common stock.
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DESCRIPTION OF FIRST COMMUNITY CAPITAL STOCK AND COMPARISON OF SHAREHOLDER
RIGHTS
In the merger, Professional Bancorp shareholders will exchange their shares
of Professional Bancorp common stock for shares of First Community common stock.
First Community is a California corporation subject to the provisions of the
California General Corporation Law. Professional Bancorp is a Pennsylvania
corporation subject to Pennsylvania Business Corporation Law. Upon consummation
of the merger, Professional Bancorp shareholders electing to receive stock
consideration will become First Community shareholders. The articles of
incorporation and bylaws of First Community, in addition to the California
General Corporation Law, will govern their rights as First Community
shareholders.
Set forth below is a summary of the material features of the First Community
common stock. Also set forth below is a summary of the material differences
between the rights of a holder of First Community common stock and a holder of
Professional Bancorp common stock. This summary is not a complete discussion of
the charter documents and other instruments of First Community and Professional
Bancorp that create the rights of the security holders.
Pursuant to the certificate of incorporation of First Community, the
authorized capital stock of First Community consists of 15,000,000 shares of
common stock of which approximately 3,903,891 are outstanding [as of June 30,
2000] and 5,000,000 shares of preferred stock of which none are outstanding.
In the future, the authorized but unissued and unreserved shares of First
Community common stock and the authorized but unissued and reserved shares of
First Community preferred stock will be available for general corporate
purposes, including but not limited to, possible issuance as stock dividends or
stock splits, in future mergers or acquisitions, pursuant to stock compensation
plans of First Community or in future private placements or public offerings.
First Community has no present plans for the issuance of additional authorized
shares of its capital stock, other than as pursuant to the 1992 Stock Option
Plan or that are assumed under Professional Bancorp's 1990, 1992 and 1998 Stock
Option Plans. Except as otherwise may be required to approve a merger or other
transaction in which the additional authorized shares of First Community common
stock or authorized shares of First Community preferred stock would be issued,
no approval of First Community shareholders will be required for the issuance of
those shares.
COMMON STOCK. Each share of First Community common stock has the same
relative rights, and is identical to all respects with, each other share of
First Community common stock. Holders of First Community common stock will be
entitled to one vote per share on all matters requiring shareholder action,
including, but not limited to, the election of, and any other matters relating
to, directors. Holders of First Community common stock will be entitled to
cumulate their votes for the election of directors.
The holders of First Community common stock will be entitled to receive
dividends, out of funds legally available therefor, subject to any restrictions
imposed by federal regulators and the payment of any preferential amounts to
which any class of preferred stock may be entitled. Upon liquidation,
dissolution or winding up of First Community, holders of First Community common
stock will be entitled to share ratably all assets remaining after the payment
of liabilities of First Community and of preferential amounts of which any
preferred stock may be entitled.
The holders of First Community common stock will have no preemptive or other
subscription rights. First Community common stock will not be subject to call or
redemption, and, upon receipt by First Community of the full purchase price
therefor, each share of First Community common stock will be fully paid and
non-assessable.
PREFERRED STOCK. First Community is currently authorized by its certificate
of incorporation to issue up to 5,000,000 shares of preferred stock. The board
of directors has broad authority to designate and establish the terms of one or
more series of preferred stock. Among other matters, the board is authorized to
establish voting powers, designations, preferences and special rights of each
such series and any qualifications, limitations and restrictions thereon. First
Community preferred stock may rank prior to
129
<PAGE>
First Community common stock as to dividend rights, liquidation preferences, or
both, may have full or limited voting rights, and may be convertible into First
Community common stock. The holders of any class or series of First Community
preferred stock also may have the right to vote separately as a class or series
under the terms of the class or series as hereafter fixed by the board or
otherwise required by California law.
COMPARISON OF CORPORATE STRUCTURE
First Community is a California corporation and, accordingly, the rights of
shareholders of First Community common stock and related matters are governed by
the California General Corporation Law and the articles of incorporation and
bylaws of First Community. Professional Bancorp is a Pennsylvania corporation
and, accordingly, the rights of shareholders of Professional Bancorp common
stock are governed by the Pennsylvania Business Corporation Law of 1988, and the
articles of incorporation and bylaws of Professional Bancorp. As a result of the
merger, some of Professional Bancorp's shareholders will become shareholders of
First Community. Certain differences arise from this change of governing law, as
well as from differences between First Community's articles of incorporation and
bylaws and those of Professional Bancorp. The summary contained in the following
chart is not intended to be complete and is qualified by reference to California
law, Pennsylvania law, the articles of incorporation of First Community and
Professional Bancorp and the bylaws of First Community and Professional Bancorp.
<TABLE>
<CAPTION>
FIRST COMMUNITY PROFESSIONAL BANCORP
------------------------------------ ------------------------------------
<S> <C> <C>
AUTHORIZED CAPITAL The authorized capital stock of The authorized capital stock of
STOCK: First Community consists of Professional Bancorp consists of
15,000,000 shares of common stock 12,500,000 shares of common stock.
and 5,000,000 shares of preferred
stock.
If the merger is completed, the
authorized capital stock of First
Community will remain the same.
ISSUED CAPITAL: The outstanding capital stock of The outstanding capital stock of
First Community consists of Professional Bancorp consists of
approximately 3,958,416 shares of approximately 2,030,754 shares of
common stock. No shares of preferred common stock.
stock are outstanding.
After the merger First Community
will have approximately 4,516,873
shares of common stock outstanding.
Former Professional Bancorp
shareholders will own approximately
12.4% of First Community after the
merger.
</TABLE>
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<TABLE>
<CAPTION>
FIRST COMMUNITY PROFESSIONAL BANCORP
------------------------------------ ------------------------------------
<S> <C> <C>
DIVIDENDS: The ability of First Community to The ability of Professional Bancorp
pay cash dividends is limited by the to pay cash dividends is limited by
provisions of Section 500 of the the provisions of Section 1551 of
General Corporation Law of the Pennsylvania Business
California, which prohibits the Corporation Law, which provides that
payment of dividends unless: (i) the the board of directors may authorize
retained earnings of the corporation a business corporation to make
immediately prior to the distributions to shareholders
distribution exceeds the amount of subject to certain limitations. A
the distribution; (ii) the assets of distribution to shareholders may not
the corporation exceed its be made if: (i) the corporation
liabilities by 25%; or (iii) the would be unable to pay its debts as
current assets of the corporation they become due in the usual course
exceed its current liabilities, but of business; or (ii) the total
if the average pre-tax earnings of assets of the corporation would be
the corporation before interest less than the sum of its total
expense for the two years preceding liabilities, plus the amount that
the distribution was less than the would be needed, if the corporation
average interest expense of the were to be dissolved, to satisfy the
corporation for those years, the preferential rights upon dissolution
current assets of the corporation of shareholders whose preferential
must exceed its current liabilities rights are superior to those
by 25%. receiving the distribution.
VOTING RIGHTS: Shareholders of First Community Shareholders of Professional Bancorp
common stock are entitled to one common stock are entitled to one
vote per share on all matters vote per share on all matters
requiring shareholder action, requiring shareholder action,
including the election of, and any including the election of, and any
other matters relating to, other matters relating to,
directors. Shareholders of First directors. Shareholders of
Community common stock are entitled Professional Bancorp common stock
to cumulate their votes for the are entitled to cumulate their votes
election of directors. for the election of directors.
CALLING OF SPECIAL The First Community bylaws currently The Professional Bancorp bylaws
MEETINGS OF provide that the chairman of the provide that the chairman of the
SHAREHOLDERS: board, president, or majority of the board, the president or the board of
directors may each call a special directors may each call a special
meeting. In addition, under the meeting. In addition, an "interested
bylaws, a special meeting may be shareholder" (as defined under
called upon written request of the Pennsylvania Business Corporation
holders of at least 10% of all Law), may call a special meeting
outstanding capital stock entitled under certain circumstances for the
to vote at the meeting. purpose of approving a business
combination. An "interested
shareholder" is, generally, a
shareholder or group of shareholders
beneficially owning more than 20% of
the voting power of a public
corporation.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FIRST COMMUNITY PROFESSIONAL BANCORP
------------------------------------ ------------------------------------
<S> <C> <C>
NUMBER OF The First Community board currently The Professional Bancorp board
DIRECTORS: consists of 9 directors. currently consists of six directors.
The bylaws of First Community
provide for a board of directors
that consists of five to nine
members as fixed by the board from
time to time. If the merger is
completed, the size of the First
Community board will be increased by
one director.
VACANCIES: Vacancies in the First Community Vacancies in Professional Bancorp
board are generally filled by a board are filled by a majority vote
majority vote of the remaining of the remaining members of the
members of the board. board even if less than a quorum or
by a sole remaining director.
If the vacancy is a result of the If one or more directors resigns
removal (other than by conviction of from the board effective at a future
a felony or determination if unsound date, the directors then in office,
mind) the vacancy may only be filled including those who have resigned,
by a majority vote of the have the power to fill the vacancies
shareholders. Shareholders may also by a majority vote.
elect a director at any time to fill
a vacancy not filled by the board.
If the number of directors is less If, after the filling of any vacancy
than a quorum vacancies may be by the board or a sole remaining
filled by: the unanimous written director, the directors then in
consent of directors still in office who have been elected by the
office; a majority of directors shareholders constitute less than a
still in office at a special meeting majority of all of the directors in
of the board; or by a sole remaining office, any holder or holders of an
director. aggregate of 5 percent or more of
Professional Bancorp shares
outstanding having the right to vote
for those directors may (i) call a
special meeting of shareholders to
elect directors to replace the
directors appointed by the board or
a sole remaining director, as the
case may be, to fill the vacancies,
or (ii) apply to the superior court
of the proper county for an order
requiring a special meeting of
shareholders to be held to elect all
directors.
CLASSIFICATION OF First Community does not currently Professional Bancorp does not
BOARD OF have a classified board. The First currently have a classified board.
DIRECTORS Community bylaws currently require Professional Bancorp bylaws
that all directors be elected at currently require that all directors
each annual meeting of shareholders be elected at each annual meeting of
for a term of one year. shareholders for a term of one year.
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
FIRST COMMUNITY PROFESSIONAL BANCORP
------------------------------------ ------------------------------------
<S> <C> <C>
REMOVAL OF First Community directors may be Professional Bancorp directors may
DIRECTORS: removed from office with or without be removed from office with or
cause by the affirmative vote of a without cause by the affirmative
majority of the outstanding shares vote of a majority of the
of First Community common stock outstanding shares of Professional
entitled to vote. Bancorp common stock entitled to
vote.
However, no director may be removed
(unless the entire board is removed)
when the votes cast against removal
would be sufficient to elect the
director if voted cumulatively at an
election at which the same total
number of votes were cast and the
entire number of the directors
authorized at the time of the
director's most recent election were
then being elected.
SHAREHOLDER RIGHTS First Community does not have a Professional Bancorp does not have a
PLAN: shareholder rights plan. shareholder rights plan.
BUSINESS Under California law, the approval Under the Pennsylvania Business
COMBINATIONS AND of a majority of First Community's Corporation Law and the Professional
TAKE-OVERS: board of directors and the holders Bancorp bylaws, the approval of a
of a majority of outstanding First majority of Professional Bancorp's
Community common stock is required board of directors and the majority
for First Community to merge or of the votes cast by shareholders is
consolidate with another corporation required for Professional Bancorp to
or sell all or substantially all of merge or consolidate with another
its assets, except as described corporation or sell all or
below. First Community Bancorp may, substantially all of its assets.
however, acquire another corporation Professional Bancorp is also subject
or bank (including through a merger to several anti-takeover provisions
with another subsidiary of First under Pennsylvania law that may
Community), for cash or stock, in a discourage open market purchases of
transaction that does not require a corporation's stock or a
any shareholder approval, such as non-negotiated tender or exchange
with the proposed merger with offer for such stock and,
Professional Bancorp, so long as accordingly, may be considered
First Community's shareholders will disadvantageous by a shareholder who
own at least 5/6 of the surviving would desire to participate in any
appli entity. such transaction. The Pennsylvania
Business Corporation Law provides
for the following: (i) subject to
certain exceptions, a "business
combination" with a shareholder or
group of shareholders beneficially
owning more than 20% of the voting
power of a public corporation (an
"interested shareholder") is
prohibited for a five-year period
following the date on which the
holder became an interested
shareholder; (ii) the "control
transaction"
</TABLE>
133
<PAGE>
<TABLE>
<CAPTION>
FIRST COMMUNITY PROFESSIONAL BANCORP
------------------------------------ ------------------------------------
<S> <C> <C>
provision, which permits
shareholders in certain change of
control transactions to demand
payment from a new 20% shareholder
of the fair market value of the
demanding shareholders' shares; and
(iii) the "control share" provision,
which limits the voting power of
shareholders acquiring more than
20%, 33.3% and/or 50% of a
corporation's voting stock.
AMENDMENT OF The First Community bylaws may be The Professional Bancorp bylaws may
ORGANIZATIONAL amended by the affirmative vote of a be amended by the affirmative vote
DOCUMENTS: majority of the board of directors. of at least a majority of
First Community shareholders, Professional Bancorp shareholders
however, retain the right to adopt or, except for a bylaw expressly
new bylaws or amend or repeal any committed to shareholders under the
bylaw, including any bylaw adopted Pennsylvania Business Corporation
by the board. Law, by a majority of the board of
directors.
The First Community articles of The Professional Bancorp articles of
incorporation may be amended by the incorporation may be amended by the
affirmative vote of the majority of majority vote of Professional
First Community shareholders. Bancorp shareholders.
</TABLE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The certificate of incorporation of First Community limits the liability of
directors for breach of their duties as directors to the maximum extent
permitted by the California General Corporation Law. These duties include the
duty to serve in good faith for the best interests of the corporation and its
shareholders and the duty to exercise reasonable care while acting on behalf of
the corporation. Although California General Corporation Law does not change a
director's duties, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. However, the California
General Corporation Law states that no such limitation of liability will result
from certain conduct, including, but not limited to, i) acts or omissions
involving intentional misconduct or a knowing and culpable violation of law,
ii) for acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, and iii) for any transaction
from which the director derived an improper personal benefit.
The bylaws of First Community provide that First Community SHALL indemnity
its officers and directors to the fullest extent permitted by the California
General Corporation Law against expenses, judgments, fines and settlements
arising by reason of the fact that such person is or was a director or officer
of First Community. In addition, the bylaws of First Community provide that
First Community MAY indemnify its employees to the fullest extent provided by
the California General Corporation Law. First Community believes that
indemnification under its bylaws covers at least negligence and gross negligence
on the part of the indemnified parties.
First Community has purchased director and officer liability insurance and
First Community expects that after the merger such coverage will be continued
and will be extended to directors and officers of First Community.
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<PAGE>
LEGAL MATTERS
The validity of the shares of First Community common stock to be issued
pursuant to the terms of the merger agreement and the material federal income
tax consequences of the merger on First Community will be passed upon for First
Community by Sullivan & Cromwell. The material federal income tax consequences
of the merger on Professional Bancorp and its shareholders will be passed upon
for Professional Bancorp by Jeffer, Mangels, Butler & Marmaro LLP.
EXPERTS
The consolidated financial statements of First Community Bancorp and
subsidiaries as of December 31, 1999 and 1998 and for each of the years in the
three-year period ended December 31, 1999 have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Professional Bancorp, Inc. and
subsidiary as of and for the year ended December 31, 1999, have been included
herein and in the registration statement in reliance upon the report of Moss
Adams, independent auditors, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of Professional Bancorp, Inc. and
subsidiary as of December 31, 1998, and for each of the years in the two-year
period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
First Community has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the distribution
to Professional Bancorp shareholders of the shares of First Community common
stock to be issued in connection with the merger. The registration statement,
including the attached exhibits and schedules, contains additional relevant
information about First Community and First Community common stock. The rules
and regulations of the Securities and Exchange Commission allow us to omit
certain information included in the registration statement from this proxy
statement/prospectus.
In addition, Professional Bancorp and First Community file reports, proxy
statements and other information with the Securities and Exchange Commission
under the Exchange Act. You may read and copy this information at the following
locations of the Securities and Exchange Commission.
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois
60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 West Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The
Securities and Exchange Commission also maintains an Internet world wide web
site that contains reports, proxy statements and other information about
issuers, like Professional Bancorp, who file electronically with the Securities
and Exchange Commission. The address of the site is HTTP://WWW.SEC.GOV.
You should also be able to inspect reports, proxy statements and other
information about Professional Bancorp and First Community at the offices of
NASDAQ Operations, 1735 K Street, N.W., Washington, D.C. 20006.
135
<PAGE>
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FIRST COMMUNITY AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets for Years Ended December 31,
1999 and 1998........................................... F-3
Consolidated Statement of Earnings for Years Ended
December 1999, 1998 and 1997............................ F-4
Consolidated Statement of Shareholders' Equity and
Comprehensive Income for Years Ended December 1999, 1998
and 1997................................................ F-5
Consolidated Statements of Cash Flows for Years Ended
December 31, 1999, 1998 and 1997........................ F-6
Notes to Consolidated Financial Statements................ F-8
FIRST COMMUNITY UNAUDITED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet for Six Months Ended
June 30, 2000 and 1999 and Three Months Ended June 30,
2000 and 1999........................................... F-28
Unaudited Consolidated Statements of Operations for Six
Months Ended June 30, 2000 and 1999 and Three Months
Ended June 30, 200 and 1999............................. F-29
Unaudited Condensed Consolidated Statements of
Comprehensive Income (Loss) for Six Months Ended
June 30, 2000 and 1999 and Three Months Ended June 30,
2000 and 1999........................................... F-30
Unaudited Condensed Consolidated Statements of Cash Flows
for Six Months Ended June 30, 2000 and 1999............. F-31
Notes to Unaudited Condensed Consolidated Financial
Statements.............................................. F-32
PROFESSIONAL BANCORP AUDITED FINANCIAL STATEMENTS
Independent Auditors' Reports............................. F-35
Consolidated Balance Sheets for Years Ended December 31,
1999 and 1998........................................... F-37
Consolidated Statements of Operations and Comprehensive
Income (Loss) for Years Ended December 31, 1999, 1998
and 1997................................................ F-38
Consolidated Statement of Changes in Shareholders' Equity
for Years Ended December 31, 1999, 1998 and 1997........ F-39
Consolidated Statements of Cash Flows for Years Ended
December 31, 1999, 1998 and 1997........................ F-40
Notes to Consolidated Financial Statements................ F-41
PROFESSIONAL BANCORP UNAUDITED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet for Six Months Ended
June 30, 2000 and 1999 and Three Months Ended June 30,
2000 and 1999........................................... F-71
Unaudited Consolidated Statements of Operations for Six
Months Ended June 30, 2000 and 1999 and Three Months
Ended June 30, 2000 and 1999............................ F-72
Unaudited Consolidated Statements of Comprehensive Income
for Six Months Ended June 30, 2000 and 1999 and Three
Months Ended June 30, 2000 and 1999..................... F-73
Unaudited Consolidated Statements of of Changes in
Shareholders' Equity for Six Month Period Ending
June 30, 2000........................................... F-74
Unaudited Consolidated Statements of Cash Flows for Six
Months Ended June 30, 2000 and 1999..................... F-75
Notes to Unaudited Consolidated Financial Statements...... F-76
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Community Bancorp:
We have audited the accompanying consolidated balance sheets of First
Community Bancorp and subsidiaries (the Company) as of December 31, 1999 and
1998 and the related consolidated statements of earnings, shareholders' equity
and comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Community Bancorp and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
August 18, 2000
F-2
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks (note 15)........................... $ 21,148,000 18,843,000
Federal funds sold.......................................... 10,889,000 36,123,000
------------ -----------
Total cash and cash equivalents........................... 32,037,000 54,966,000
Time deposits in financial institutions..................... 7,502,000 5,440,000
Investments:
Federal Reserve Bank and Federal Home Loan Bank stock, at
cost.................................................... 1,235,000 856,000
Securities available-for-sale, at fair value (note 2)..... 34,460,000 31,591,000
Securities held-to-maturity, at amortized cost (note 3)... 14,868,000 5,933,000
Loans (note 4)............................................ 206,102,000 170,980,000
Less allowance for loan losses.......................... 4,025,000 3,785,000
------------ -----------
Net loans............................................. 202,077,000 167,195,000
Premises and equipment, net (note 5)........................ 5,480,000 5,231,000
Premises held-for-sale (note 6)............................. -- 1,176,000
Investment property held-for-sale........................... -- 1,392,000
Other real estate owned..................................... 1,315,000 104,000
Deferred income taxes (note 9).............................. 2,555,000 1,631,000
Accrued interest............................................ 1,885,000 1,459,000
Other assets................................................ 948,000 639,000
------------ -----------
Total assets.......................................... 304,362,000 277,613,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (notes 3 and 7):
Noninterest bearing....................................... 93,763,000 79,643,000
Interest bearing.......................................... 180,469,000 171,778,000
------------ -----------
Total deposits........................................ 274,232,000 251,421,000
Interest payable and other liabilities...................... 2,618,000 2,889,000
Borrowings.................................................. 1,657,000 470,000
------------ -----------
Total liabilities..................................... 278,507,000 254,780,000
------------ -----------
Shareholders' equity (notes 10, 16 and 18):
Serial preferred stock, no par value. Authorized 5,000,000
shares; none issued and outstanding..................... -- --
Common stock, no par value. Authorized 15,000,000 shares;
issued and outstanding 3,878,259 and 3,854,092 shares as
of December 31, 1999 and 1998, respectively............. 19,394,000 18,772,000
Accumulated other comprehensive income, net unrealized
gains (losses) on securities available-for-sale, net
(note 2)................................................ (565,000) 31,000
Retained earnings......................................... 7,026,000 4,030,000
------------ -----------
Total shareholders' equity............................ 25,855,000 22,833,000
Commitments and contingencies (notes 13, 14 and 17)
------------ -----------
Total liabilities and shareholders' equity............ $304,362,000 277,613,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRSTCOMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans............................ $19,056,000 16,971,000 14,221,000
Interest on federal funds sold........................ 1,380,000 1,135,000 948,000
Interest on interest earning deposits................. 355,000 1314,000 82,000
Interest on investment securities..................... 2,614,000 1,838,000 1,456,000
----------- ---------- ----------
Total interest income............................... 23,405,000 20,258,000 16,707,000
----------- ---------- ----------
Interest expense:
Deposits (note 7)..................................... 5,648,000 5,354,000 4,523,000
Borrowings............................................ 40,000 36,000 41,000
----------- ---------- ----------
Total interest expense.............................. 5,688,000 5,390,000 4,564,000
----------- ---------- ----------
Net interest income before provision for loan
losses............................................ 17,717,000 14,868,000 12,143,000
Provision for loan losses (note 4)...................... 518,000 941,000 310,000
----------- ---------- ----------
Net interest income after provision for loan
losses............................................ 17,199,000 13,927,000 11,833,000
----------- ---------- ----------
Noninterest income:
Service charges on deposit accounts................... 1,175,000 1,158,000 1,063,000
Escrow fees........................................... -- -- 176,000
Merchant discount fees, net........................... 84,000 71,000 86,000
SBA loan servicing fees............................... 170,000 207,000 199,000
Mortgage fees......................................... 82,000 263,000 114,000
Gain on sale of loans................................. 353,000 621,000 441,000
Other................................................. 440,000 372,000 347,000
----------- ---------- ----------
Total noninterest income............................ 2,304,000 2,692,000 2,426,000
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits........................ 5,853,000 5,484,000 4,756,000
Occupancy............................................. 1,496,000 1,382,000 1,264,000
Impairment loss on premises held-for-sale (note 6).... -- 38,000 --
Furniture and equipment............................... 672,000 592,000 470,000
Legal expenses........................................ 285,000 204,000 160,000
Other professional services........................... 1,410,000 1,214,000 1,124,000
Stationery, supplies and printing..................... 378,000 348,000 269,000
Advertising........................................... 339,000 430,000 394,000
Real estate owned and property held-for-sale.......... 182,000 62,000 73,000
Insurance............................................. 120,000 144,000 137,000
Loss on sale of securities............................ 2,000 -- --
Other................................................. 1,336,000 999,000 897,000
----------- ---------- ----------
Total noninterest expense........................... 12,073,000 10,897,000 9,544,000
----------- ---------- ----------
Earnings before income taxes............................ 7,430,000 5,722,000 4,715,000
Income taxes (note 9)................................... 3,166,000 2,140,000 1,878,000
----------- ---------- ----------
Net earnings........................................ $ 4,264,000 3,582,000 2,837,000
=========== ========== ==========
Basic earnings per share (note 12)...................... $ 1.10 0.93 0.74
=========== ========== ==========
Diluted earnings per share (note 12).................... $ 1.05 0.88 0.71
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
----------------------- COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT INCOME (LOSS) EARNINGS TOTAL INCOME
--------- ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996...................... 3,817,631 $18,134,000 (62,000) (1,303,000) 16,769,000
Exercise of stock options... 5,001 24,000 -- -- 24,000
Net earnings................ -- -- -- 2,837,000 2,837,000 2,837,000
Other comprehensive income,
net unrealized gains on
securities
available-for-sale, net of
tax effect of $9,000...... -- -- 50,000 -- 50,000 50,000
--------- ----------- -------- ---------- ---------- ---------
Balance at December 31,
1997...................... 3,822,632 18,158,000 (12,000) 1,534,000 19,680,000 2,887,000
=========
Exercise of stock options... 31,460 117,000 -- -- 117,000
Net earnings................ -- -- -- 3,582,000 3,582,000 3,582,000
Transfer pursuant to
regulatory guidelines
(note 16)................. -- 497,000 -- (497,000) --
Cash dividends paid......... -- -- -- (589,000) (589,000)
Other comprehensive income,
net unrealized gains on
securities
available-for-sale, net of
tax effect of $31,000..... -- -- 43,000 43,000 43,000 43,000
--------- ----------- -------- ---------- ---------- ---------
Balance at December 31,
1998...................... 3,854,092 18,772,000 31,000 4,030,000 22,833,000 3,625,000
=========
Exercise of stock options... 24,167 96,000 -- -- 96,000
Net earnings................ -- -- -- 4,264,000 4,264,000 4,264,000
Transfer pursuant to
regulatory guidelines
(note 16)................. -- 526,000 -- (526,000) --
Cash dividends paid......... -- -- -- (742,000) (742,000)
Other comprehensive income,
net unrealized gains on
securities
available-for-sale, net of
tax effect of $432,000.... -- -- (596,000) -- (596,000) (596,000)
--------- ----------- -------- ---------- ---------- ---------
Balance at December 31,
1999...................... 3,878,259 $19,394,000 (565,000) 7,026,000 25,855,000 3,668,000
========= =========== ======== ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 4,264,000 3,582,000 2,837,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization..................... 893,000 984,000 551,000
Impairment loss on premises held-for-sale......... -- 38,000 --
Net accretion on investment securities............ (142,000) (189,000) (193,000)
Provision for loan losses......................... 518,000 941,000 310,000
Gain on sale of loans............................. (353,000) (621,000) (441,000)
Real estate valuation adjustments................. 159,000 (54,000) (36,000)
Loss on sale of securities........................ 2,000 -- --
Proceeds on sale of SBA loans..................... 4,607,000 5,866,000 4,654,000
Originations of SBA loans......................... (1,935,000) (4,073,000) (2,999,000)
Increase in interest receivable and other
assets.......................................... (735,000) (198,000) (107,000)
Decrease (increase) in deferred income taxes...... (925,000) (309,000) 556,000
Increase in interest payable and other
liabilities..................................... 916,000 132,000 668,000
------------ ----------- -----------
Net cash provided by operating activities....... 7,269,000 6,099,000 5,800,000
------------ ----------- -----------
Cash flows from investing activities:
Net increase in loans outstanding................... (37,719,000) (21,626,000) (27,223,000)
Maturities of time deposits in financial
institutions...................................... 5,143,000 4,160,000 100,000
Purchases of time deposits in financial
institutions...................................... (7,205,000) (5,440,000) --
Maturities of securities held-to-maturity........... 5,700,000 11,376,000 8,815,000
Purchases of securities held-to-maturity............ (14,719,000) (11,459,000) (14,484,000)
Proceeds from sale of securities
available-for-sale................................ 1,499,000 -- --
Maturities of securities available-for-sale......... 15,164,000 28,552,000 4,500,000
Purchases of securities available-for-sale.......... (20,369,000) (38,733,000) (8,308,000)
Proceeds from sale of other real estate owned....... 104,000 308,000 674,000
Proceeds from sales of investment property
held-for-sale..................................... 50,000 27,000 919,000
Increase in investment property held-for-sale....... (132,000) -- --
Purchases of premises and equipment................. (1,093,000) (2,771,000) (1,287,000)
Proceeds from sale of premises and equipment........ 38,000 225,000 172,000
Additions to premises held-for-sale................. -- (489,000) (111,000)
Proceeds from sale of premises held-for-sale........ 1,176,000 -- --
------------ ----------- -----------
Net cash used in investing activities........... (52,363,000) (35,870,000) (36,233,000)
------------ ----------- -----------
Cash flows from financing activities:
Net increase in deposits:
Noninterest bearing............................... 14,120,000 19,521,000 13,266,000
Interest bearing.................................. 8,691,000 39,960,000 22,192,000
Proceeds from exercise of stock options............. 96,000 117,000 24,000
Cash dividends paid................................. (742,000) (589,000) --
------------ ----------- -----------
Net cash provided by financing activities....... 22,165,000 59,009,000 35,482,000
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................... (22,929,000) 29,238,000 5,049,000
Cash and cash equivalents at beginning of year........ 54,966,000 25,728,000 20,679,000
------------ ----------- -----------
Cash and cash equivalents at end of year.............. $ 32,037,000 54,966,000 25,728,000
============ =========== ===========
</TABLE>
F-6
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $5,673,000 5,318,000 4,493,000
Income taxes........................................... 3,880,000 2,253,000 827,000
Supplemental disclosure of noncash investing and financing
activities:
Transfer of loans to other real estate owned............. -- 104,000 107,000
Transfer of allowance from other real estate owned to
investment in property held-for-sale................... -- -- 103,000
Transfer from retained earnings to common stock.......... 526,000 497,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Community Bancorp (the Company) is the holding company for Rancho
Santa Fe National Bank (Rancho) and First Community Bank of the Desert (First
Community) (collectively the Banks) and its wholly owned subsidiary, Desert
Community Properties, Inc. On May 31, 2000, a subsidiary of the Company merged
with and into First Community pursuant to an Agreement and Plan of Merger, by
and between the Company, Rancho and First Community (the Merger). As a result of
the Merger, First Community became a wholly owned subsidiary of the Company. The
Merger was accounted for by the pooling-of-interest method of accounting, and
accordingly, the financial information for all periods presented herein has been
restated to present the combined consolidated financial condition and results of
operations of the Company, Rancho and First Community as if the Merger had been
in effect for all periods presented.
The Company conducts business through the Banks. Rancho and First Community
are full services banks with four and six banking offices, respectively. The
Banks are subject to the laws of the State of California and federal regulations
governing the financial services industry. The Company is a registered bank
holding company under the Bank Holding Company Act of 1956, as amended, and is
subject to regulation and supervision by the Federal Reserve Board. The areas
served by the Banks are San Diego County, the Desert Communities of the
Coachella Valley and the Morongo Basin.
(a) BASIS OF PRESENTATION
The accounting and reporting policies of the Company and its wholly owned
subsidiaries, Rancho and First Community, are in accordance with generally
accepted accounting principles and conform to general practices within the
banking industry. All significant intercompany balances and transactions have
been eliminated. The following is a description of the more significant
accounting policies:
(b) INVESTMENT SECURITIES AND SECURITIES AVAILABLE-FOR-SALE
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the Company has the ability
at the time of purchase to hold securities until maturity, they are classified
as held-to-maturity. Investment securities held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts over the period
to call or maturity of the related security using the interest method.
Securities to be held for indefinite periods of time, but not necessarily to be
held-to-maturity or on a long-term basis, are classified as available-for-sale
and carried at fair value with unrealized gains or losses reported as a separate
component of shareholders' equity in accumulated other comprehensive income, net
of applicable income taxes. Realized gains or losses on the sale of securities
available-for-sale, if any, are determined using the amortized cost of the
specific securities sold. If a decline in the fair value of a security below its
amortized cost is judged by management to be other than temporary, the cost
basis of the security is written down to fair value and the amount of the
write-down is included in operations. Securities available-for-sale include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayment risk and other related factors. Securities are individually
evaluated for appropriate classification, when acquired; consequently, similar
types of securities may be classified differently depending on factors existing
at the time of purchase.
F-8
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(c) LOANS AND LOAN FEES
Loans are stated at the principal amount outstanding. Interest income is
recorded on an accrual basis in accordance with the terms of the respective
loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. The accrual of interest on loans is discontinued
when principal or interest payments are past due 90 days or when, in the opinion
of management, there is a reasonable doubt as to the collectibility in the
normal course of business. When loans are placed on nonaccrual status, all
interest previously accrued but not collected is reversed against current period
interest income. Income on nonaccrual loans is subsequently recognized only to
the extent that cash is received and the loan's principal balance is deemed
collectible. Loans are restored to accrual status when the loans become both
well-secured and are in the process of collection.
Nonrefundable loan fees and related direct costs associated with the
origination or purchase of loans are deferred and netted against outstanding
loan balances. The net deferred fees or costs are recognized as an adjustment to
interest income over the contractual life of the loans using a method which
approximates the interest method or taken into income when the related loans are
sold. The amortization of loan fees is discontinued on nonaccrual loans.
(d) TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
Gains or losses resulting from sales of loans are recognized at the date of
settlement and are based on the difference between the cash received and the
carrying value of the related loans less related transaction costs. A transfer
of financial assets in which control is surrendered is accounted for as a sale
to the extent that consideration other than beneficial interests in the
transferred assets is received in the exchange. Liabilities and derivative
financial instruments issued or obtained by the transfer of financial assets are
measured at fair value, if practicable. Assets or other retained interests
received by the transfer are measured by allocating the previous carrying value
between the asset sold and the asset or retained interest received, if any,
based on their relative fair values at the date of the sale. The Company records
the cash gain on the sale of the guaranteed portion of SBA loans.
(e) COMPREHENSIVE INCOME
Comprehensive income consists of net earnings and net unrealized gains
(losses) on securities available-for-sale, net and is presented in the
consolidated statements of shareholders' equity and comprehensive income.
(f) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risks in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience, current economic conditions which may affect the
borrowers' ability to pay, and the underlying collateral value of the loans.
Loans which are deemed to be uncollectible are charged off and deducted from the
allowance. The provision for loan losses and recoveries on loans previously
charged off are added to the allowance.
F-9
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
A loan is considered impaired when it is probable that a creditor will be
unable to collect all amounts due according to the original contractual terms of
the loan agreement. If the measurement of impairment for the loan is less than
the recorded investment in the loan, a valuation allowance is established with a
corresponding charge to the provision for loan losses.
Management believes that the allowance for loan losses is adequate. In
making its evaluation of the adequacy of the allowance for loan losses,
management considers the Company's historical experience, the volume and type of
lending conducted by the Company, the amounts of classified and nonperforming
assets, regulatory policies, general economic conditions and other factors
regarding the collectibility of loans in the Company's portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. These agencies may
require the Company to recognize additions to the allowance based on their
judgments related to information available to them at the time of their
examinations.
(g) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to noninterest expense using the
straight-line method over the estimated useful lives of the assets which range
from two to twenty-five years. Leasehold improvements are capitalized and
amortized to noninterest expense on a straight-line basis over the terms of the
leases or the estimated useful lives of the improvements, whichever is shorter.
(h) PREMISES HELD-FOR-SALE
Premises held-for-sale are reported at the lower of the carrying amount or
fair value less costs to sell. The fair value of the property is measured as the
amount at which the property could be bought or sold in a current transaction
between willing parties, other than in a forced or liquidation sale and is based
on a recent appraisal.
(i) INVESTMENT IN PROPERTY HELD-FOR-SALE
Investment in property held-for-sale consists of land purchased and
held-for-sale or development. These properties are recorded at the lower of cost
or fair value. Costs include the acquisition costs of the land, direct costs of
development and interest and real estate taxes during periods in which
activities necessary to get the property ready for sale are in progress.
Interest and property taxes are charged to expense after the property is
substantially ready for sale.
(j) OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the fair value of the property less
selling costs at the time of acquisition. Fair value is based on current
appraisals less estimated selling and holding costs. The excess of the recorded
loan balance over the estimated fair value of the property at the time of
acquisition is charged to the allowance for loan losses. Any subsequent write
downs are charged to noninterest expense and recognized as a valuation
allowance. Subsequent increases in the fair value of the asset less selling
costs reduces the valuation allowance, not below zero, and is credited to
income. Operating expenses of such
F-10
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
properties, net of related income, and gains and losses on their disposition are
included in noninterest expense.
(k) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consist of cash, due from banks and federal funds sold. Generally,
federal funds are sold for one-day periods.
(l) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(m) STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the pro forma
disclosure provisions of SFAS No. 123.
(n) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period to prepare these consolidated financial statements in conformity with
generally accepted accounting principles. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses. Actual results could differ from
those estimates.
(o) NEW ACCOUNTING STANDARDS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25. FASB Interpretation No. 44 clarifies certain issues related to
the application of APB Opinion 25 and is effective July 1, 2000, with certain
conclusions covering specific events that occurred either December 15, 1998 or
January 12, 2000.
F-11
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FASB Interpretation No. 44 is not expected to have a material effect on the
Company's financial position or results of operations.
(p) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
(2) SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains and losses and fair value of
securities available-for-sale as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Securities...... $22,784,000 -- 515,000 22,269,000
Mortgage-backed Securities...... 12,151,000 -- 459,000 11,692,000
Corporate Bonds................. 500,000 -- 1,000 499,000
----------- -------- ------- ----------
$35,435,000 -- 975,000 34,460,000
=========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Securities...... $17,101,000 34,000 19,000 17,116,000
Mortgage-backed Securities...... 13,937,000 70,000 38,000 13,969,000
Corporate Bonds................. 500,000 6,000 -- 506,000
----------- ------- ------ ----------
$31,538,000 110,000 57,000 31,591,000
=========== ======= ====== ==========
</TABLE>
The maturity distribution based on amortized cost and fair value as of
December 31, 1999, by contractual maturity, is shown below. Mortgage-backed
securities have contractual terms to maturity, but require periodic payments to
reduce principal. In addition, expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
---------------------------
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due in one year or less............................ $ 648,000 639,000
Due after one year through five years.............. 25,865,000 25,285,000
Due after five years through ten years............. 6,564,000 6,272,000
Due after ten years................................ 2,358,000 2,264,000
----------- ----------
$35,435,000 34,460,000
=========== ==========
</TABLE>
F-12
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(2) SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
Proceeds from the sale of securities available-for-sale during 1999 were
$1,499,000. Gross losses of $2,000 were realized on sales in 1999. There were no
sales of securities during 1998 or 1997.
(3) INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost, gross unrealized gains and losses and fair value of
investment securities held-to-maturity as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Securities...... $14,514,000 -- 91,000 14,423,000
Municipal Securities............ 349,000 1,000 3,000 347,000
Other Securities................ 5,000 -- -- 5,000
----------- ----- ------ ----------
$14,868,000 1,000 94,000 14,775,000
=========== ===== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
Securities..................... $ 5,582,000 -- 56,000 5,526,000
Municipal Securities............. 351,000 17,000 -- 368,000
----------- ------ ------ ---------
$ 5,933,000 17,000 56,000 5,894,000
=========== ====== ====== =========
</TABLE>
The maturity distribution based on amortized cost and fair value as of
December 31, 1999 by contractual maturity, is shown below. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
---------------------------
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due within one year................................ $12,500,000 12,424,000
Due after one year through five years.............. 2,005,000 1,990,000
Due after five years through ten years............. 349,000 347,000
Due after ten years................................ 14,000 14,000
----------- ----------
$14,868,000 14,775,000
=========== ==========
</TABLE>
As of December 31, 1999 and 1998, investment securities held-to-maturity
with an amortized cost of $5,863,000 and $5,870,000, respectively, and
securities available-for-sale with a fair value of $16,418,000 and $13,634,000,
respectively, (Note 2) totaling $22,281,000 and $19,504,000, respectively, were
pledged as security for public deposits and other purposes as required by
various statutes and agreements.
F-13
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(4) LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
As of December 31, 1999 and 1998, loans consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Commercial........................................ $ 87,465,000 79,710,000
Real estate, construction......................... 38,464,000 31,492,000
Real estate, mortgage............................. 67,235,000 48,060,000
Consumer.......................................... 6,169,000 4,923,000
Investment in leveraged and direct leases......... 124,000 198,000
SBA, portion held for sale, at cost which
approximates market............................. 946,000 995,000
SBA, unguaranteed portion held for investment..... 6,246,000 6,241,000
------------ -----------
206,649,000 171,619,000
Less:
Deferred loan fees, net......................... (547,000) (639,000)
Allowance for loan losses....................... (4,025,000) (3,785,000)
------------ -----------
$202,077,000 167,195,000
============ ===========
</TABLE>
Nonaccrual loans totaling $1,845,000, $559,000 and $490,000 were outstanding
as of December 31, 1999, 1998 and 1997, respectively. Loans that were past due
90 days or more and still accruing interest were $75,000, $243,000 and $408,000
as of December 31, 1999, 1998 and 1997, respectively. Interest income of
$158,000, $41,000 and $100,000 would have been recorded for the years ended
December 31, 1999, 1998 and 1997, respectively, if nonaccrual loans had been
performing in accordance with their original terms. Interest income of $76,000
and $5,000 was recorded on loans subsequently transferred to a nonaccrual status
for the years ended December 31, 1999 and 1997, respectively. No interest income
was recorded on loans subsequently transferred to nonaccrual status for the year
ended December 31, 1998.
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year................. $3,785,000 3,382,000 3,194,000
Provision for loan losses.................. 518,000 941,000 310,000
Loans charged-off.......................... (592,000) (696,000) (299,000)
Recoveries on loans previously charged
off...................................... 314,000 158,000 177,000
---------- --------- ---------
Loans charged-off, net of recoveries....... (278,000) (538,000) (122,000)
---------- --------- ---------
Balance, end of year....................... $4,025,000 3,785,000 3,382,000
========== ========= =========
</TABLE>
The Company's impaired loans comprise all internally classified loans,
including nonaccrual loans with specified outstanding balances. The Company
measures its impaired loans by using the fair value of the collateral if the
loan is collateral-dependent and the present value of the expected future cash
flows discounted at the loan's effective interest rate if the loan is not
collateral-dependent. As of December 31, 1999 and 1998, all impaired loans were
collateral-dependent. The Company recognizes income from impaired loans on the
accrual basis unless the loan is on nonaccrual status. Income from loans on
F-14
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(4) LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES (CONTINUED)
nonaccrual status is recognized to the extent cash is received and the loan's
principal balance is deemed collectible. The following table presents a
breakdown of impaired loans and any impairment allowance related to impaired
loans as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
RECORDED IMPAIRMENT RECORDED IMPAIRMENT
INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loans with impairment allowance--
other collateral............... $ 499,000 159,000 1,429,000 346,000
Loans without impairment
allowance--real estate......... 1,334,000 -- -- --
---------- ------- --------- -------
Total impaired loans............. $1,833,000 159,000 1,429,000 346,000
========== ======= ========= =======
</TABLE>
Based on the Company's evaluation process to determine the level of the
allowance for loan losses mentioned previously and the fact that a majority of
the Company's nonperforming loans are secured, management believes the allowance
level to be adequate as of December 31, 1999 to absorb the estimated known and
inherent risks identified through its analysis. For the years ended
December 31, 1999, 1998 and 1997, interest income of $76,000, $125,000 and
$66,000 was recorded on impaired loans, respectively, and the average balance of
impaired loans was $1,409,000, $1,519,000 and $841,000, respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Land.................................................. $ 384,000 429,000
Buildings............................................. 3,034,000 3,148,000
Furniture, fixtures and equipment..................... 5,186,000 4,464,000
Leasehold improvements................................ 1,141,000 998,000
Construction in Progress.............................. -- 107,000
Vehicles.............................................. 77,000 77,000
---------- ---------
9,822,000 9,223,000
Less accumulated amortization and depreciation........ 4,342,000 3,992,000
---------- ---------
$5,480,000 5,231,000
========== =========
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $807,000, $733,000 and $518,000, respectively.
(6) PREMISES HELD-FOR-SALE
During 1996, Rancho committed to a plan to dispose of the premises
previously occupied by Rancho's escrow function. The fair value of this property
was less than the carrying value and accordingly Rancho recorded a provision for
impairment loss to write down the carrying value of the property to the amount
of the estimated fair value, less estimated selling costs to dispose of the
property. The impairment provision
F-15
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(6) PREMISES HELD-FOR-SALE (CONTINUED)
totaled approximately $268,000 for the year ended December 31, 1996. During
1998, Rancho took an additional write-down of $38,000 to bring the impairment
allowance to approximately $306,000 at December 31, 1998 and made improvements
of $489,000.
The building was sold to an affiliate in April 1999 at book value which
approximated market.
(7) DEPOSITS
Interest bearing deposits as of December 31, 1999 and 1998 are comprised of
the following:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Savings deposits.................................. $ 11,895,000 10,819,000
Market rate deposits.............................. 112,358,000 108,246,000
Time deposits under $100,000...................... 25,117,000 28,821,000
Time deposits of $100,000 or more................. 31,099,000 23,892,000
------------ -----------
$180,469,000 171,778,000
============ ===========
</TABLE>
The following summarizes the maturity of time deposits as of December 31,
1999:
<TABLE>
<S> <C>
Less than one year.......................................... $44,787,000
One to two years............................................ 2,321,000
Two to five years........................................... 231,000
Five to ten years........................................... 8,877,000
-----------
$56,216,000
===========
</TABLE>
Interest expense on deposits for the years ended December 31, 1999, 1998 and
1997 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Savings deposits........................... $ 187,000 212,000 209,000
Market rate deposits....................... 2,955,000 3,031,000 2,528,000
Time deposits under $100,000............... 1,253,000 1,207,000 1,117,000
Time deposits of $100,000 or more.......... 1,253,000 904,000 669,000
---------- --------- ---------
$5,648,000 5,354,000 4,523,000
========== ========= =========
</TABLE>
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for the Company's financial instruments and a
description of the methodologies and assumptions used to determine such amounts
follows:
(a) CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount is assumed to be the fair value because of the liquidity
of these instruments.
F-16
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(b) TIME DEPOSITS IN FINANCIAL INSTITUTIONS
The carrying amount is assumed to be the fair value given the short-term
nature of these deposits.
(c) INVESTMENT SECURITIES
Fair values are based on quoted market prices available as of the balance
sheet date. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
(d) LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and further segmented into fixed
and adjustable rate interest terms and by credit risk categories. The fair value
estimates do not take into consideration the value of the loan portfolio in the
event the loans had to be sold outside the parameters of normal operating
activities.
The fair value of fixed rate loans and non-performing or adversely
classified adjustable rate loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loans. The discount
rates used for performing fixed rate loans are the Company's current offer rates
for comparable instruments with similar terms.
The fair value of performing adjustable rate loans is estimated to be
carrying value. These loans reprice frequently at market rates and the credit
risk is not considered to be greater than normal.
(e) DEPOSITS
The fair value of deposits with no stated maturity, such as noninterest
bearing demand deposits, savings and checking accounts, is equal to the amount
payable on demand as of the balance sheet date. The fair value of time deposits
is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities. No value has been assigned to the Company's long-term relationships
with its deposit customers (core deposit intangible).
(f) BORROWINGS
The carrying amount is assumed to be the fair value because rates paid are
the same as rates currently offered for borrowings with similar remaining
maturities and characteristics.
(g) COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties.
F-17
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(h) LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on what management
believes to be conservative judgments regarding expected future cash flows,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Since the fair values have been estimated as of December 31, 1999
and 1998, the amounts that will actually be realized or paid at settlement or
maturity of the instruments could be significantly different.
The fair values of the Company's financial instruments as of December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
CARRYING OR CARRYING OR
CONTRACT FAIR VALUE CONTRACT FAIR VALUE
AMOUNT ESTIMATES AMOUNT ESTIMATES
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks....... $ 21,148,000 21,148,000 18,843,000 18,843,000
Federal funds sold............ 10,889,000 10,889,000 36,123,000 36,123,000
Investment in Federal Reserve
Bank and Federal Home Loan
Bank Stock.................. 1,235,000 1,235,000 856,000 856,000
Time deposits in financial
institutions................ 7,502,000 7,502,000 5,440,000 5,440,000
Securities
available-for-sale.......... 34,460,000 34,460,000 31,591,000 31,591,000
Securities held-to-maturity... 14,868,000 14,775,000 5,933,000 5,894,000
Loans, net.................... 202,077,000 201,887,000 167,195,000 167,892,000
Financial Liabilities:
Deposits.................... 274,232,000 274,185,000 251,421,000 251,584,000
Borrowings.................. 1,657,000 1,657,000 470,000 470,000
Off-balance sheet financial
instruments:
Commitments to extend
credit.................... 73,115,000 1,097,000 69,878,000 1,048,000
Standby letters of credit... 2,641,000 39,000 1,334,000 20,000
</TABLE>
F-18
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(9) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
Loan loss allowance, due to differences in
computation of bad debts.......................... $ 861,000 822,000
Unrealized losses on securities
available-for-sale................................ 410,000 --
Other real estate and investment in property
held-for-sale..................................... 304,000 236,000
Interest on nonaccrual loans........................ 237,000 191,000
Deferred loan fees and costs........................ 147,000 147,000
Deferred compensation............................... 144,000 118,000
Net operating losses................................ 113,000 127,000
Accrued liabilities................................. 34,000 73,000
State tax benefit................................... 312,000 63,000
Other............................................... 146,000 118,000
---------- ---------
Total gross deferred tax assets................... 2,708,000 1,895,000
---------- ---------
Deferred tax liabilities:
Unrealized gains on securities available-for-sale... -- (22,000)
Premises and equipment, principally due to
differences in depreciation....................... (153,000) (242,000)
---------- ---------
Total gross deferred tax liabilities.............. (153,000) (264,000)
---------- ---------
Total net deferred tax assets..................... $2,555,000 1,631,000
========== =========
</TABLE>
Based upon projections for future taxable income over the next twelve month
period in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences.
For the years ended December 31, 1999, 1998 and 1997, the components of
income taxes consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current income taxes:
Federal................................ $2,705,000 $1,757,000 $2,528,000
State.................................. 889,000 723,000 231,000
---------- ---------- ----------
3,659,000 2,480,000 1,321,000
---------- ---------- ----------
Deferred income taxes:
Federal................................ (416,000) (343,000) 412,000
State.................................. (77,000) 3,000 145,000
---------- ---------- ----------
(493,000) (340,000) 557,000
---------- ---------- ----------
$3,166,000 2,140,000 1,878,000
========== ========== ==========
</TABLE>
F-19
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(9) INCOME TAXES (CONTINUED)
A reconciliation of total income taxes for the years ended December 31,
1999, 1998 and 1997 to the amount computed by applying the applicable statutory
federal income tax rate of 34% to earnings before income taxes follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Computed expected income taxes............. $2,526,000 1,945,000 1,603,000
State tax, net of federal tax benefit...... 536,000 479,000 248,000
Reduction of liabilities from prior
years.................................... -- (147,00) --
Other, net................................. 104,000 (137,000) 27,000
---------- --------- ---------
$3,166,000 2,140,000 1,878,000
========== ========= =========
</TABLE>
As of December 31, 1999 and 1998 taxes payable totaled $487,000 and
$398,000, respectively.
The Company has available at December 31, 1999 and 1998 approximately
$447,000 and $487,000, respectively, of unused federal operating loss
carryforwards that may be applied against future taxable income through 2009.
The applications of the net operating loss and other carryforwards are assumed
to be subject to annual IRC Section 382 limitations.
(10) STOCK OPTIONS AND WARRANTS
At the time of the Merger, all outstanding stock options of First Community
were converted into stock options of the Company at an exchange rate of 0.30
shares. The following disclosures reflect the combination of the Company, First
Community and Rancho stock option data.
The Company has a stock option plan (the Plan) pursuant to which the
Company's Board of directors may grant stock options to officers, directors and
key employees. The Plan authorizes grants of options to purchase up to 500,000
shares of authorized but unissued Company common stock. Stock options are
granted with an exercise price greater than or equal to the stock's fair market
value at the date of grant. Stock options have terms not to exceed 10 years from
the date of the grant and vest and become fully exercisable in installments
determined at the date of grant. All of First Community's stock options vested
at the Merger.
As of December 31, 1999, there were 116,000 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1999, 1998 and 1997 was $1.57, $2.13 and $2.33, respectively, on
the date of grant using the Black-Scholes options-pricing model with the
following weighted-average assumptions: 1999--expected dividend yield 2.32%,
risk-free interest rate of 5.27%, and an expected life of 5 years;
1998--expected dividend yield 1.50%, risk-free interest rate of 4.69%, and an
expected life of 5 years; 1998--no expected dividend yield, risk-free interest
rate of 5.71%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options
F-20
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(10) STOCK OPTIONS AND WARRANTS (CONTINUED)
under SFAS No. 123, the Company's net earnings would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Net earnings, as reported.................. $4,264,000 3,582,000 2,837,000
Pro forma net earnings..................... 4,107,000 3,454,000 2,746,000
Basic earnings per share, as reported...... 1.10 0.93 0.74
Pro forma basic earnings per share......... 1.06 0.90 0.71
Diluted earnings per share, as reported.... 1.05 0.88 0.71
Pro forma basic earnings per share......... 1.01 0.85 0.69
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF SHARES PRICE
---------------- --------
<S> <C> <C>
Balance at December 31, 1996................................ $178,648 5.08
Granted..................................................... 178,668 8.95
Exercised................................................... (5,001) 5.00
Cancelled................................................... (953) 11.76
-------- -----
Balance at December 31, 1997................................ 351,382 17.03
Granted..................................................... 107,750 11.90
Exercised................................................... (31,460) 3.71
Cancelled................................................... (19,635) 9.70
-------- -----
Balance at December 31, 1998................................ 408,037 9.42
Granted..................................................... 81,000 12.51
Exercised................................................... (24,167) 4.13
Cancelled................................................... (35,000) 15.86
Forfeited................................................... (1,666) 5.00
-------- -----
Balance at December 31, 1999................................ $428,204 10.33
======== =====
</TABLE>
As of December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.60--$56.67 and
4.3 years, respectively. As of December 31, 1999, the number of options
exercisable was 271,145 and the weighted-average exercise price of those options
was $8.07.
During 1995, the Company issued to certain shareholders warrants for 83,555
shares of common stock. The warrants entitle these shareholders to acquire a
like number of shares of common stock for an exercise price of $4.80 per share.
The warrants are eligible for exercise and expire in 2000.
On February 1, 2000, 60,000 options granted to two executives during 1999
were cancelled and 130,000 new options were granted with an exercise price of
$7.50 per share. Of the new options, 50% vested on the
F-21
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(10) STOCK OPTIONS AND WARRANTS (CONTINUED)
grant date and 25% vest annually on the anniversary of the grant date. On
February 1, 2000, the exercise price of 10,000 options granted to two employees
during 1999 was amended to $7.50 per share. Of the options granted during 1999,
3,500 are contingent upon execution of a key employee agreement.
(11) EMPLOYEE BENEFIT PLANS
The Banks have 401(k) plans for the benefit of substantially all employees.
Amounts accrued and charged to expense were $14,000, $42,000 and $36,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(12) NET EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations:
<TABLE>
<CAPTION>
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic 1999 EPS:
Net earnings............................. $4,264,000 3,863,000 1.10
Effect of dilutive stock options......... -- 214,000 (0.05)
---------- --------- -----
Diluted EPS............................ 4,264,000 4,077,000 1.05
========== ========= =====
Basic 1998 EPS:
Net earnings............................. 3,582,000 3,836,000 0.93
Effect of dilutive stock options......... 247,000 (0.05)
---------- --------- -----
Diluted EPS............................ 3,582,000 4,083,000 0.88
========== ========= =====
Basic 1997 EPS:
Net earnings............................. 2,837,000 3,820,000 0.74
Effect of dilutive stock options......... -- 170,000 (0.03)
---------- --------- -----
Diluted EPS............................ $2,837,000 3,990,000 0.71
========== ========= =====
</TABLE>
F-22
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(13) LEASE COMMITMENTS
As of December 31, 1999, aggregate minimum rental commitments for certain
real property under noncancellable operating leases having an initial or
remaining term of more than one year are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 752,000
2001........................................................ 707,000
2002........................................................ 570,000
2003........................................................ 446,000
2004........................................................ 316,000
Thereafter.................................................. 1,049,000
----------
$3,840,000
==========
</TABLE>
F-23
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(13) LEASE COMMITMENTS (CONTINUED)
Total gross rental expense for the years ended December 31, 1999, 1998 and
1997 was $815,000, $762,000 and $729,000, respectively. There are no contingent
rental payments applicable to any of the leases. Most of the leases provide that
the Company pay maintenance, insurance and certain other operating expenses
applicable to the leased premises in addition to the monthly minimum payments.
Management expects that in the normal course of business, leases that expire
will be renewed or replaced by other leases.
Total rental income for the years ended December 31, 1999, 1998 and 1997 was
approximately $121,000, $137,000 and $66,000, respectively.
(14) COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
Commitments to extend credit amounting to $73,115,000 and $69,878,000 were
outstanding as of December 31, 1999 and 1998, respectively. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
Standby letters of credit and financial guarantees amounting to $2,641,000
and $1,334,000 were outstanding as of December 31, 1999 and 1998, respectively.
Standby letters of credit and financial guarantees are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support private borrowing
arrangements. Most guarantees will expire within one year. The Company generally
requires collateral or other security to support financial instruments with
credit risk. Management does not anticipate that any material loss will result
from the outstanding commitments to extend credit, standby letters of credit or
financial guarantees.
As of December 31, 1999 and 1998, the Company had lines of credit in the
amount of $11,500,000 from correspondent banks, none of which were outstanding
as of December 31, 1999 or 1998. These lines are renewable annually. As of
December 31, 1999 and 1998, the Company had a Fed discount limit of
approximately $3,327,000 and $1,327,000, respectively, none of which was
outstanding. As of December 31, 1999, the Company had a Federal Home Loan Bank
limit of approximately $9,000,000, none of which was outstanding. The
availability of the lines of credit, as well as adjustments in deposit programs,
provide for liquidity in the event that the level of deposits should fall
abnormally low. These sources provide that funding thereof, may be withdrawn
depending upon the financial strength of the Company.
The Company participates in the Treasury, Tax and Loan Note program. The
Company has a limit of $1,700,000 at the Federal Reserve Bank. Treasury, Tax and
Loan balances fluctuate based on the amounts
F-24
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
deposited by customers and the amounts called for payment by the Federal Reserve
Bank. At December 31, 1999 and 1998 the interest rates on the Treasury, Tax and
Loan Note, was 4.54% and 4.28%, respectively.
(15) RESTRICTED CASH BALANCES
The Company is required to maintain reserve balances with the Federal
Reserve Bank. Reserve requirements are based on a percentage of deposit
liabilities. The average reserves held at the Federal Reserve Bank for the years
ended December 31, 1999 and 1998 were approximately $5,369,000 and $2,978,000,
respectively.
(16) DIVIDEND AVAILABILITY
Holders of Company common stock are entitled to receive dividends declared
by the board of directors out of funds legally available therefore under the
laws of the State of California and certain federal laws and regulations
governing the banking and financial services business. In addition, the Banks
are subject to certain restrictions under the laws of the State of California
and certain federal laws and regulations governing banks which limit their
ability to transfer funds to the Company through intercompany loans, advances or
cash dividends.
During 1999 and 1998, Rancho paid $742,000 and $589,000, respectively, in
dividends and transferred $526,000 and $497,000, respectively, from retained
earnings to common stock in accordance with regulatory guidelines.
(17) LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company.
(18) REGULATORY MATTERS
The Company, as a bank holding company, is subject to regulation by the
Board of Governors of the Federal Reserve System under the Bank Holding Company
Act of 1956, as amended.
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Banks must meet specific capital guidelines that
involve quantitative measures of the Company's and the Banks' assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital
F-25
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(18) REGULATORY MATTERS (CONTINUED)
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1999, that the Company and the Banks have met all capital
adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the regulatory
agencies categorized the Company and each of the Banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Company and the Banks must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Company's or either of the Banks' categories.
F-26
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(18) REGULATORY MATTERS (CONTINUED)
Actual capital amounts and ratios for the Company and the Banks as of
December 31, 1999 and 1998 are presented in the following table:
<TABLE>
<CAPTION>
CAPITAL
ACTUAL ADEQUACY REQUIREMENT WELL CAPITALIZED
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk-Weighed
Assets):
Consolidated Company........... $29,463,000 12.15% $19,400,000 a8% $24,249,000 a10%
Rancho......................... 19,567,000 12.44 12,581,000 a8 15,726,000 a10
First Community................ 9,896,000 11.61 6,819,000 a8 8,523,000 a10
Tier I Capital (to Risk-Weighted
Assets):
Consolidated Company........... 24,419,000 10.89 9,700,000 a4 14,550,000 a6
Rancho......................... 17,595,000 11.19 6,290,000 a4 9,436,000 a6
First Community................ 8,824,000 10.35 3,409,000 a4 5,114,000 a6
Tier I Capital (to Average
Assets):
Consolidated Company........... 26,419,000 8.56 12,343,000 a4 15,429,000 a5
Rancho......................... 17,595,000 9.48 7,421,000 a4 9,277,000 a5
First Community................ 8,824,000 7.17 4,922,000 a4 6,152,000 a5
As of December 31, 1998
Total Capital (to Risk-Weighted
Assets):
Consolidated Company........... 25,455,000 12.07 16,874,000 a8 21,093,000 a10
Rancho......................... 16,828,000 12.86 10,469,000 a8 13,086,000 a10
First Community................ 8,627,000 10.77 6,405,000 a8 8,007,000 a10
Tier I Capital (to Risk-Weighted
Assets):
Consolidated Company........... 22,802,000 10.81 8,437,000 a4 12,656,000 a6
Rancho......................... 15,183,000 11.60 5,234,000 a4 7,852,000 a6
First Community................ 7,619,000 9.52 3,203,000 a4 4,804,000 a6
Tier I Capital (to Average
Assets):
Consolidated Company........... 22,802,000 8.66 10,527,000 a4 13,159,000 a5
Rancho......................... 15,183,000 9.64 6,297,000 a4 7,872,000 a5
First Community................ 8,627,000 7.20 4,230,000 a4 5,287,000 a5
</TABLE>
(19) PENDING MERGER
The Company and Professional Bancorp, Inc. (Professional) announced on
August 7, 2000 that they had signed a definitive agreement under which the
Company will acquire Professional and its wholly owned subsidiary, First
Professional Bank, N.A. Under the terms of the agreement, shareholders of
Professional will receive either $8.00 in cash or 0.55 shares of Company common
stock for each share of Professional common stock, subject to adjustment. The
proposed merger is subject to regulatory and shareholder approval.
F-27
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks..................................... $ 28,899 $ 21,148
Federal funds sold.......................................... 30,093 10,889
-------- --------
Total cash and cash equivalents......................... 58,992 32,037
Interest-bearing deposits in financial institutions......... 3,948 7,502
Federal Reserve Bank and Federal Home Loan Bank stock, at
cost...................................................... 1,076 1,235
Securities held-to-maturity (fair value of $12,820,000 at
June 30, 2000 and $14,775,000 at December 31, 1999)....... 12,866 14,868
Securities available-for-sale (amortized cost of $32,822,000
at June 30, 2000 and $35,435,000 at December 31, 1999).... 31,794 34,460
-------- --------
Total securities........................................ 45,736 50,563
Gross loans................................................. 224,412 206,650
Deferred fees and costs..................................... (572) (548)
-------- --------
Loans, net of deferred fees and costs................... 223,840 206,102
Allowance for loan losses................................... (3,987) (4,025)
-------- --------
Net loans............................................... 219,853 202,077
Premises and equipment...................................... 5,184 5,480
Other real estate owned, net................................ 1,315 1,315
Other assets................................................ 6,650 5,388
-------- --------
Total Assets............................................ $341,678 $304,362
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits............................... $106,061 $ 93,763
Interest bearing deposits................................... 204,282 180,469
-------- --------
Total deposits.......................................... 310,343 274,232
Accrued interest payable and other liabilities.............. 3,572 2,618
Short-term borrowings....................................... 2,472 1,657
-------- --------
Total Liabilities....................................... 316,387 278,507
SHAREHOLDERS' EQUITY:
Common stock, no par value; authorized 15,000,000 shares,
issued and outstanding 3,891,517 and 3,878,259 shares as
of June 30, 2000 and December 31, 1999, respectively...... 19,849 19,394
Preferred stock; authorized 5,000,000 shares, no shares
issued and outstanding.................................... -- --
Retained earnings........................................... 6,038 7,026
Accumulated other comprehensive loss:
Net unrealized losses on securities available-for-sale,
net..................................................... (596) (565)
-------- --------
Total Shareholders' Equity.............................. 25,291 25,855
-------- --------
Total Liabilities and Shareholders' Equity............ $341,678 $304,362
======== ========
Shares outstanding.......................................... 3,891.6 3,878.3
Book value per share........................................ $ 6.50 $ 6.67
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
F-28
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
6 MONTHS 3 MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................ $11,553 $ 9,140 $ 5,978 $ 4,859
Interest on interest-bearing deposits in financial
institutions........................................ 167 160 62 96
Interest on investment securities..................... 1,439 1,201 703 630
Interest on federal funds sold........................ 676 827 525 361
------- ------- ------- --------
Total interest income............................... 13,835 11,328 7,268 5,946
INTEREST EXPENSE:
Interest expense on deposits.......................... 3,495 2,779 1,930 1,352
Interest expense on short-term borrowings............. 53 19 15 13
------- ------- ------- --------
Total interest expense.............................. 3,548 2,798 1,945 1,365
------- ------- ------- --------
NET INTEREST INCOME..................................... 10,287 8,530 5,323 4,581
Provision for loan losses............................. -- 240 -- 105
------- ------- ------- --------
Net interest income after provision for loan
losses............................................ 10,287 8,290 5,323 4,476
NON-INTEREST INCOME:
Service charges and fees on deposit accounts.......... 595 583 285 301
Merchant discount fees................................ 51 47 34 31
Other commissions and fees............................ 312 265 157 148
Gain on sale of loans................................. 179 167 124 75
Other income.......................................... 136 96 92 46
------- ------- ------- --------
Total non-interest income........................... 1,273 1,158 692 601
NON-INTEREST EXPENSE:
Salaries and employee benefits........................ 3,329 2,853 1,668 1,435
Occupancy............................................. 773 684 377 363
Furniture and equipment............................... 478 332 236 179
Legal expenses........................................ 159 107 75 52
Other professional services........................... 913 675 510 372
Stationery, supplies and printing..................... 135 117 90 60
FDIC assessment....................................... 32 22 17 11
Cost of other real estate owned....................... 33 160 33 159
Advertising........................................... 196 196 95 101
Insurance............................................. 63 53 32 27
Loss on sale of securities............................ 11 2 -- 2
Merger costs.......................................... 3,561 -- 3,561 --
Other................................................. 951 870 605 459
------- ------- ------- --------
Total non-interest expense.......................... 10,634 6,071 7,299 3,220
------- ------- ------- --------
Income (loss) before income taxes................... 926 3,377 (1,284) 1,857
Income taxes........................................ 1,125 1,439 207 804
------- ------- ------- --------
Net income (loss)..................................... $ (199) $ 1,938 $(1,491) $ 1,053
======= ======= ======= ========
PER SHARE INFORMATION:
Number of shares (weighted average):
Basic............................................... 3,880.9 3,857.0 3,883.7 3,859.6
Diluted............................................. 4,093.5 4,059.0 4,082.6 4,058.4
Income (loss) per share:
Basic............................................... $ (0.05) $ 0.50 $ (0.38) $ 0.27
Diluted............................................. $ (0.05) $ 0.48 $ (0.38) $ 0.26
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
F-29
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss)........................................... $(199) $1,938 $(1,491) $1,053
Other comprehensive income (loss), net of related income
taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the
period................................................ (28) (375) 85 (299)
Less reclassifications of realized losses included in
income................................................ (3) -- -- (2)
----- ------ ------- ------
(31) (375) 85 (301)
----- ------ ------- ------
Comprehensive income (loss)................................. $(230) $1,563 $(1,406) $ 752
===== ====== ======= ======
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
F-30
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
6 MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (199) $ 1,938
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 492 368
Provision for loan losses............................... -- 240
Real estate valuation adjustment........................ -- 159
Gain on sale of loans................................... (179) (167)
Loss on sale of securities available-for-sale........... 11 2
Increase in other assets................................ (1,240) (398)
Increase (decrease) in accrued interest payable and
other liabilities..................................... 954 (1,070)
-------- --------
Net cash (used in) provided by operating activities... (161) 1,072
Cash flows from investing activities:
Net increase in loans outstanding......................... (17,597) (16,761)
Net decrease (increase) in interest-bearing deposits in
financial institutions.................................. 3,554 (984)
Securities held-to-maturity:
Maturities.............................................. 4,002 2,388
Purchases............................................... (2,000) (9,500)
Securities available-for-sale:
Proceeds from sale...................................... 1,489 1,499
Maturities.............................................. 1,624 11,439
Purchases............................................... (501) (14,646)
Net change in FRB and FHLB stock.......................... 159 (112)
Proceeds from sale of property held for sale.............. -- 1,176
Increase in property held for sale........................ -- (128)
Purchases of premises and equipment....................... (206) (770)
-------- --------
Net cash used in investing activities................. (9,476) (26,399)
Cash flows from financing activities:
Net increase in deposits:
Non-interest bearing.................................... 12,298 8,455
Interest bearing........................................ 23,813 11,616
Proceeds from exercise of stock options................... 114 20
Net increase in short-term borrowings..................... 815 1,135
Cash dividends paid....................................... (448) (296)
-------- --------
Net cash provided by financing activities............. 36,592 20,930
-------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 26,955 (4,397)
Cash and cash equivalents at beginning of period............ 32,037 54,966
-------- --------
Cash and cash equivalents at end of period.................. $ 58,992 $ 50,569
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest.................................................. $ 3,511 $ 2,779
Income taxes.............................................. $ 1,145 $ 1,255
Supplemental disclosure of noncash investing and financing
activities:
Transfers from retained earnings to common stock.......... $ 341 $ 264
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
F-31
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1--BASIS OF PRESENTATION
First Community Bancorp (the "Company") is the holding company for Rancho
Santa Fe National Bank ("Rancho") and First Community Bank of the Desert ("First
Community" and together with Rancho, the "Banks"). The unaudited condensed
consolidated financial statements of the Company included herein reflect all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary to present a fair statement of the results for
the interim periods indicated. Certain reclassifications have been made to the
unaudited condensed consolidated financial statements for 1999 to conform to the
2000 presentation. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"). The
results of operations for the three and six months ended June 30, 2000 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year.
The preparation of unaudited condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates subject to change include the allowance for loan losses, the
carrying value of other real estate owned and the deferred tax asset.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in Rancho's and First Community's Annual Reports filed on
Form S-4/A on May 5, 2000 for the year ended December 31, 1999.
NOTE 2--ACQUISITIONS
FIRST COMMUNITY ACQUISITION
On May 31, 2000, a subsidiary of the Company merged with and into First
Community pursuant to an Agreement and Plan of Merger, dated as of October 22,
1999, as amended (the "Merger Agreement"), by and between the Company, Rancho
and First Community, (the "Merger"). As a result of the Merger, First Community
became a wholly-owned subsidiary of the Company.
Pursuant to the Merger Agreement, each issued and outstanding share of
common stock of First Community ("First Community Common Stock") prior to the
Merger (other than as provided in the Merger Agreement) was converted into the
right to receive 0.3 shares (the "Conversion Number") of common stock of the
Company ("Company Common Stock"). In addition, each option and each warrant to
acquire shares of First Community Common Stock outstanding immediately prior to
the Effective Time (as defined in the Merger Agreement) was converted into an
option and warrant, respectively, to acquire 0.3 shares of Company Common Stock.
Upon consummation of the Merger, the Company issued approximately 1,392,799
shares of Company Common Stock to former holders of First Community Common
Stock, and as a result, the former shareholders of First Community Common Stock
own shares of Company Common Stock representing approximately 35.9% of the
outstanding shares of Company Common Stock.
The financial information as of all dates and for all periods prior to the
First Community Merger presented herein has been restated to present the
combined consolidated financial condition and results of
F-32
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 2--ACQUISITIONS (CONTINUED)
operations of the Company and First Community as if the First Community Merger
had been in effect as of all dates and for all periods presented.
PROFESSIONAL BANCORP INC. ACQUISITION
The Company announced on August 7, 2000 that it had signed a definitive
agreement to acquire Professional Bancorp Inc. ("Professional") and its
wholly-owned subsidiary, First Professional Bank ("First Professional"). Under
terms of the agreement, shareholders of Professional will receive either $8.00
in cash or 0.55 shares of Company common stock for each share of Professional
common stock. Professional shareholders will have the option to choose either
cash or stock consideration. In the event that more than 50% of Professional
shareholders choose common stock or cash, the consideration will be prorated to
the Professional shareholders such that half the shares will receive cash and
half will receive Company common stock. For Professional shareholders receiving
stock, 0.55 shares of Company common stock will be received for each share of
Professional common stock (within a range of Company stock prices). The Company
anticipates issuing approximately 559,000 shares of Company common stock in this
transaction.
The acquisition will use purchase accounting and is expected to close late
in the fourth quarter of the year. Both companies have completed their due
diligence. Completion of the transaction is conditional upon the receipt of
shareholder and regulatory approvals.
NOTE 3--NET INCOME (LOSS) PER SHARE
The following is a summary of the calculation of basic and diluted net
income (loss) per share for the six and three month periods ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)......................... $ (199) $ 1,938 $(1,491) $ 1,053
======= ======= ======= =======
Weighted average shares outstanding....... 3,880.9 3,857.0 3,883.7 3,859.6
======= ======= ======= =======
Basic net income (loss) per share......... $ (0.05) $ 0.50 $ (0.38) $ 0.27
======= ======= ======= =======
Weighted average shares outstanding....... 3,880.9 3,857.0 3,883.7 3,859.6
Effect of dilutive stock options and
warrants(1)............................. 212.6 202.0 198.9 198.8
------- ------- ------- -------
Diluted shares outstanding................ 4,093.5 4,059.0 4,082.6 4,058.4
======= ======= ======= =======
Diluted net income (loss) per share (1)... $ (0.05) $ 0.48 $ (0.38) $ 0.26
======= ======= ======= =======
</TABLE>
------------------------
(1) The effect of stock options and warrants is antidilutive in the 2000 periods
and therefore are not used for the computation of diluted net loss per
share.
F-33
<PAGE>
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 4--NEW ACCOUNTING STANDARDS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of
Accounting Principles Board ("APB") Opinion No. 25. FASB Interpretation No. 44
clarifies certain issues related to the application of APB Opinion 25 and is
effective July 1, 2000, with certain conclusions covering specific events that
occurred either December 15, 1998 or January 12, 2000. FASB Interpretation
No. 44 is not expected to have a material effect on the Company's financial
position or results of operations.
F-34
<PAGE>
[INDEPENDENT AUDITORS' REPORT]
To the Board of Directors
Professional Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Professional
Bancorp, Inc. and Subsidiary as of December 31, 1999 and the related
consolidated statements of operations and comprehensive income (loss), changes
in stockholders' equity, and cash flows for the year ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Professional
Bancorp, Inc. and Subsidiary as of December 31, 1999 and the consolidated
results of their operations and cash flows for the year ended December 31, 1999
in conformity with generally accepted accounting principles.
Moss Adams LLP
Los Angeles, California
January 28, 2000, Except for Note 8
as to which the date is February 1, 2000
and Note 11 as to which the date is
March 22, 2000.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Professional Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Professional
Bancorp, Inc. (a Pennsylvania corporation) and subsidiary as of December 31,
1998 and the related consolidated statements of operations and comprehensive
income, changes in shareholders' equity and cash flows for each of the years in
the two-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Professional
Bancorp, Inc. and subsidiary as of December 31, 1998 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Los Angeles, California
April 19, 1999
F-36
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
NOTES 1999 1998
----- ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks:
Noninterest-bearing...................................... 2 $ 15,721,372 $ 20,992,183
Interest-bearing......................................... 697,430 572,519
------------ ------------
Federal funds sold......................................... 27,000,000 10,400,000
Cash and cash equivalents.................................. 43,418,802 31,964,702
Securities available-for-sale (cost of $48,187,000 and
$81,369,000 in 1999 and 1998, respectively).............. 3 45,524,729 80,891,072
Securities held-to-maturity (fair value of $17,901,000 and
$24,135,000 in 1999 and 1998, respectively).............. 3 18,199,500 24,080,592
Loans (net of allowance for loan losses of $5,873,000 and
$2,200,000 in 1999 and 1998, respectively)............... 4,10 156,484,089 115,518,693
Premises and equipment, net................................ 5 1,151,919 1,390,128
Deferred tax asset......................................... 7 2,843,726 1,242,748
Accrued interest receivable and other assets............... 5,866,918 4,613,504
------------ ------------
$273,489,683 $259,701,439
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits: 6
Demand, noninterest-bearing.............................. $109,560,458 $109,421,629
Demand, interest-bearing................................. 16,033,189 16,710,541
Savings and money market................................. 84,783,194 75,500,642
Time deposits............................................ 45,651,235 28,947,934
------------ ------------
Total deposits............................................. 256,028,076 230,580,746
Convertible notes.......................................... 12 679,000 1,116,000
Accrued interest payable and other liabilities............. 7 1,914,639 2,683,582
------------ ------------
Total liabilities.......................................... 258,621,715 234,380,328
------------ ------------
Commitments and contingent liabilities..................... 9
SHAREHOLDERS' EQUITY: 8,11
Common stock, $.008 par value; 12,500,000 shares
authorized; 2,100,221 and 2,065,811 issued and 2,030,754
and 1,996,344 outstanding in 1999 and 1998,
respectively............................................. $ 16,801 $ 16,526
Additional paid-in-capital................................. 21,271,477 20,873,603
Retained earnings (accumulated deficit).................... (3,221,239) 5,239,275
Treasury stock, at cost (69,467 shares in 1999 and 1998)... (537,251) (537,251)
Accumulated other comprehensive loss....................... 3 (2,661,820) (271,042)
------------ ------------
Total shareholders' equity................................. 14,867,968 25,321,111
------------ ------------
$273,489,683 $259,701,439
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans....................................................... 4 $12,762,486 $10,264,651 $ 9,686,133
Securities.................................................. 3 4,374,644 4,890,065 5,834,456
Federal funds sold and securities purchased under agreements
to resell................................................. 1,109,345 1,773,156 1,159,971
Interest-bearing deposits in other banks.................... 48,863 20,550 28,779
----------- ----------- -----------
TOTAL INTEREST INCOME....................................... 18,295,338 16,948,422 16,709,339
----------- ----------- -----------
INTEREST EXPENSE
Deposits.................................................... 6 3,258,697 3,373,818 3,336,954
Convertible notes........................................... 45,855 252,882 473,619
Federal funds purchased and securities sold under agreements
to repurchase............................................. 108,737 3,055 15,807
----------- ----------- -----------
TOTAL INTEREST EXPENSE...................................... 3,413,289 3,629,755 3,826,380
----------- ----------- -----------
NET INTEREST INCOME......................................... 14,882,049 13,318,667 12,882,959
Provision for loan losses................................... 4 13,992,636 405,829 180,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 889,413 12,912,838 12,702,959
----------- ----------- -----------
OTHER OPERATING INCOME
Net gain (loss) on sale of securities available-for-sale.... 3 39,610 (5,640) --
Merchant discount........................................... 290,913 207,572 272,763
Mortgage brokering fees..................................... 34,412 162,811 105,660
Service charges on deposits................................. 940,041 918,354 791,247
Other income................................................ 547,336 452,043 622,964
----------- ----------- -----------
TOTAL OTHER OPERATING INCOME................................ 1,852,312 1,735,140 1,792,634
----------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits.............................. 6,544,938 5,987,476 5,803,575
Occupancy................................................... 1,498,062 1,438,988 1,481,016
Legal fees, net of legal settlement......................... 1,067,627 394,908 (105,834)
Furniture and equipment..................................... 827,984 810,920 828,845
Professional services....................................... 10 1,462,935 1,145,885 1,346,273
Strategic planning and investor relations................... 60,404 147,743 375,086
FDIC assessment............................................. 55,927 24,951 27,063
Office supplies............................................. 287,131 237,273 226,620
Other assessment............................................ 176,097 189,556 224,613
Telephone................................................... 298,165 287,849 272,692
Audit, accounting and examinations.......................... 340,365 188,733 131,603
Postage..................................................... 145,161 160,151 150,353
Messenger service........................................... 55,101 33,615 70,692
Imprinted checks............................................ 9,538 42,709 90,939
Donations................................................... 128,794 93,900 101,427
Meetings and business developments.......................... 211,458 191,026 163,488
Other expense............................................... 1,130,428 851,043 936,317
----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES.............................. 14,300,115 12,226,726 12,124,768
----------- ----------- -----------
Earnings (loss) before taxes................................ (11,558,390) 2,421,252 2,370,825
Provision (benefit) for income taxes........................ 7 (3,198,627) 989,653 892,300
----------- ----------- -----------
NET EARNINGS (LOSS)......................................... $(8,359,763) $ 1,431,599 $ 1,478,525
=========== =========== ===========
Net earnings (loss)......................................... $ 835,763 $ 1,431,599 $ 1,478,525
Unrealized gain (loss) on securities available for sale net
tax....................................................... (2,390,778) (17,722) 171,134
Reclassification adjustment, net of tax..................... -- 10,489 --
----------- ----------- -----------
Comprehensive income (loss)................................. $10,750,541 $ 1,424,366 $ 1,649,659
=========== =========== ===========
EARNINGS (LOSS) PER SHARE
Basic..................................................... 1 $ (4.15) $ 0.81 $ 1.10
Diluted................................................... 1 (4.15)(a) $ 0.74 $ 0.97
</TABLE>
------------------------------
(a) No effect has been given to dilutive securities because the impact is
anti-dilutive.
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
--------------------- PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) STOCK INCOME (LOSS) TOTAL
---------- -------- ----------- ------------ --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........ 1,341,316 $11,286 $12,488,001 $ 2,514,501 $(537,251) $ (434,943) $14,041,594
Conversion of notes (Note 12)..... 14,174 113 158,433 -- -- -- 158,546
Exercise of stock options
(Note 8)........................ 1,732 14 13,340 -- -- -- 13,354
Change in net unrealized holding
gain on securities
available-for-sale net of tax
benefit of $64,346.............. -- -- -- -- -- 171,134 171,134
Net earnings...................... -- -- -- 1,478,525 -- -- 1,478,525
---------- ------- ----------- ----------- --------- ----------- -----------
Balance, December 31, 1997........ 1,357,222 11,413 12,659,774 3,993,026 (537,251) (263,809) 15,863,153
Conversion of notes (Note 12)..... 334,494 2,676 3,798,376 -- -- -- 3,801,052
Issuance of cash dividend......... -- -- -- (185,350) -- -- (185,350)
Exercise of stock options (Note
8).............................. 304,628 2,437 3,791,926 -- -- -- 3,794,363
Tax benefit on stock options
exercised....................... -- -- 561,344 -- -- -- 561,344
Forfeited interest on conversion
of Convertible notes............ -- -- 62,183 -- -- -- 62,183
Change in net unrealized holding
loss on securities
available-for-sale net of tax
benefit $12,190................. -- -- -- -- -- (7,233) (7,233)
Net earnings...................... -- -- -- 1,431,599 -- -- 1,431,599
---------- ------- ----------- ----------- --------- ----------- -----------
Balance, December 31, 1998........ 1,996,344 16,526 20,873,603 5,239,275 (537,251) (271,042) 25,321,111
Conversion of Notes (Note 12)..... 34,410 275 397,874 -- -- -- 398,149
Cash Dividends.................... -- -- -- (100,751) -- -- (100,751)
Change in net unrealized holding
loss on securities
available-for-sale net of tax
benefits of $975,000 which has
been fully reserved............. -- -- -- -- -- (2,390,778) (2,390,778)
Net Loss.......................... -- -- -- (8,359,763) -- -- (8,359,763)
---------- ------- ----------- ----------- --------- ----------- -----------
Balance, December 31, 1999........ 2,030,754 $16,801 $21,271,477 $(3,221,239) $(537,251) $(2,661,820) $14,867,968
========== ======= =========== =========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ (8,359,763) $ 1,431,599 $ 1,478,525
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 584,440 590,804 563,171
Provision for loan losses............................... 13,992,636 405,829 180,000
Loss on sale of securities available-for-sale........... 39,610 5,640 --
Amortization of convertible note expense................ 54,374 69,019 103,495
Deferred taxes.......................................... (1,600,978) 19,553 1,919,341
Accrued interest receivable and other assets............ (1,307,788) (197,390) 810,887
Accrued interest payable and other liabilities............ (807,794) 243,364 (288,120)
Net amortization of premiums and discounts on securities
held-to-maturity........................................ 37,113 332,861 262,390
Net amortization of premiums and discounts on securities
available-for-sale...................................... 30,321 318,562 263,101
------------ ------------ ------------
Net cash from operating activities........................ 2,662,171 3,219,841 5,292,790
============ ============ ============
Cash flows from investing activities:
Proceeds from:
Maturities of securities held-to-maturity................. -- 500,000 3,000,000
Maturities of securities available-for-sale............... -- 8,550,000 4,000,000
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity............... 5,638,016 9,746,919 6,501,551
Mortgage-backed securities available-for-sale............. 7,270,175 13,155,115 8,404,884
Sales of securities available-for-sale...................... 27,299,512 15,331,685 --
Purchases of:
Securities held-to-maturity............................... -- -- (2,991,950)
Securities available-for-sale............................. (1,458,090) (65,147,023) (10,587,422)
Net (increase) decrease in loans............................ (54,958,032) (12,024,440) (13,320,921)
Purchases of bank premises and equipment, net............... (346,231) (433,161) (499,460)
------------ ------------ ------------
Net cash from investing activities.......................... (16,554,650)) (30,320,905) (5,493,318)
============ ============ ============
Cash flows from financing activities:
Net increase (decrease) in demand deposits and savings
accounts.................................................. 8,744,029 (300,917) (8,020,242)
Net increase (decrease) in time certificates of deposit..... 16,703,301 1,417,999 (3,792,842)
Proceeds from exercise of stock options..................... -- 3,794,364 13,354
Cash dividends paid......................................... (100,751) (185,350) --
------------ ------------ ------------
Net cash from financing activities.......................... 25,346,579 4,726,096 (11,799,730)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents........ 11,454,100 (22,374,968) (12,000,308)
Cash and cash equivalents, beginning of year................ 31,964,702 54,339,670 66,339,978
------------ ------------ ------------
Cash and cash equivalents, end of year...................... $ 43,418,802 $ 31,964,702 $ 54,339,670
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest.................................................. $ 3,388,000 $ 3,687,607 $ 3,907,889
Income taxes.............................................. 1,120,000 187,000 523,009
Non-cash investing and financial activities:
Unrealized losses on securities available-for-sale........ 2,390,778 30,330 309,059
Conversion of notes (see Note 12)......................... 398,149 3,801,052 158,546
Tax benefit on stock options exercised.................... -- 561,344 --
Forfeited interest on conversion of convertible notes..... -- 62,183 --
</TABLE>
See accompanying notes to consolidated financial statements
F-40
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Professional Bancorp, Inc. and its subsidiary (collectively the Company) are
engaged in the general commercial banking business and provide a wide range of
commercial banking services primarily directed towards meeting the financial
needs of the medical services community and other distinct non-medical service
organizations. Services include those traditionally offered by commercial banks
such as checking and savings accounts; time certificates of deposit; and
commercial, consumer/installment, home equity and short-term real estate loans,
with an emphasis on cash flow lending. The service area of the Company consists
of the California counties of Los Angeles, Orange, Riverside, San Bernardino and
Ventura with a full-service office at its Santa Monica headquarters and four
full-service branches located in Beverly Hills, Tarzana, Pasadena and Redlands.
The accounting and reporting policies of the Company are in accordance with
generally accepted accounting principles and conform to general practices within
the banking industry. The preparation of these financial statements requires
management to make estimates and assumptions that effect the reported amount of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The allowance for loan losses and the
deferred tax asset are material estimates subject to change.
CONSOLIDATION
The consolidated financial statements include the accounts of Professional
Bancorp, Inc. (the "Company") and its wholly owned subsidiary, First
Professional Bank, N.A. (the "Bank") and Professional Bancorp Mortgage, Inc.
(PBMI) a majority owned subsidiary of the Bank. All material intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of the
fair value of financial instruments, whether or not recognized on the statement
of financial condition, for which it is practicable to estimate the value. A
significant portion of the Bank's assets and liabilities are financial
instruments as defined under SFAS No. 107. Fair values, estimates and
assumptions are set forth in Note 14, Fair Value of Financial Instruments.
INTEREST RATE RISKS
The Company, as an institution with long-term assets (both loans and
investments), may experience a decrease in profitability and the value of such
assets if the general level of interest rates rise. Interest rates paid on
certain deposits may rise more quickly in a rapidly rising interest rate
environment than do interest rates on securities, in which case the Company
would be exposed to the risk that its cost of funds may rise more quickly than
its interest income. Changes in the general level of interest rates affect the
Company's various securities in differing ways. In a declining interest rate
environment, the rate at which the underlying mortgages of mortgage-backed
securities are prepaid tends to increase as borrowers refinance their loans. If
a higher than anticipated level of prepayments were to continue for an extended
period of time, there could be an adverse effect on the level of the Company's
outstanding securities. Securities held in the Company's available-for-sale
portfolio are reported at fair value, with unrealized gains and losses, net of
taxes, excluded from earnings and reported as a separate component of
shareholders' equity. In a
F-41
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
rising interest rate environment, unrealized losses may negatively affect the
Company's shareholders' equity from quarter to quarter.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk exist for groups of borrowers when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The ability of the Bank's borrowers to repay their commitments is
contingent on several factors, including the economic conditions in the
borrowers' geographic area and the individual financial condition of the
borrowers. The Bank's lending activities are primarily conducted in Southern
California. The Bank currently focuses on the origination of commercial loans to
health care organizations ranging from single practitioners to large
multi-specialty medical groups. Ongoing changes in the delivery of health care
could negatively impact certain borrowers. The Bank has loans and loan
commitments to a small number of clients that total between $2,000,000 and the
Bank's legal lending limit of approximately $3.7 million.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one day periods.
SECURITIES
The Company classifies its investment in debt and equity securities as
held-to-maturity, available-for-sale or trading securities, as applicable.
Securities held-to-maturity are those debt securities for which the Company has
the ability and intent to hold until maturity. Trading securities are acquired
and sold to benefit from short-term movements in market prices. All other
securities are classified as available-for-sale. All securities are under the
control of the Company.
Securities held-to-maturity are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Trading securities are
carried at fair value and are recorded as of their trade dates. Gains or losses
on trading securities, both realized and unrealized, are recognized currently in
income. As of December 31, 1999, the Company does not have, nor contemplates
having, any securities classified as trading securities. Securities classified
as available-for-sale are recorded at fair value with any unrealized gains or
losses, reflected as an addition or reduction of accumulated other comprehensive
income, net of tax, as a separate component of shareholders' equity. Unrealized
losses on securities, reflecting a decline in value judged to be other than
temporary, are charged to income in the consolidated statements of operations.
Premiums and discounts are amortized or accreted over the life of the
related securities held-to-maturity and available-for-sale as an adjustment to
yield using the interest method. Interest income is recognized when earned.
Realized gains and losses on securities are included in operations and are
derived using the specific identification method for determining the cost of the
securities sold.
F-42
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
The Bank purchases securities under agreements to resell and sells
securities under agreements to repurchase. The agreements have a duration of one
business day and are fully collateralized. Securities purchased under resale
agreements are recorded as short-term investments, while securities sold under
repurchase agreements are recorded as short-term obligations. At December 31,
1999 and 1998, the Bank had no such agreements outstanding.
DERIVATIVES
The Bank may enter into interest rate exchange agreements and cap and floor
agreements for protection against future fluctuations in the interest rates of
specifically identified assets or liabilities. Interest rate swap agreements are
for the purpose of synthetically altering the interest rates on a portion of the
Bank's super NOW and money market accounts. Interest rate floor agreements are
used to reduce the potential impact of lower interest rates which would reduce
the interest income on loans and on certain securities. Interest rate cap
agreements are used to reduce the potential impact of rising interest rates
which would reduce the interest income on certain securities. Interest rate swap
agreements and interest rate cap and floor agreements are accounted for as
hedges. Gains or losses on the sales of such agreements are deferred and
transferred into interest income or expense over the maturity period of the
agreement. Net interest income (expense) resulting from the differential between
interest rate exchange payments is recorded on a current basis. Premiums paid
for purchased interest rate cap and floor agreements are amortized on a
straight-line basis to interest expense over the terms of the agreements.
Unamortized premiums are included in other assets in the consolidated financial
statements. Amounts receivable under cap and floor agreements are recorded as an
increase to interest income.
MORTGAGE BROKERING FEES
The Company's mortgage brokering operations, conducted by PBMI, consist
solely of a broker function. This service is provided to assist the Bank's
clients in obtaining mortgage loans with other institutions. PBMI does not
originate or sell mortgage loans. PBMI earns revenue, in the form of points and
any documentation fees charged on a loan, but is otherwise not involved in the
loan.
MERCHANT DISCOUNT INCOME
Merchant discount income consists of the fees charged on credit card
receipts submitted by the Bank's business clients for processing. The income
received and the fees paid by the Bank to credit card issuers and expenses for
third party processors are netted and reported as a component of other income.
Such amounts are recognized when received or paid.
LOANS AND THE RELATED ALLOWANCE FOR LOAN LOSSES
Loans are recorded at face value, less payments received. Interest on loans
is accrued daily as earned, except where a reasonable doubt exists as to the
full collectibility of interest or principal, in which case the accrual of
income is discontinued and the balance of accrued interest is reversed.
Generally, this means that loans are put on nonaccrual status when interest is
ninety days or more past due, unless the loan is well secured and in the process
of collection. All payments received subsequent to the loan being put on
F-43
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
nonaccrual are used to reduce the principal balance. Only after the principal is
reduced to zero is interest income realized. Once a loan is placed on nonaccrual
it generally remains on nonaccrual unless the borrower has the capacity to make
payments as evidenced by tax returns and other financial statements and has the
intent to make payments as evidenced by keeping the loan current for a period of
three to six months.
Loan fees in excess of certain direct origination costs are deferred and
amortized into interest income utilizing the interest method over the lives of
the related loans. When a loan is repaid or sold, any unamortized net deferred
fee balance is credited to income. Accretion of deferred loan fees is
discontinued when loans are placed on nonaccrual status.
The allowance for loan losses is maintained at a level considered adequate
by management to provide for loan losses. Credits deemed uncollectible are
charged to the allowance. Provisions for loan losses and recoveries on loans
previously charged off are added to the allowance. Management, in determining
the adequacy of the allowance for loan losses, takes into consideration
(1) loan loss experience, (2) collateral values, (3) changes in the loan
portfolio, (4) an assessment of the effect of current and anticipated economic
conditions on the loan portfolio, and (5) examinations conducted by Bank
regulatory agencies. While management believes the allowance for loan losses is
adequate to absorb losses inherent in the loan portfolio, there exists the risk
of losses which cannot be precisely quantified. Because this risk is continually
changing in response to factors beyond the control of the Bank, such as the
state of the economy, management's judgment as to the adequacy of the allowance
for loan losses is necessarily an estimate. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
record additions to the allowance based on their judgments of information
available to them at the time of their examination.
IMPAIRED LOANS
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement on a timely basis. Impairment of a loan is measured by the present
value of expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent. If the measure of the impaired loan is less
than the recorded investment in the loan, the Company recognizes impairment by
creating a valuation allowance with a corresponding charge to provision for loan
losses. Large groups of smaller balance homogenous loans that are collectively
evaluated for impairment are not subject to this accounting treatment.
For loans classified as nonaccrual and troubled debt restructurings,
specific valuation allowances are established for the difference between the
loan amount and the fair value of collateral less estimated selling costs.
Impaired loans which are performing under their contractual terms are reported
as performing loans, and cash payments are allocated to principal and interest
in accordance with the terms of the loan.
F-44
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation on furniture, fixtures, and equipment is computed
using the straight-line method over the estimated useful lives of the related
assets, which range from three to five years. Leasehold improvements are
capitalized and amortized over the lease term or estimated useful lives of the
improvements, whichever is shorter, using the straight-line method.
AMORTIZATION OF CONVERTIBLE NOTE EXPENSES
Expenses associated with the convertible note offering in 1994 are being
amortized on a straight-line basis over the 10 year term of the note.
INCOME TAXES
The Company and its subsidiary file consolidated federal income and state
franchise tax returns. Provisions for income taxes are based on amounts reported
in the statements of income (after exclusion of non-taxable income such as
interest on state and municipal securities) and include deferred taxes on
temporary differences between tax and financial statement purposes. Deferred
taxes are computed using the asset and liability approach. A valuation allowance
is established for deferred tax assets if based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The valuation allowance is sufficient to reduce
the deferred tax assets to the amount that is more likely than not to be
realized.
EARNINGS (LOSS) PER SHARE
Earnings per share are based upon the weighted average number of shares of
common stock and common stock equivalents outstanding, net of common stock held
in treasury. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted from issuance of common
stock that then shared in earnings.
COMPREHENSIVE INCOME
Comprehensive income consists of net earnings (loss) and net unrealized
gains (losses) on securities and is presented in the consolidated statements of
operations and comprehensive income.
STOCK OPTION PLAN
As permitted by SFAS 123, Accounting for Stock-Based Compensation, the
Company continues to apply APB Opinion No. 25 (APB 25) and related
interpretations in accounting for its stock option plans. Under SFAS 123, a fair
value method is used to determine compensation cost for stock options or similar
equity instruments. Compensation is measured at the grant date and is recognized
over the service or vesting period. Under APB 25, compensation cost is the
excess, if any, of the quoted market price of the stock at the measurement date
over the amount that must be paid to acquire the stock. The new standard
F-45
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires disclosure of the proforma effect on income, as if the Company had
adopted SFAS 123, which is disclosed in Note 8.
401(k) SAVINGS PLAN
The Bank has a 401(k) savings plan in effect for substantially all of its
full-time employees who have completed one year of continuous service. Employee
contributions under the plan are matched by the Bank up to a maximum of 3.0% of
the employee's annual salary for 1999, 1998 and 1997. Salaries and employee
benefits expense includes $114,700, $95,100, and $71,700 for 1999, 1998, and
1997, respectively, related to the Bank's contributions.
YEAR 2000 (UNAUDITED)
The Year 2000 issue presented a very real and significant challenge to the
Company, along with the entire financial services industry. This problem had the
potential to affect a wide range of systems and equipment, including software
and hardware, utilities, communications platforms and devices, and facilities.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to represent the calendar year.
Software so developed and not corrected could have produced inaccurate or
unpredictable results when dates change in the Year 2000. Such occurrences could
have had a material adverse effect on the Company's financial condition, results
of operations, or business as the Company, like most financial organizations,
was significantly subject to the potential Year 2000 issues due to the nature of
financial information. Management had successfully developed and implemented a
Year 2000 Preparedness Plan. There is no known impact on the Company related to
the Year 2000 issue.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standard Board (FASB) issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting For Derivative
Instruments and Hedging Activities" (SFAS 133) which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. During 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of Effective Date of SFAS 133 and Amendment to SFAS 133", which amends certain
provisions of SFAS 133 and extends the initial effective date.
These standards require that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, and unrecognized firm commitment, an available-for-sale security, or
a foreign-currency-denominated forecasted transaction.
Under these statements, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be
F-46
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consistent with the entity's approach to managing risk. These statements are
effective for the Company on July 1, 2001. Management is in the process of
determining what effect, if any, adoption of this statement will have on the
financial position or results of operations of the Company.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, an amendment of FASB Statement No 65." Under
SFAS 134, after the securitization of a mortgage loan held for sale, retained
mortgage-backed securities shall be classified in accordance with the provisions
of Statement 115. However, a mortgage banking enterprise must classify as
trading any retained mortgage-backed securities that it commits to sell before
or during the securitization process. SFAS 134 is effective for the first
quarter beginning after December 15, 1998 and enterprises may reclassify
mortgage-backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place when the Statement is initially
applied. The adoption of this statement did not have a significant impact on the
financial position or results of operations of the Company.
During 1999, the FASB issued SFAS No. 135, Rescission of SFAS No. 75 and
Technical Corrections, SFAS No. 136, "Transfer of Assets to a Not-For-Profit
Organization or Charitable Trust that Raises or Holds Contributions for Others."
Management does not believe either of these statements will have a significant
impact on the financial position or results of operations of the Company.
NOTE 2--RESTRICTED CASH BALANCES
Aggregate cash balances in the form of deposits with the Federal Reserve
Bank of approximately $8,098,000 and $5,661,000 were maintained to satisfy
federal regulatory requirements at December 31, 1999 and 1998, respectively.
F-47
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--INVESTMENT SECURITIES
The amortized cost and fair value of securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED REALIZED
COST GAIN LOSS FAIR VALUE GAIN(LOSS)
--------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government agency and mortgage-backed
securities.............................. $37,393 $-- $1,924 $35,469 $40
Small Business Administration
securities.............................. 647 -- 16 631 --
Municipal securities...................... 2,551 -- 173 2,378 --
Federal Reserve Bank Stock................ 439 -- -- 439 --
Collateralized mortgage obligations....... 7,157 -- 549 6,608 --
------- --- ------ ------- ---
Total................................. $48,187 $-- $2,662 $45,525 $40
======= === ====== ======= ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------
NET
GROSS GROSS REALIZED
AMORTIZED UNREALIZED UNREALIZED GAIN
COST GAIN LOSS FAIR VALUE (LOSS)
--------- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government agency and mortgage-backed
securities.............................. $68,487 $153 $514 $68,126 $(6)
Small Business Administration
securities.............................. 858 1 7 852 --
Municipal securities...................... 2,551 3 8 2,546 --
Federal Reserve Bank Stock................ 439 -- -- 439 --
Collateralized mortgage obligations....... 9,034 -- 106 8,928 --
------- ---- ---- ------- ---
Total................................. $81,369 $157 $635 $80,891 $(6)
======= ==== ==== ======= ===
</TABLE>
During the year ended December 31, 1999 and 1998 securities
available-for-sale were sold for aggregate proceeds of $27,300,000 and
$15,337,000, respectively. These sales resulted in net realized gains and losses
of $96,000 and ($56,000) in 1999 and $12,000 and ($18,000) in 1998. There were
no sales of securities available-for-sale during 1997.
F-48
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities available-for-sale
at December 31, 1999, by contractual maturity is shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Due within one year...................................... $ 439 $ 439
Due after one year through five years.................... -- --
Due after five years through ten years................... 1,689 1,606
Due after ten years...................................... 46,059 43,480
------- -------
Total................................................ $48,187 $45,525
======= =======
</TABLE>
The amortized cost and fair value of securities held-to-maturity are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government securities........................... $ 3,032 $10 $ 25 $ 3,017
U.S. Government agency securities.................... 1,750 -- 31 1,719
U.S. Government agency mortgage-backed securities.... 13,418 -- 253 13,165
------- --- ---- -------
Total............................................ $18,200 $10 $309 $17,901
======= === ==== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government securities........................... $ 3,043 $151 $ -- $ 3,194
U.S. Government agency securities.................... 2,250 21 -- 2,271
U.S. Government agency mortgage-backed securities.... 18,788 1 119 $18,670
------- ---- ---- -------
Total............................................ $24,081 $173 $119 $24,135
======= ==== ==== =======
</TABLE>
F-49
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities held-to-maturity
at December 31, 1999 by contractual maturity is shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Due after one year through five years.................... $ 5,135 $ 5,087
Due after five years through ten years................... 9,037 8,794
Due after ten years...................................... 4,028 4,020
------- -------
$18,200 $17,901
======= =======
</TABLE>
There were no trading securities during 1999 and 1998.
During 1999, the highest daily balance and the average balance for the
securities was $105,470,000 and $74,349,000, respectively. During 1998, the
highest daily outstanding balance and average balance for the securities was
$107,941,000 and $83,900,000, respectively.
PLEDGED SECURITIES
U.S. Treasury securities with a carrying value of approximately $3,032,000
and $3,043,000 were pledged to secure treasury tax and loan deposits as required
by law at December 31, 1999 and 1998, respectively.
F-50
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4--LOANS AND THE RELATED ALLOWANCE FOR LOAN LOSSES
A summary of the major components of loans outstanding at December 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial loans........................................ $124,403 $ 93,952
Real estate secured commercial loans.................... 27,538 11,698
Equity lines of credit.................................. 4,330 5,931
Other lines of credit................................... 4,689 4,817
Installment loans....................................... 1,608 1,482
Lease financing......................................... -- 32
-------- --------
Gross Loans......................................... 162,568 117,912
Less:
Allowance for loan losses............................. (5,873) (2,200)
Deferred loan fees, net............................... (211) (193)
-------- --------
Loans, net.............................................. $156,484 $115,519
======== ========
The composition of gross loans outstanding between fixed
and variable is as follows:
Fixed rate.............................................. $ 42,194 $ 16,734
Variable rate........................................... 120,374 101,178
-------- --------
Total............................................. $162,568 $117,912
======== ========
</TABLE>
The following table provides information with respect to the Company's past
due loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans 90 days or more past due and still accruing.......... $ 2,891 $ 100
Nonaccrual loans........................................... 8,412 1,359
------- ------
Total past due loans....................................... $11,303 $1,459
======= ======
</TABLE>
Total accrued interest on loans 90 days past due and still accruing was
$18,000 at December 31, 1999 and the Company had no accrued interest due on
loans 90 days past due at December 31, 1998.
The effect of nonaccrual loans on interest income for the years 1999 and
1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Contractual interest due.................................... $804 $126
Interest recognized......................................... 338 90
---- ----
Net interest foregone....................................... $466 $ 36
==== ====
</TABLE>
F-51
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4--LOANS AND THE RELATED ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The Company had approximately $8,708,000 in impaired loans as of
December 31, 1999. The carrying value of impaired loans for which there is a
related allowance for loan losses was $414,000, with the amount of specific
allowance for loan losses allocated to these loans of $134,000. There were
$8,294,000 in impaired loans for which there was no related specific allowance
for loan losses. The average recorded investment in impaired loans during 1999
was $4,436,000 and there was no income recorded utilizing either the cash basis
or accrual basis method of accounting. Impaired loans at December 31, 1999,
included $8,412,000 of nonaccrual loans.
The Company had approximately $1,836,000 in impaired loans as of
December 31, 1998. The carrying value of impaired loans for which there is a
related allowance for loan losses was $153,000, with the amount of specific
allowance for loan losses allocated to these loans of $41,000. There was
$1,683,000 in impaired loans for which there was no related specific allowance
for loan losses. The average recorded investment in impaired loans during 1998
was $1,131,085 and there was no income recorded utilizing either the cash basis
or accrual basis method of accounting. Impaired loans at December 31, 1998,
included $1,359,000 of nonaccrual loans.
The Company had approximately $1,199,000 in impaired loans as of
December 31, 1997. The carrying value of impaired loans for which there is a
related allowance for loan losses was $234,000, with the amount of specific
allowance for loan losses allocated to these loans of $80,000. There was
$965,000 in impaired loans for which there was no related specific allowance for
loan losses. The average recorded investment in impaired loans during 1997 was
$1,342,000 and there was no income recorded utilizing either the cash basis or
accrual basis method of accounting. Impaired loans at December, 1997, included
$877,000 of nonaccrual loans.
A summary of the activity within the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year......................... $ 2,200 $1,802 $2,253
Provision for loan losses........................ 13,992 406 180
Loans charged-off................................ (10,452) (269) (882)
Recoveries on loans previously charged-off....... 133 261 251
------- ------ ------
Balance, end of year............................... $ 5,873 $2,200 $1,802
======= ====== ======
</TABLE>
The Company's commercial loans as of December 31, 1999 and 1998 are
partially secured by the following collateral:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Stock.................................................... $ 4,140 $ 3,395
Cash..................................................... 14,901 2,504
Furniture, equipment and/or accounts receivables......... 81,584 65,314
Unsecured, real estate, automobiles, or assignment of
life insurance......................................... 23,778 22,739
-------- -------
Total.................................................... $124,403 $93,952
======== =======
</TABLE>
F-52
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5--PREMISES AND EQUIPMENT
A summary of the major components of premises and equipment at December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Furniture, fixtures and equipment........................... $3,829 $3,498
Leasehold improvements...................................... 1,477 1,470
------ ------
Total premises and equipment, at cost..................... 5,306 4,968
Less accumulated depreciation and amortization.............. (4,154) (3,578)
------ ------
Net premises and equipment................................ $1,152 $1,390
====== ======
</TABLE>
Depreciation and amortization expense related to premises and equipment was
approximately $584,000, $591,000 and $563,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
NOTE 6--DEPOSITS AND SHORT-TERM BORROWINGS
A summary of time certificates of deposit outstanding at December 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Time certificates of deposit under $100,000............... $ 7,222 $ 8,625
Time certificates of deposit of $100,000 and over......... 38,429 20,323
------- -------
Total..................................................... $45,651 $28,948
======= =======
</TABLE>
Interest expense for the years ended December 31, 1999, 1998 and 1997
relating to interest-bearing deposits and other borrowings amounted to the
following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing demand deposits................... $ 101 $ 134 $ 108
Savings and money market deposits.................. 1,758 1,801 1,821
Time certificates of deposit under $100,000........ 289 383 391
Time certificates of deposit of $100,000 and
over............................................. 1,110 1,056 1,017
------- ------ ------
Interest expense on deposits..................... 3,258 3,374 3,337
------- ------ ------
Federal funds purchased and securities sold under
agreements to repurchase......................... 109 3 16
Convertible notes.................................. 46 253 473
------- ------ ------
Interest expense on deposits and other
borrowings....................................... $ 3,413 $3,630 $3,826
======= ====== ======
</TABLE>
The Bank sells securities under agreements to repurchase. Securities sold
under repurchase agreements are recorded as short-term obligations. During 1999,
the highest daily outstanding balance and the average balance of securities sold
under agreements to repurchase was $25,000,000 and $2,166,000,
F-53
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6--DEPOSITS AND SHORT-TERM BORROWINGS (CONTINUED)
respectively; the average rate paid was 5.03%. During 1998, the highest daily
outstanding balance and the average balance of securities sold under agreements
to repurchase was $5,000,000 and $55,000, respectively; the average rate paid
was 5.50%. During 1997, the highest daily outstanding balance and the average
balance of securities sold under agreements to repurchase was $8,000,000 and
$274,000, respectively; the average rate paid was 5.77%. Securities subject to
repurchase agreements, are retained by the Company's custodian under written
agreements that recognize the customers' interests in the securities.
NOTE 7--INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes:
Federal.......................................... $(1,533) $ 471 $ 395
State............................................ (204) 3 8
------- ------ ------
Total current taxes................................ (1,737) 474 403
------- ------ ------
Deferred taxes (credits):
Federal.......................................... (1,170) 257 248
State............................................ (292) 259 241
------- ------ ------
Total deferred taxes............................. (1,462) 516 489
------- ------ ------
Provision (benefit) for income taxes............... $(3,199) $ 990 $ 892
======= ====== ======
</TABLE>
The following summarizes the differences between the income taxes reported
for financial statement purposes and income taxes at the federal statutory rate
of 34%, in 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rate...................... $(3,930) $ 827 $ 806
State franchise taxes, net of federal income tax
benefit.......................................... (827) 173 164
Valuation reserve.................................. 2,444 -- --
Net benefit from net operating loss carry back..... (904) -- --
Other.............................................. 18 (10) (78)
------- ----- -------
Provision (benefit) for income taxes........... $(3,199) $ 990 $ 892
======= ===== =======
Effective tax rate................................. (27.7%) 40.9% 37.6%
======= ===== =======
</TABLE>
Included in accrued interest receivable and other assets is refundable
income taxes of $1,780,000 at December 31, 1999. Included in accrued interest
payable and other liabilities is current income taxes payable of $837,000 at
December 31, 1998.
F-54
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 7--INCOME TAXES (CONTINUED)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Prepaid expenses....................................... $ 211 $ 211
State taxes............................................ 485 11
------- ------
Gross deferred tax liabilities....................... 696 222
------- ------
Deferred tax assets:
Other.................................................. 82 76
Depreciation, leasing transactions, fixed asset gain or
loss................................................. 251 169
Bad debt deductions.................................... 1,290 377
Deferred compensation.................................. 419 379
Core deposit amortization.............................. 20 20
Loan fee amortization.................................. 48 48
Accrued vacation....................................... 148 148
Contributions carryforward............................. 44 9
Net operating loss carryforward........................ 2,474 32
OREO reserve........................................... 112 --
Unrealized loss on securities available-for-sale....... 1,095 207
------- ------
Gross deferred tax assets.............................. 5,983 1,465
Valuation Reserve...................................... (2,444) --
------- ------
Net deferred tax asset..................................... $ 2,843 $1,243
======= ======
</TABLE>
The gross net operating loss carryforwards for federal and state income
taxes of approximately $5,583,000 and $2,910,000 begin expiring in 2019 and 2001
respectively. During the current year, a valuation allowance of $2,444,000 was
recorded to account for uncertainties related to the use of the Company's
deferred tax assets to offset future income, resulting in reduced tax benefit in
the year ended December 31, 1999. Management periodically reviews the factors
that may change the amount of valuation allowance as facts and circumstances
dictate. The deciding facts and circumstances causing management to establish
this reserve occurred during the fourth quarter of 1999. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the projected future taxable
income and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize all benefits
related to these deductible differences.
F-55
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8--SHAREHOLDERS' EQUITY
STOCK OPTION PLAN
The Company's stock option plans allow option holders to "pyramid" their
options upon exercise. Through this process, which utilizes the intrinsic value
of the options at the time of exercise, the option holders avoid incurring
additional costs. As a result, more options may be exercised than shares issued,
depending on the intrinsic value of the options at the time of exercise.
The Company has a stock option plan dated December 18, 1990 (the "1990
Plan") as amended and restated on September 22, 1992, which authorizes the
issuance of up to 120,000 shares of the Company's unissued common stock to
directors, officers and other personnel. Option prices may not be less than 100%
of the fair market value at the date of the grant for incentive stock options
and 85% of the fair market value for non-qualified stock options. Options
granted under the 1990 Plan expire not more than ten years after the date of
grant and must be fully paid when exercised. The status of options granted under
the 1990 Plan is shown as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED OPTIONS OPTIONS
PRICE ($) AVERAGE OUTSTANDING VESTED
------------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996.... 7.71-14.22 $ 10.54 62,603 62,603
Exercised........................... 7.71 (1,732)
Canceled............................ 12.92 12.92 (3,307)
Granted............................. --
Outstanding at December 31, 1997.... 7.71-14.22 10.54 57,564 57,564
Exercised........................... 7.71 (40,028)
Canceled............................ --
Granted............................. 17.00 1,500
-------
Outstanding at December 31, 1998.... 7.71-14.22 11.32 19,036 19,036
Exercised........................... --
Canceled............................ -- --
Granted............................. 11.16 11.21 42,667
-------
Outstanding at December 31, 1999.... 61,703 61,703
</TABLE>
At December 31, 1999, there were 61,862 shares available for grant under the
1990 Plan. At December 31, 1999, stock options outstanding had 8.5 years
weighted average life. Of the options outstanding at December 31, 1999 and 1998,
61,703 and 19,036, respectively, were exercisable with weighted-average prices
of $11.21 and $11.32, respectively.
The Company also has a stock option plan dated December 31, 1992 (the "1992
Plan"), which authorizes the issuance of up to 393,750 shares of the Company's
unissued common stock to directors, officers and other personnel. Option prices
may not be less than 100% of the fair market value at the date of the grant for
incentive stock options and 85% of the fair market value for non-qualified stock
options.
F-56
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
Options granted under the 1992 Plan expire not more than ten years after the
date of grant and must be fully paid when exercised. The status of options
granted under the 1992 Plan is shown as follows:
<TABLE>
<CAPTION>
EXERCISE OPTIONS
PRICE OUTSTANDING VESTED
--------------------- ----------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1996 and 1997.......... $ 12.70 358,313 358,313
=======
Exercised.......................................... 12.70 (264,600)
--------
Outstanding at December 31, 1998................... 12.70 93,713 93,713
=======
Granted............................................ 11.16 13,500
--------
Outstanding at December 31, 1999................... (12.57 weighted avg.) 107,213 97,047
======== =======
</TABLE>
At December 31, 1999, 102,213 options were exercisable at a weighted-average
exercise price per share of $12.57.
In addition, the Company also has a stock option plan dated March 25, 1998
(the "1998 Plan"), which authorizes the issuance of up to 100,000 shares of the
Company's unissued common stock to directors, officers and other personnel.
Option prices may not be less than 100% of the fair market value at the date of
the grant for incentive stock options and 85% of the fair market value for
non-qualified stock options. Options granted under the 1998 Plan expire not more
than ten years after the date of grant and must be fully paid when exercised. As
of December 31, 1999, there were no options granted or outstanding under the
1998 Plan.
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS 123, the Company's net
income (loss) would approximate the pro forma amounts, indicated below. These
pro forma amounts were calculated using the Black-Scholes option-pricing model
with the assumptions indicated in the table below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net income (loss) as reported.............................. $(8,360) $1,432
Pro forma loss net income (loss)........................... $(8,659) $1,424
Earnings per common share as reported (basic).............. $ (4.15) $ .81
Pro forma earnings per common share (loss)................. $ (4.30) $ .81
Expected life (years)...................................... 5 5
Risk-free interest rate.................................... 4.86% 4.93%
Volatility................................................. 63.7% 46%
Expected dividend yield.................................... -- --
</TABLE>
The weighted average grant date fair value of the options granted during the
year ended December 31, 1999 and 1998 was $10.375 and $17.00, respectively.
There were no options granted during 1997.
F-57
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
On February 1, 2000, 60,000 options granted to two executives during 1999
were cancelled and 130,000 new options were granted with an exercise price of
$7.50 per share. Of the new options, 50% vested on the grant date and 25% vest
annually on the anniversary of the grant date. On February 1, 2000, the exercise
price of 10,000 options granted to two employees during 1999 was amended to
$7.50 per share. Of the options granted during 1999, 3,500 are contingent upon
execution of a key employee agreement.
COMMON STOCK ISSUANCE
On May 14, 1996, the Company declared a 5% stock dividend paid on June 21,
1996, primarily by a distribution of 64,714 treasury shares. On June 23, 1995,
the Company declared a 5% stock dividend primarily paid by a distribution of
56,274 treasury shares on July 19, 1995. On January 19, 1993, the Company
concluded a private placement offering of 341,250 shares of common stock at a
price of $12.70 per share. All but 15,225 shares were sold as of December 31,
1992. In connection with the offering, 413,438 options and 137,812 warrants were
issued on December 31, 1992 and are considered issued and outstanding. The
options and warrants became exercisable on December 31, 1994 at a price of
$12.70 per share and expire on December 31, 2002. Proceeds to the Company from
the offering totaled $3,559,000 as of December 31, 1992. Additional proceeds of
$182,000 were received on January 19, 1993.
In connection with the private placement, the Company issued (i) a warrant
to Robert H. Leshner, principal of the placement agent, to purchase 110,250
shares of Common Stock (the "Leshner Warrant") and (ii) a warrant to Andrew E.
Haas, which was subsequently reissued as two warrants to purchase 13,781 shares
to each of Mr. Haas and Curtis Swindal, each at a purchase price of $12.70 per
share exercisable in full on or after December 31, 1994 and before December 31,
2002. The Company agreed to grant the holders of the shares issued upon exercise
of the warrants ("Warrant Shares") the right, on two occasions during the
five-year period beginning December 31, 1994, to require the Company to register
(the "Demand Registration") the Warrant Shares under the Securities Exchange Act
of 1934 (the "Act"). The Company will pay the expenses of one Demand
Registration.
Under the terms of the Leshner Warrant, if Dr. Joel W. Kovner, former
Chairman of the Board and Chief Executive Officer of the Company, dies before
December 31, 2002, then the Company will purchase, at the option of
Mr. Leshner, some or all of the warrants and/or Warrant Shares then owned by
Mr. Leshner, provided that (i) the maximum aggregate purchase price paid by the
Company shall be not more than $1,000,000 and (ii) the funds to purchase such
warrants and/or Warrant Shares shall come solely from the proceeds of the key
person life insurance policy on Dr. Kovner. Furthermore, if at any time prior to
December 31, 2002 Mr. Leshner wishes to sell some or all of the warrants and/or
Warrant Shares to a third party, Mr. Leshner must offer to sell such warrants
and/or Warrant Shares to the Company on the same terms and conditions being
offered to such third party. Another term of the Leshner Warrant restricts
Company's ability to issue certain types of preferred stock which would entitle
the holders thereof to receive dividends or distributions of assets that vary in
amount with Bancorp's performance.
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its premises and certain equipment under several
noncancellable operating leases which expire on various dates through
January 31, 2014. Rental expense for the years ended December 31, 1999, 1998 and
1997 amounted to approximately $1.0 million, $1.0 million and $1.1 million,
respectively.
F-58
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The following is a schedule of future minimum rental commitments required
under operating leases that have initial or remaining noncancellable lease terms
in excess of one year as of December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------ --------------
<S> <C>
2000........................................................ $1,060
2001........................................................ 967
2002........................................................ 474
2003........................................................ 348
2004........................................................ 200
Thereafter.................................................. 1,815
------
Total....................................................... $4,864
======
</TABLE>
The building lease commitments are subject to cost-of-living adjustments to
reflect future changes in the consumer price index or a fixed periodic rate
increase. Those leases with fixed periodic rate increases and/or specified
months with no rent due are amortized so that the average monthly cost of the
lease is charged each month.
LENDING COMMITMENTS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its clients.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The Bank's exposure to credit loss in the event of
nonperformance by the other party to commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. At December 31, 1999 and 1998, the Company had commitments to
extend credit of approximately $46.7 million and $49.9 million, respectively,
and obligations under standby letters of credit of approximately $5.6 million
and $6.5 million, respectively. These commitments and obligations were variable
rate in structure.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a client to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. At December 31, 1999,
all guarantees extended for a period of 12 months or less. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for extending loan facilities to clients. The Company evaluates each
client's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if necessary by the Company upon an extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held varies but
may include accounts receivable, inventory, property plant and equipment and
income-producing commercial real estate.
OTHER OBLIGATIONS
As part of a separation agreement, a former executive was granted a
continuation of services arrangement where the Company is obligated to pay
$150,000 per annum beginning May 2001 and continuing through May 2016. In
connection with this agreement, the Company invested in and is the beneficiary
of life insurance policy proceeds which fund this obligation and meets other
settlement
F-59
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
requirements as discussed in Note 8. As of December 31, 1999, the accrued
liability for the salary continuation was $1.0 million and the cash surrender
value of the life insurance policies, recorded in other assets, was
$2.3 million.
NOTE 10--TRANSACTIONS INVOLVING DIRECTORS AND AFFILIATED PARTIES
As part of its normal banking activities, the Company has extended credit to
various directors and employees and their related interest. The credit extended
to these individuals and affiliates for the two years ended December 31, is
summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
-------------- -------- --------
<S> <C> <C>
Balance, beginning of year.................................. $ 3,650 $3,711
Credit granted.............................................. 1,500 293
Loan payments............................................... (2,950) (354)
------- ------
Balance, end of year........................................ $ 2,200 $3,650
======= ======
</TABLE>
Interest income earned on these loans amounted to approximately $159,400,
$343,000 and $286,000 during the years 1999, 1998, and 1997, respectively. In
the opinion of management, all of the above reference extensions of credit are
on terms similar to transactions with nonaffiliated parties and involve only
normal credit risk, when initially underwritten. Amounts included in deposits at
December 31, 1999, related to directors and affiliated parties was approximately
$789,000.
The Company and the Bank entered into a Consulting Agreement with Network
Health Financial Services, Inc. ("NHFS"), a California Corporation for which
Melinda McIntyre-Kolpin serves as Chief Executive Officer. Pursuant to the
Consulting Agreement, NHFS provides consulting services to the Company and the
Bank with respect to personnel matters, operational procedures and client
development and retention. NHFS is paid its actual costs incurred in the
performance of its duties under the Consulting Agreement (including hourly rates
for certain specified NHFS personnel while they are performing consulting
services), plus an additional 25% of such costs. In addition, the Bancorp and
Bank pay flat monthly rates for the services of Ms. McIntyre-Kolpin and
Ms. Patti Derry. During 1999, the Bancorp and the Bank paid NHFS total fees in
the amount of approximately $644,000 pursuant to the Consulting Agreement.
Either party may terminate the Consulting Agreement by giving 30 days notice to
the other party. The Company and the Bank terminated the Consulting Agreement on
March 6, 2000.
NOTE 11--CAPITAL ADEQUACY AND RESTRICTIONS ON DIVIDEND PAYMENTS
The Office of the Comptroller of the Currency (the "OCC"), the Bank's
primary regulator, has established minimum leverage ratio guidelines for
national banks. These guidelines provide for a minimum Tier 1 capital leverage
ratio (Tier 1 capital to adjusted total assets) of 3.0% for national banks that
meet certain specified criteria, including having the highest regulatory rating.
All other national banks will generally be required to maintain a minimum Tier 1
capital leverage ratio of 3.0% plus an additional 100 to 200 basis points.
The Federal Reserve Board, as the Company's primary regulator, has similarly
established minimum leverage ratio guidelines for bank holding companies. These
guidelines also provide for a minimum Tier 1 leverage ratio of 3.0% for bank
holding companies that meet certain specified criteria, including having the
F-60
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--CAPITAL ADEQUACY AND RESTRICTIONS ON DIVIDEND PAYMENTS (CONTINUED)
highest regulatory rating. All other bank holding companies will generally be
required to maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an
additional 100 to 200 basis points. The Federal Reserve Board has not advised
the Company of any specific minimum Tier 1 capital leverage ratio applicable to
it. Under risk-based capital standards, banking organizations are expected to
meet a minimum ratio for qualifying total capital to risk-weighted assets of
8.0%, 4.0% of which must be Tier 1 capital.
The Federal Deposit Insurance Act of 1991 contains "prompt correction
action" provisions pursuant to which insured depository institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
The following table sets forth the minimum required regulatory capital
ratios for a bank holding company and bank, and various regulatory capital
ratios of the Company and the Bank at December 31, 1999.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
(IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMPANY
Leverage............................... $14,972 5.21% $11,494 4.00% $14,368 5.00%
Tier 1 Risk-Based...................... 14,972 8.97 6,675 4.00 10,013 6.00
Total Risk-Based....................... 17,784 10.66 13,350 8.00 16,688 10.00
BANK
Leverage............................... $13,786 4.81% $11,457 4.00% $14,321 5.00%
Tier 1 Risk-Based...................... 13,786 8.18 6,741 4.00 10,112 6.00
Total Risk-Based....................... 15,939 9.46 13,482 8.00 16,853 10.00
</TABLE>
F-61
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--CAPITAL ADEQUACY AND RESTRICTIONS ON DIVIDEND PAYMENTS (CONTINUED)
The following table sets forth the minimum required regulatory capital
ratios for a bank holding company and bank, and various regulatory capital
ratios of the Company and the Bank at December 31, 1998.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
(IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMPANY
Leverage..................................... $25,592 9.59% $10,677 4.00% $13,346 5.00%
Tier 1 Risk-Based............................ 25,592 17.31 5,914 4.00 8,872 6.00
Total Risk-Based............................. 28,561 19.32 11,829 8.00 14,786 10.00
BANK
Leverage..................................... $22,297 8.37% $10,661 4.00% $13,326 5.00%
Tier 1 Risk-Based............................ 22,297 15.12 5,899 4.00 8,848 6.00
Total Risk-Based............................. 24,145 16.37 11,797 8.00 14,747 10.00
</TABLE>
Under federal banking law, dividends declared by the Bank in any calendar
year may not, without the approval of the OCC, exceed its net earnings, as
defined, for that year combined with its retained net earnings for the preceding
two years. Dividends declared may not exceed amounts necessary to satisfy the
aforementioned capital requirements. As of December 31, 1999, the Bank could not
declare dividends without obtaining regulatory approval.
Federal banking law also restricts the Bank from extending credit to the
Company in excess of 10% of the capital stock and surplus, as defined. Any such
extensions of credit are subject to strict collateral requirements.
The OCC conducted an examination in 1999 and determined that the Bank
required special supervisory attention. To implement this corrective action, the
OCC and the Bank entered into a formal agreement on March 22, 2000, which
requires the Bank to: maintain certain regulatory capital levels; appoint a full
time president and a full time senior lending officer; establish a loan workout
department; implement an overdraft policy; improve the management of the loan
portfolio; establish an independent loan review system; immediately take action
to protect the Bank's interest in criticized assets; establish an organizational
structure with clear lines of authority for the CEO and President; develop a
conflict of interest policy which includes relationships with officers,
directors and consultants; develop a three year strategic plan; develop a profit
plan to improve and sustain earnings and a capital plan to meet and maintain a
well capitalized regulatory requirements. The agreement also establishes a
schedule for compliance and requires additional recovery reporting by the Bank.
F-62
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--CAPITAL ADEQUACY AND RESTRICTIONS ON DIVIDEND PAYMENTS (CONTINUED)
The following table sets forth the capital ratios for the bank, at
December 31, 1999 and the required ratios by September 30, 2000:
<TABLE>
<CAPTION>
REQUIRED BY THE EXCESS
ACTUAL FORMAL AGREEMENT (DEFICIENCY)
------------------- ------------------- -------------------
(IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BANK
Leverage....................................... $13,786 4.81% $14,321 5.00% $ (535) (.19)%
Tier 1 Risk-Based.............................. 13,786 8.18 10,112 6.00 3,674 2.18
Total Risk-Based............................... 15,939 9.46 16,853 10.00 (914) (.54)
</TABLE>
NOTE 12--CONVERTIBLE NOTES
On June 19, 1994, the Company completed a public offering of $5,750,000 in
convertible subordinated reset notes (the "Notes") which mature on March 1, 2004
and incurred expenses of $1,205,000. Interest on the Notes is payable
semiannually on March 1 and September 1 of each year, commencing on
September 1, 1994 at the rate of 8.50% per annum until March 1, 1998, and from
March 2, 1998 until the principal thereof is paid or made available for payment
at a rate of 7.21% per annum, or the Reference Rate (as defined below) plus 150
basis points. The "Reference Rate" is the most recent "Five Year Constant
Treasury Maturity Index" published by the Federal Reserve Bank, or its
successor, at least 60 days prior to March 2, 1998. The Notes are convertible
into common stock of the Company at any time prior to maturity, unless
previously redeemed, at a conversion price of $12.6984 per share, subject to
adjustment in certain events. The Notes are redeemable in whole or in part at
the option of the Company at any time on or after March 2, 1998 at the
redemption prices set, subject to the prior approval of the Board of Governors
of the Federal Reserve System. During 1999, $437,000 of the notes were converted
into 34,410 common stock shares. During 1998, $4,321,000 of the Notes were
converted into 334,494 common stock shares. During 1997, $180,000 of the Notes
were converted into 14,174 common stock shares. During 1996, $2,000 of the Notes
were converted into 157 common stock shares. During 1995, $131,000 of the Notes
were converted into 10,316 common stock shares. If all $679,000 of the remaining
Notes were converted into common stock, 53,471 shares of common stock would be
issued.
NOTE 13--DERIVATIVE FINANCIAL INSTRUMENTS
The Company had only limited involvement with derivative financial
instruments and did not use them for trading purposes. They are used to manage
well-defined interest rate price risks. The Company was not a party to any
derivative financial instruments as of December 31, 1999.
Interest rate floor and cap agreements are used to reduce the potential
impact of changes in interest rates which would reduce the interest income
and/or market value on loans and on certain securities. The Company entered into
three interest rate floor agreements during December 1994 and January 1995 for a
total notional amount of $60 million. The agreements entitled the Company to
receive from counterparties on a monthly basis the amounts, if any, by which the
one-month London Interbank Offered Rate ("LIBOR") falls below 6%. The floor
agreements were for a period of three years. The average premium paid for the
floor agreements was approximately 20 basis points or $120,000 and was being
amortized over three years. In May 1995, the Company sold the floor contracts
for total consideration of $722,500. This
F-63
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
amount is being amortized over the original three year term. In 1997, net
interest income was increased approximately $235,000, as a result of the
interest rate floor agreements.
In December 1995, the Company entered into two interest rate cap agreements
for a notional amount of $10 million each. The agreements entitle the Company to
receive from counterparties on a quarterly basis the amounts, if any, by which
the one year Constant Maturity Treasury Index ("CMT") rises above 6.50% on a
$10 million notional amount and 6.75% on a $10 million notional amount. The cap
agreements are for a period of three years and expired December 1998. The
average premium paid for the cap agreements was approximately 63.5 basis points
or $127,000 and is being amortized over three years. Net interest income in
1999, 1998 and 1997 was decreased by the interest rate caps by approximately
$1,600, $40,000 and $42,000, respectively.
The Company uses interest rate swap agreements for the purpose of
synthetically altering the interest rates on a portion of the Bank's super NOW
and money market accounts. In January 1993, the Company entered into two
interest rate swap agreements that paid the Company a fixed rate of 7.21% for
three years beginning in January 1993, while the Company paid the prime rate.
These swaps had a total notional amount of $40 million and terminated in
January 1996. Net interest income for 1996 and 1995 was reduced by the two swaps
by approximately $15,000 and $694,000, respectively. In November 1993, the Bank
entered into a swap with a notional amount of $15 million to synthetically alter
interest rates on a portion of the Bank's super NOW and money market accounts.
The effective date of the swap is May 26, 1994 and covers a period of five years
ending in May 1999. Under the terms of the swap, the Bank pays a rate of prime
less 190 basis points while receiving the three-month LIBOR. The rate the Bank
pays adjusts daily while the rate the Bank receives adjusts quarterly. The terms
of the swap originally included an interest rate cap, which was terminated in
1994, and an expense of approximately $385,000 was recorded. Net interest income
was reduced by the swap by approximately $32,000 and $134,000 in 1999 and 1998,
each year, respectively.
The Company is exposed to potential credit losses in the event of
nonperformance by the counterparties to its interest rate floor agreements,
interest rate swap agreements and nonderivative financial assets, but has no
off-balance-sheet credit risk of accounting loss. The Company anticipates,
however, that counterparties will be able to fully satisfy their obligations
under the contracts. The Company does not obtain collateral or other security to
support the financial instruments subject to credit risk but monitors the credit
standing of counterparties.
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a current market
exchange. The use
F-64
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(IN THOUSANDS) VALUE FARI VALUE VALUE VALUE FAIR
-------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents......................... $ 43,419 $ 43,419 $ 31,965 $ 31,965
Securities available-for-sale..................... 45,525 45,525 80,891 80,891
Securities held-to-maturity....................... 18,200 17,901 24,081 24,135
Loans, net........................................ 156,484 156,206 115,519 116,091
Liabilities:
Noninterest-bearing transaction accounts.......... 109,560 109,560 109,422 109,422
Interest-bearing transaction accounts............. 16,033 16,033 16,710 16,710
Savings and money market accounts................. 84,783 84,783 75,501 75,501
Certificates of deposit and other time deposits... 45,651 45,666 28,948 28,799
Convertible notes................................. 679 679 1,116 1,051
</TABLE>
The carrying values of cash and cash equivalents reported in the balance
sheet approximate fair values due to the short-term nature of the assets. The
fair value of marketable securities and interest rate swaps and caps is based on
quoted market prices, dealer quotes, and prices obtained from independent
pricing services. The fair values of loans are estimated using discounted cash
flow analysis. The analysis was performed on a loan-by-loan basis by projecting
each loan's expected cash flows and discounting these flows at appropriate
discount rates. The expected cash flows were determined by contractually
scheduled payments of principal and interest, incorporating scheduled rate
adjustments, periodic caps, and lifetime ceilings and floors for adjustable
loans. The fair values are based on a stable interest rate scenario and do not
incorporate bid-ask spreads or discounts that might be required to dispose of
assets in bulk. Discount rates applied to the expected cash flows were based on
the Bank's offer rates for new loans with similar collateral and terms, adjusted
to reflect differential risk based on collateral value, payment status, and/or
credit classification at December 31, 1999 and 1998, respectively.
The fair value of deposits with no defined maturities, such as demand
deposits, money market deposits and savings accounts, is the amount payable on
demand at the valuation date. For deposit liabilities with defined maturities,
such as time certificates of deposit, estimation of fair value was based on the
discounted value of future cash flows expected to be paid, where the discount
rate was the Bank's offer rate for similar deposits with maturities equivalent
to the remaining terms on the deposits being valued at December 31, 1999 and
1998, respectively.
Standby letters of credit principally support corporate obligations and
include $1.5 million and $395,000 that was collateralized with cash at
December 31, 1999 and 1998, respectively. At December 31, 1999, $5.6 million of
the standby letters of credit and $37.2 million of other lending commitments
expire within one year. The estimated fair value of lending commitments and
letters of credit is estimated using fees currently charged for similar
arrangements, adjusted for changes in interest rates and credit that occurred
subsequent to origination.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1999 and 1998. Although management is
not aware of any factors that would
F-65
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
those dates and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
NOTE 15--EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss) used in basic earnings per share
computation:........................................... $(8,359,763) $1,431,599 $1,478,525
Interest savings on conversion of convertible notes, net
of income taxes........................................ (a) 149,200 279,435
----------- ---------- ----------
Diluted earnings (loss).................................. $(8,359,763) $1,580,799 $1,757,960
=========== ========== ==========
Denominator for basic earnings per share -weighted
average number of shares outstanding................... 2,015,226 1,768,663 1,345,972
Effect of dilutive securities:
Warrants and Options................................... (a) 125,596 33,835
Convertible notes...................................... (a) 253,942 428,164
Denominator for diluted earnings per share............. 2,015,226 2,148,201 22,739
=========== ========== ==========
Basic earnings (loss) per share.......................... $ (4.15) $ 0.81 $ 1.10
=========== ========== ==========
Diluted earnings (loss) per share........................ $ (4.15) $ 0.74 $ 0.97
=========== ========== ==========
</TABLE>
------------------------
(a) No effect has been given to dilutive securities because the impact is
anti-dilutive.
NOTE 16--PARENT COMPANY INFORMATION
The Bancorp has met its obligations principally from the payment of
dividends from the Bank. As of December 31, 1999, the Bank was unable to pay
dividends without obtaining regulatory approval.
The following financial information represents the balance sheets of the
Bancorp as of December 31, 1999 and 1998, the related statements of operations
and of cash flows for the three-year period ended December 31, 1999.
F-66
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash in First Professional Bank, N.A........................ $ 433 $ 3,276
Investment in First Professional Bank, N.A.................. 16,303 22,296
Loans....................................................... 865 244
Accrued interest receivable and other assets................ 673 708
------- -------
$18,274 $26,524
======= =======
Liabilities:
Accrued interest payable and other liabilities.............. $ 65 $ 77
Convertible Notes........................................... 679 1,116
Other Liabilities........................................... -- 10
------- -------
Total Liabilities......................................... 744 1,203
Shareholder's equity........................................ 17,530 25,321
------- -------
$18,274 $26,524
======= =======
</TABLE>
F-67
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Cash dividends from First Professional Bank, N.A.......... $ -- $ -- $ 425
Interest.................................................. 80 15 7
Other..................................................... 14 4 4
------- ------ ------
Total income............................................ 94 19 436
------- ------ ------
Expenses:
Interest.................................................. 46 253 474
Salaries and employer taxes............................... 34 22 31
Amortization of convertible note expenses................. 16 69 104
Legal fees, net of legal settlement....................... 209 218 (481)
Other Professional services............................... 49 117 67
Other..................................................... 75 11 1
------- ------ ------
Total expenses.......................................... 429 690 196
------- ------ ------
Provision for Loan Loss..................................... (660) -- --
Earnings (loss) before income taxes and equity in
undistributed net earnings of First Professional Bank,
N.A....................................................... (995) (671) 240
Provision for income taxes..................................
------- ------ ------
Earnings before equity in undistributed net earnings of
First Professional Bank, N.A.............................. (995) (671) 240
Equity in undistributed net (loss) earnings of First
Professional Bank, N.A.................................... (7,365) 2,103 1,239
------- ------ ------
Net (loss) earnings......................................... $(8,360) $1,432 $1,479
======= ====== ======
</TABLE>
F-68
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $(8,360) $ 1,432 $ 1,479
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:...........................
(Increase) decrease in accrued interest receivable and other
assets.................................................... 34 (39) (14)
(Decrease) increase in accrued expenses and other
liabilities............................................... (22) (186) (6)
(Decrease) in deferred taxes................................ -- 69 104
Equity in undistributed (earnings) loss of First
Professional Bank, N.A.................................... 7,365 (2,103) (1,239)
------- ------- -------
Net cash provided by (used in) investing activities......... (983) (827) 324
------- ------- -------
Cash Flows from investing activities:
Advanced from FPB......................................... 400 -- --
Net decrease (increase) in loans.......................... (621) (144) --
------- ------- -------
Net cash provided by (used in) investing activities......... (221) (144) --
------- ------- -------
Cash flows from financing activities:
Capital infusion into FPB................................. (1,500) -- --
Proceeds from exercise of convertible notes............... (38) 3,794 14
Dividends paid............................................ (101) (185) --
------- ------- -------
Net cash provided by (used in) financing activities......... (1,639) 3,609 14
------- ------- -------
Net increase (decrease) in cash............................. (2,843) 2,638 338
Cash, beginning of year..................................... 3,276 638 300
------- ------- -------
Cash, end of year........................................... $ 433 $ 3,276 $ 638
======= ======= =======
Supplemental disclosure of cash flow information--cash paid
during the year for:
Interest.................................................. $ 58 $ 381 $ 474
</TABLE>
F-69
<PAGE>
PROFESSIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth the Company unaudited data regarding
operations for each quarter of 1999, 1998 and 1997. This information, in the
opinion of management, includes all normal recurring adjustments necessary to
state fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
1999 1999 1999 1999 1998 1998
-------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest income.......................... $ 4,755 $ 4,801 $4,419 $4,321 $4,476 $4,343
Interest expense......................... 950 864 750 849 1,040 793
Net interest income...................... 3,805 3,937 3,669 3,472 3,437 3,550
Provision for loan losses................ 8,395 4,426 1,047 125 406 --
Gains (losses) on securities:
Available-for-sale..................... -- -- 4 36 3 --
Other Income............................. 431 458 443 481 387 418
Other expenses........................... 3,820 3,582 3,605 3,294 2,702 3,096
Earnings (loss) before income taxes...... (7,979) (3,613) (536) 569 719 872
Net earnings (loss)...................... (6,073) (2,363) (259) 336 392 512
Earnings (loss) per share (as restated):
Basic.................................. (3.00) (1.17) (.13) .17 0.20 0.26
Diluted................................ (3.00)(a) (1.17)(a) (.13)(a) .16 0.18 0.22
</TABLE>
------------------------
(a) No effect has been given to dilutive securities because the impact is
anti-dilutive
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1998 1998 1997 1997 1997 1997
-------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest income................................... $4,120 $4,009 $4,375 $4,168 $4,148 $4,019
Interest expense.................................. 896 901 1,044 965 896 921
Net interest income............................... 3,224 3,108 3,331 3,203 3,252 3,098
Provision for loan losses......................... -- -- 60 60 60
Gains (losses) on securities:
Available-for-sale.............................. (9) -- -- -- -- --
Other Income...................................... 469 467 368 455 541 428
Other expenses.................................... 3,296 3,133 2,453 3,325 3,202 3,144
Earnings (loss) before income taxes............... 388 442 1,246 273 531 322
Net earnings (loss)............................... 224 304 778 199 312 190
Earnings (loss) per share (as restated):
Basic........................................... 0.13 0.22 0.49 0.15 0.23 0.14
Diluted......................................... 0.13 0.17 0.45 0.15 0.23 0.14
</TABLE>
In the third and fourth quarter of 1999, the Company added $4,400,000 and
$8,400,000, respectively, to the allowance for loan losses in recognition that
the quality of certain loans had deteriorated and to provide protection against
future potential losses.
Earnings (loss) per share is based on the weighted average number of shares
outstanding during each period. Full-year weighted average shares differ from
quarterly weighted average shares, and therefore annual earnings (loss) per
share may not equal the sum of the quarters.
F-70
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks:
Noninterest-bearing....................................... $ 28,571 $ 15,721
Interest-bearing............................................ 405 697
Federal funds sold.......................................... 47,450 27,000
-------- --------
Cash and cash equivalents................................... 76,426 43,418
Securities available-for-sale (cost of $48,058 and $47,748
in 2000 and 1999, respectively)........................... 45,540 45,086
Securities held-to-maturity (fair value of $16,316 and
$18,340 in 2000 and 1999, respectively)................... 16,597 18,639
Loans (net of allowance for loan losses of $7,276 and $5,873
in 2000 and 1999, respectively)........................... 121,351 156,484
Premises and equipment, net................................. 1,027 1,152
Deferred tax asset.......................................... 2,844 2,844
Accrued interest receivable and other assets................ 4,618 5,867
-------- --------
Total Assets................................................ $268,403 $273,490
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Demand, noninterest-bearing............................... $116,322 $109,561
Demand, interest-bearing.................................. 16,644 16,033
Savings and money market.................................. 89,549 84,783
Time deposits............................................. 28,188 45,651
-------- --------
Total deposits.............................................. 250,703 256,028
Convertible notes........................................... 679 679
Accrued interest payable and other liabilities.............. 2,045 1,915
-------- --------
Total liabilities........................................... 253,427 258,622
-------- --------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares
Authorized; 2,100,221 issued and 2,030,754 outstanding
both 2000 and 1999...................................... 17 17
Additional paid-in-capital.................................. 21,271 21,271
Accumulated deficit......................................... (3,256) (3,221)
Treasury stock, at cost (69,467 shares in both 2000 and
1999)..................................................... (537) (537)
Unrealized loss on securities available-for-sale, net of
taxes..................................................... (2,519) (2,662)
-------- --------
Total shareholders' equity.................................. 14,976 14,868
-------- --------
Total Liabilities and Shareholder's Equity.................. $268,403 $273,490
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-71
<PAGE>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income
Loans....................................................... $2,990 $3,194 $6,565 $6,078
Securities.................................................. 1,006 1,057 2,013 2,379
Federal funds sold and securities purchased under agreements
to resell................................................. 696 163 1,169 246
Interest-bearing deposits in other banks.................... 11 5 16 37
------ ------ ------ -----
Total interest income....................................... 4,703 4,419 9,763 8,740
------ ------ ------ -----
Interest expense
Deposits.................................................... 847 737 1,845 1,461
Convertible notes........................................... 14 14 25 30
Federal funds purchased and securities sold under agreements
to repurchase............................................. -- -- -- 109
------ ------ ------ -----
Total interest expense...................................... 861 751 1,870 1,600
------ ------ ------ -----
Net interest income......................................... 3,842 3,668 7,893 7,140
Provision for loan losses................................... 650 1,047 1,743 1,172
------ ------ ------ -----
Net interest income after provision for loan losses......... 3,192 2,621 6,150 5,968
------ ------ ------ -----
Other operating income
Net gain (loss) on sale securities available-for-sale....... -- 4 -- 40
Merchant discount........................................... 71 79 143 140
Mortgage brokering fees..................................... 3 8 8 63
Service charges on deposits................................. 247 229 482 458
Other income................................................ 155 128 293 263
------ ------ ------ -----
Total other operating income................................ 476 448 926 964
------ ------ ------ -----
Other operating expenses
Salaries and employee benefits.............................. 1,944 1,786 3,791 3,491
Occupancy................................................... 366 351 733 738
Furniture and equipment..................................... 197 214 371 423
Meetings and business development........................... 14 48 29 121
Donations................................................... 25 66 36 90
Other promotion............................................. 56 73 120 143
Legal fees.................................................. 297 226 427 318
Audit, accounting and examinations.......................... 105 130 157 173
Professional services....................................... 243 334 556 643
Strategic planning and other outside consulting............. 11 16 39 23
Office supplies............................................. 79 63 131 127
Telephone................................................... 94 61 192 124
Postage..................................................... 35 33 68 69
Messenger service........................................... 29 8 45 14
FDIC assessment............................................. 30 6 59 13
Other assessments........................................... 43 48 83 92
Other expense............................................... 147 142 274 297
------ ------ ------ -----
Total other operating expenses.............................. 3,715 3,605 7,111 6,899
------ ------ ------ -----
Earnings before taxes....................................... (47) (536) (35) 33
Provision for income taxes.................................. -- (277) -- (43)
------ ------ ------ -----
Net earnings................................................ $ (47) $ (259) $ (35) 76
====== ====== ====== =====
Earnings per share
Basic..................................................... $ (.02) $ (.13) $ (.02) $ .04
Diluted................................................... (a) (a) (a) $ .04
</TABLE>
------------------------------
(a) Anti dilutive
See accompanying notes to consolidated financial Statements
F-72
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net earnings (loss)......................................... $(46) $ (259) $(35) $ 76
---- ------- ---- -------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during the
period.................................................. 338 (857) 144 (1,047)
Reclassification adjustment............................... -- 8 -- 19
---- ------- ---- -------
Other comprehensive income................................ 338 (849) 144 (1,028)
---- ------- ---- -------
Comprehensive income (Loss)................................. $292 $(1,108) $109 $ (952)
==== ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-73
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
SIX MONTH PERIOD ENDING JUNE 30, 2000
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
--------------------- PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) STOCK INCOME (LOSS) TOTAL
---------- -------- ---------- ------------ -------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Conversion of Notes (Note
12)........................ 2,030,754 $17 $21,271 $(3,221) $(537) $(2,662) $14,868
Cash Dividends............... -- -- -- -- -- -- --
Change in net unrealized
holding loss on securities
available-for-sale......... -- -- -- -- -- 143 143
Net earnings (loss).......... -- -- -- (35) -- -- (35)
---------- --- ------- ------- ----- ------- -------
Balance, June 30, 2000....... 2,030,754 $17 $21,271 $(3,256) $(537) $(2,519) $14,976
========== === ======= ======= ===== ======= =======
Balance, December 31, 1998... $1,996,344 $17 $20,874 $ 5,239 $(537) $ (271) $25,322
Conversion of Notes (Note
12)........................ 19,529 -- 224 -- -- -- 224
Cash Dividends............... -- -- -- (101) -- -- (101)
Change in net unrealized
holding loss on securities
available-for-sale......... -- -- -- -- -- (1,028) (1,028)
Net earnings (loss).......... -- -- -- 76 -- -- 76
---------- --- ------- ------- ----- ------- -------
Balance, June 30, 1999....... $2,015,873 $17 $21,098 $ 5,214 $(537) $(1,299) $24,493
========== === ======= ======= ===== ======= =======
</TABLE>
F-74
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
(UNAUDITED) (IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ (35) $ 76
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation and amortization............................. 208 294
Provision for loan losses................................. 1,463 1,172
(Gain) loss on sales of securities available-for-sale..... -- (39)
Amortization of convertible note expense.................. 7 9
Increase in deferred tax asset............................ -- (1,349)
Decrease (increase) in accrued interest receivable and
other assets............................................ 1,348 744
Increase (decrease) in accrued interest payable and other
liabilities............................................. 123 (593)
Net amortization of premiums and discounts on securities
held-to-maturity........................................ 76 121
Net amortization of premiums and discounts on securities
available-for-sale...................................... 50 149
-------- --------
Net cash provided by operating activities................. 3,240 584
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of securities held-to-maturity............... -- 250
Maturities of securities available-for-sale............. 1,305 --
Sales of securities available-for-sale.................. -- 27,187
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity............. 1,967 2,954
Mortgage-backed securities available-for-sale........... 1,704 5,736
Purchases of securities available-for-sale................ (3,370) (1,947)
Net (increase) decrease in loans........................ 33,569 (27,558)
Purchase of bank premises and equipment, net............ (82) (291)
-------- --------
Net cash provided by investing activities............... 35,093 6,331
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings
accounts................................................ 12,138 (8,055)
Net increase (decrease) in time deposits.................. (17,463) 3,806
Cash dividends............................................ -- (101)
-------- --------
Net cash provided by (used in) in financing activities.... (5,325) (4,350)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 33,008 2,565
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 43,418 31,964
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 76,426 $ 34,529
======== ========
Supplemental disclosure of cash flow information--
Cash paid during the period for:
Interest.................................................. 1,467 1,606
Income taxes.............................................. -- 1,120
Supplemental disclosure of noncash items:
Pre-tax change in unrealized losses on securities
available for sale securities........................... 143 1,816
Conversion of notes..................................... -- 215
</TABLE>
See accompanying notes to consolidated financial statements.
F-75
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Professional Bancorp, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for the periods covered
have been made. Certain information and note disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Management believes that the disclosures are adequate to make the
information presented not misleading.
The financial position at June 30, 2000, and the results of operations for
the six months ended June 30, 2000 are not necessarily indicative of the results
of operations that may be expected for the year ending December 31, 2000. These
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the Company's audited financial statements and these interim financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1999.
RECLASSIFICATION
Certain amounts in the accompanying financial statements have been
classified to conform with the 2000 presentation of the item.
NOTE 2--EARNINGS PER SHARE
The actual number of shares outstanding at June 30, 2000 was 2,030,754.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
F-76
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--EARNINGS PER SHARE (CONTINUED)
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted from
issuance of common stock that then shared in earnings.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Income (Loss) used in basic earnings per share
computation..................................... (47) (259) (35) (76)
Adjustments to net income per assumed effect of
dilutive securities:
Interest on convertible notes, net of tax
effect.......................................... -- 8 -- 17
Adjusted earnings used in diluted earnings per
share computation............................... (47) (251) (35) 93
Effect of dilutive securities:
Options and Warrants............................ (a) 71,277 (a) 68,228
Convertible Notes............................... (a) 68,375 (a) 73,039
--------- --------- --------- ---------
Weighted average number of shares outstanding for
calculation of diluted earnings per share....... 2,030,754 2,154,879 2,030,754 2,154,456
Weighted average number of shares outstanding for
calculation basic earnings per share............ 2,030,754 2,154,879 2,030,754 2,154,456
Basic earnings per share.......................... (0.02) (0.13) (0.02) 0.04
Diluted earnings per share........................ (a) (a) (a) (0.04)
</TABLE>
------------------------
(a) No effect has been given to dilutive securities because the impact is
anti-dilutive.
NOTE 3--NEW ACCOUNTING STANDARDS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of
Accounting Principles Board ("APB") Opinion No. 25. FASB Interpretation No. 44
clarifies certain issues related to the application of APB Opinion 25 and is
effective July 1, 2000, with certain conclusions covering specific events that
occurred either December 15, 1998 or January 12, 2000. FASB Interpretation
No. 44 is not expected to have a material effect on the Company's financial
position or results of operations.
F-77
<PAGE>
ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 7, 2000
BY AND BETWEEN
FIRST COMMUNITY BANCORP
AND
PROFESSIONAL BANCORP, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
RECITALS
ARTICLE I
Certain Definitions
1.01 CERTAIN DEFINITIONS......................................... 1
ARTICLE II
The Merger
2.01 THE MERGER.................................................. 5
2.02 EFFECTIVE DATE AND EFFECTIVE TIME........................... 5
2.03 AGREEMENT OF MERGER......................................... 5
ARTICLE III
Consideration; Exchange Procedures
3.01 MERGER CONSIDERATION........................................ 5
3.02 ALLOCATION OF MERGER........................................ 6
3.03 RIGHTS AS SHAREHOLDERS; STOCK TRANSFERS..................... 8
3.04 FRACTIONAL SHARES........................................... 9
3.05 EXCHANGE PROCEDURES......................................... 9
3.06 ANTI-DILUTION PROVISIONS.................................... 9
3.07 OPTIONS..................................................... 10
3.08 WARRANTS.................................................... 10
ARTICLE IV
Actions Pending Acquisition
4.01 FOREBEARANCES OF THE COMPANY................................ 10
4.02 FOREBEARANCES OF FCB........................................ 13
ARTICLE V
Representations and Warranties
5.01 DISCLOSURE SCHEDULES........................................ 13
5.02 STANDARD.................................................... 13
5.03 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 13
5.04 REPRESENTATIONS AND WARRANTIES OF FCB....................... 21
ARTICLE VI
Covenants
6.01 REASONABLE BEST EFFORTS..................................... 22
6.02 SHAREHOLDER APPROVAL........................................ 23
6.03 REGISTRATION STATEMENT...................................... 23
6.04 PRESS RELEASES.............................................. 23
6.05 ACCESS; INFORMATION......................................... 24
6.06 AFFILIATES.................................................. 24
6.07 CERTAIN POLICIES............................................ 24
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
6.08 NASDAQ LISTING.............................................. 24
6.09 REGULATORY APPLICATIONS..................................... 24
6.10 INDEMNIFICATION............................................. 25
6.11 BENEFIT PLANS............................................... 26
6.12 NOTIFICATION OF CERTAIN MATTERS............................. 26
6.13 NON-COMPETE AGREEMENTS...................................... 26
6.14 [OMITTED]................................................... 27
6.15 DIRECTORS TO VOTE FOR MERGER................................ 27
6.16 APPOINTMENT OF DIRECTOR..................................... 27
6.17 ADVISORY BOARD.............................................. 27
6.18 ACQUISITION PROPOSALS....................................... 27
6.19 SPECIAL REVIEW.............................................. 27
ARTICLE VII
Conditions to Consummation of the Merger
CONDITIONS TO EACH PARTY=S OBLIGATION TO EFFECT THE
7.01 MERGER...................................................... 27
7.02 CONDITIONS TO OBLIGATION OF THE COMPANY..................... 28
7.03 CONDITIONS TO OBLIGATION OF FCB............................. 28
ARTICLE VIII
Termination
8.01 TERMINATION................................................. 29
8.02 EFFECT OF TERMINATION AND ABANDONMENT....................... 30
ARTICLE IX
Miscellaneous
9.01 SURVIVAL.................................................... 30
9.02 WAIVER; AMENDMENT........................................... 30
9.03 COUNTERPARTS................................................ 30
9.04 GOVERNING LAW............................................... 31
9.05 EXPENSES.................................................... 31
9.06 NOTICES..................................................... 31
9.07 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES.......... 31
9.08 INTERPRETATION; EFFECT...................................... 31
EXHIBIT A Form of Company Affiliate Letter
EXHIBIT B Form of Shareholder Agreement
EXHIBIT C Section 6.10 Exception
Company Disclosure Schedule
FCB Disclosure Schedule
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of August 7, 2000 (this "AGREEMENT"),
by and among Professional Bancorp, Inc. (the "COMPANY") and First Community
Bancorp ("FCB").
RECITALS
A. THE COMPANY. The Company is a Pennsylvania corporation, having its
principal place of business in Santa Monica, California.
B. FCB. FCB is a California corporation, having its principal place of
business in Rancho Santa Fe, California.
C. INTENTIONS OF THE PARTIES. It is the intention of the parties to this
Agreement that the business combination contemplated hereby be treated as a
"reorganization" under Section 368 of the Internal Revenue Code of 1986, as
amended (the "CODE").
D. BOARD ACTION. The respective Boards of Directors of each of FCB and the
Company have determined that it is in the best interests of their respective
companies and their shareholders to consummate the strategic business
combination transaction provided for herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.01 CERTAIN DEFINITIONS. The following terms are used in this Agreement
with the meanings set forth below:
"ACQUISITION PROPOSAL" means any tender or exchange offer, proposal for
a merger, consolidation or other business combination involving the Company
or any of its Significant Subsidiaries or any proposal or offer to acquire
in any manner a substantial equity interest in, or a substantial portion of
the assets or deposits of, the Company or any of its Significant
Subsidiaries, other than the transactions contemplated by this Agreement.
"AGREEMENT" means this Agreement, as amended or modified from time to
time in accordance with Section 9.02.
"BHC ACT" means the Bank Holding Company Act of 1956, as amended.
"BUSINESS COMBINATION" has the meaning set forth in Section 3.05.
"CALIFORNIA SECRETARY" means the California Secretary of State.
"CERTIFICATES" means certification representing the Shares.
"CGCL" means the California General Corporation Law.
"CODE" has the meaning set forth in the recitals.
"COMPANY" has the meaning set forth in the preamble to this Agreement.
"COMPANY AFFILIATE" has the meaning set forth in Section 6.07(a).
"COMPANY BANK" means First Professional Bank, National Association, a
wholly owned subsidiary of the Company.
"COMPANY BOARD" means the Board of Directors of the Company.
"COMPANY BY-LAWS" means the By-laws of the Company.
"COMPANY CERTIFICATE" means the Articles of Incorporation of the
Company, as amended.
"COMPANY COMMON STOCK" means the common shares, $0.008 par value, of the
Company.
<PAGE>
"COMPANY MEETING" has the meaning set forth in Section 6.02.
"COMPANY STOCK OPTION" has the meaning set forth in Section 3.06.
"COMPANY STOCK PLAN" means the 1990 Stock Option Plan, as amended and
restated on September 22, 1992, the December 31, 1992 Stock Option Plan, the
1998 Stock Option Plan and the 2000 Non Qualified Stock Option Plan of the
Company.
"COMPANY WARRANT AGREEMENT" means the agreement governing the terms of
the Company Warrants.
"COMPANY WARRANTS" means the warrants expiring in 2002 to acquire the
Company's Common Stock.
"COMPENSATION AND BENEFIT PLANS" has the meaning set forth in
Section 5.03(m).
"COSTS" has the meaning set forth in Section 6.11(a).
"DETERMINATION DATE" shall mean the day that is five business days prior
to the Effective Date.
"DISCLOSURE SCHEDULE" has the meaning set forth in Section 5.01.
"DISSENTERS' SHARES" means shares the holder of which, pursuant to the
provision of the PBCL relating to dissenters' rights, is entitled to receive
payment in accordance with the provisions of such law.
"EFFECTIVE DATE" means the effective date of the Merger, as provided for
in Section 2.02.
"EFFECTIVE TIME" means the effective time of the Merger, as provided for
in Section 2.02.
"EMPLOYEES" has the meaning set forth in Section 5.03(m).
"ENVIRONMENTAL LAWS" means all applicable local, state and federal
environmental, health and safety laws and regulations, including, without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the Clean Water
Act, the Federal Clean Air Act, and the Occupational Safety and Health Act,
each as amended, regulations promulgated thereunder, and state counterparts.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" has the meaning set forth in Section 5.03(m).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"EXCHANGE AGENT" has the meaning set forth in Section 3.02(b).
"EXCHANGE FUND" has the meaning set forth in Section 3.02(b).
"EXCHANGE RATIO" means 0.55, as adjusted pursuant to the provisions of
this definition and Sections 3.06 and 8.01(f) hereof. In the event that the
FCB Closing Average is greater than $16.67, then the Exchange Ratio shall
equal the product (rounded to two decimal places) obtained by multiplying
(i) the quotient obtained by dividing (A) $8.00 by (B) the FCB Closing
Average and (ii) 1.15.
"FCB" has the meaning set forth in the preamble to this Agreement.
"FCB BOARD" means the Board of Directors of FCB.
"FCB CLOSING AVERAGE" means the volume weighted average sales price per
share for FCB Common Stock for the fifteen (15) consecutive Nasdaq trading
day period ending on the Determination Date. For purposes of determining the
"volume weighted average," the aggregate of the "daily
Annex A-2
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sales" for each of the 15 consecutive trading days used in the calculation
shall be divided by the aggregate number of shares traded during such 15
consecutive trading days. "Daily sales" means the reported sales prices of
FCB Common Stock traded on Nasdaq on a particular trading day.
"FCB COMMON STOCK" means the common stock, no par value per share, of
FCB.
"FCB PREFERRED STOCK" means the preferred stock, no par value per share,
of FCB.
"FCB STOCK" means, collectively, FCB Common Stock and FCB Preferred
Stock.
"FDIC" means the Federal Deposit Insurance Corporation.
"FEDERAL RESERVE BOARD" means the Board of Governors of the Federal
Reserve System.
"GAAP" means generally accepted accounting principles.
"GOVERNMENTAL AUTHORITY" means any court, administrative agency or
commission or other federal, state or local governmental authority or
instrumentality.
"INDEMNIFIED PARTY" has the meaning set forth in Section 6.10(a).
"INSURANCE AMOUNT" has the meaning set forth in Section 6.11(b).
"INSURANCE POLICY" has the meaning set forth in Section 5.03(s).
"LIENS" means any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
"MATERIAL ADVERSE EFFECT" means, with respect to FCB or the Company, any
effect that (i) is material and adverse to the financial position, results
of operations, business or prospects of FCB and its Subsidiaries taken as a
whole or the Company and its Subsidiaries taken as a whole, respectively, or
(ii) would materially impair the ability of either FCB or the Company to
perform its obligations under this Agreement or otherwise materially
threaten or materially impede the consummation of the Merger and the other
transactions contemplated by this Agreement; PROVIDED, HOWEVER, that
Material Adverse Effect shall not be deemed to include the impact of
(a) changes in banking and similar laws of general applicability or
interpretations thereof by courts or governmental authorities, (b) changes
in GAAP or regulatory accounting requirements applicable to banks and their
holding companies generally, (c) any modifications or changes to valuation
policies and practices in connection with the Merger or restructuring
charges taken in connection with the Merger, in each case in accordance with
GAAP, (d) changes in general economic conditions affecting the banking
industry generally and (e) the effects of any action taken with the prior
consent of FCB.
"MERGER" has the meaning set forth in Section 2.01(a).
"MERGER CONSIDERATION" has the meaning set forth in Section 2.01(a).
"MULTIEMPLOYER PLANS" has the meaning set forth in Section 5.03(m).
"NASDAQ" means The Nasdaq Stock Market, Inc.'s National Market System.
"NEW CERTIFICATE" has the meaning set forth in Section 3.05(a).
"OCC" means the Office of the Comptroller of the Currency.
"PBCL" means the Pennsylvania Business Corporation Law.
"PENNSYLVANIA DEPARTMENT" means the Department of State of the
Commonwealth of Pennsylvania.
"PENSION PLAN" has the meaning set forth in Section 5.03(m).
Annex A-3
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"PERSON" means any individual, bank, corporation, partnership,
association, joint-stock company, business trust or unincorporated
organization.
"PLANS" has the meaning set forth in Section 5.03(m).
"PREVIOUSLY DISCLOSED" by a party shall mean information set forth in
its Disclosure Schedule.
"PROXY STATEMENT" has the meaning set forth in Section 6.03(a).
"REGISTRATION STATEMENT" has the meaning set forth in Section 6.03(a).
"REGULATORY AUTHORITY" has the meaning set forth in Section 5.03(i).
"REPLACEMENT OPTION" has the meaning set forth in Section 3.07.
"REPLACEMENT WARRANT" has the meaning set forth in Section 3.08.
"REPRESENTATIVES" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"RIGHTS" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person
any right to subscribe for or acquire, or any options, calls or commitments
relating to, or any stock appreciation right or other instrument the value
of which is determined in whole or in part by reference to the market price
or value of, shares of capital stock of such person.
"SEC" means the Securities and Exchange Commission.
"SEC DOCUMENTS" has the meaning set forth in Sections 5.03(g) and
5.04(g).
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"SHAREHOLDER AGREEMENTS" has the meaning set forth in Section 6.14.
"SHARES" means shares of Company Common Stock.
"SUBSIDIARY" and "SIGNIFICANT SUBSIDIARY" have the meanings ascribed to
them in Rule 1-02 of Regulation S-X of the SEC.
"SURVIVING CORPORATION" has the meaning set forth in Section 2.01(a).
"TAX" and "TAXES" means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts,
sales, use, ad valorem, goods and services, capital, production, transfer,
franchise, windfall profits, license, withholding, payroll, employment,
disability, employer health, excise, estimated, severance, stamp,
occupation, property, environmental, unemployment or other taxes, custom
duties, fees, assessments or charges of any kind whatsoever, together with
any interest and any penalties, additions to tax or additional amounts
imposed by any taxing authority whether arising before, on or after the
Effective Date.
"TAX RETURNS" means any return, amended return or other report
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be filed with respect to any Tax.
"TREASURY STOCK" shall mean shares of Company Stock held by the Company
or any of its Subsidiaries or by FCB or any of its Subsidiaries, in each
case other than in a fiduciary (including custodial or agency) capacity or
as a result of debts previously contracted in good faith.
Annex A-4
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ARTICLE II
THE MERGER
2.01 THE MERGER.
(a) THE COMBINATION. At the Effective Time, the Company shall merge with
and into FCB (the "MERGER"), the separate corporate existence of the Company
shall cease and FCB shall survive and continue to exist as a California
corporation (FCB, as the surviving corporation in the Merger, sometimes being
referred to herein as the "SURVIVING CORPORATION"). FCB may at any time prior to
the Effective Time (including after the Company's shareholders have approved
this Agreement) change the method of effecting the combination with the Company
(including, without limitation, the provisions of this Article II) if and to the
extent it deems such change to be necessary, appropriate or desirable; PROVIDED,
HOWEVER, that no such change shall (i) alter or change the amount or kind of
consideration to be issued to holders of Company Common Stock as provided for in
this Agreement (the "MERGER CONSIDERATION"), (ii) adversely affect the tax
treatment of the Company's shareholders as a result of receiving the Merger
Consideration, (iii) impede or delay consummation of the transactions
contemplated by this Agreement or (iv) or otherwise have an effect on the
shareholders of the Company that is material and adverse.
(b) EFFECT. Subject to the satisfaction or waiver of the conditions set
forth in Article VII, the Merger shall become effective upon the occurrence of
the filing in the office of the California Secretary of an agreement of merger
in accordance with the CGCL and the filing in the office of the Pennsylvania
Department of articles of merger in accordance with the PBCL or such later date
and time as may be set forth in such agreement and/or such certificate and the
Merger shall have the effects prescribed in the CGCL and, if applicable, the
PBCL.
(c) ARTICLES OF INCORPORATION AND BY-LAWS. The articles of incorporation
and by-laws of FCB immediately after the Merger shall be those of FCB as in
effect immediately prior to the Effective Time.
(d) DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors and
officers of FCB immediately after the Merger shall be the directors and officers
of FCB immediately prior to the Effective Time, until such time as their
successors shall be duly elected and qualified.
2.02 EFFECTIVE DATE AND EFFECTIVE TIME. Subject to the satisfaction or
waiver of the conditions set forth in Article VII, the parties shall cause
filings contemplated by Section 2.01 to be made on (i) the last day of the month
to occur after the last of the conditions set forth in Section 7.01(a), (b),
(c), (d) and (e) shall have been satisfied or waived in accordance with the
terms of this Agreement or (ii) such other date to which the parties may agree
in writing and the Merger provided for herein shall become effective upon such
filing or filings or on such date as may be specified therein. The date of such
filing or such later effective date is herein called the "EFFECTIVE DATE". The
"EFFECTIVE TIME" of the Merger shall be the time of such filing or as set forth
in such filing.
2.03 AGREEMENT OF MERGER. At the request of FCB prior to the mailing of
the Proxy Statement, FCB and the Company shall enter into a separate agreement
of merger reflecting the terms hereof for purposes of any filing requirement of
the CGCL or the PBCL.
ARTICLE III
CONSIDERATION; EXCHANGE PROCEDURES
3.01 MERGER CONSIDERATION. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any Person:
(a) Outstanding Company Common Stock. Each share, excluding Treasury Stock
and Dissenters' Shares (collectively, "EXCLUDED SHARES"), of Company
Common Stock issued and outstanding
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immediately prior to the Effective Time shall become and be converted
into the right to receive, at the election of each holder thereof, but
subject to the election and allocation procedures of Section 3.02 hereof
and to the other provisions of this Article III, either:
(i) $8.00 in cash without interest (the "CASH CONSIDERATION"), or
(ii) that number of shares of FCB Common Stock equal to the Exchange
Ratio (the "STOCK CONSIDERATION").
(b) OUTSTANDING FCB STOCK. Each share of FCB Stock issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding and
unaffected by the Merger.
(c) TREASURY SHARES. Each share of Company Common Stock held as Treasury
Stock immediately prior to the Effective Time shall be canceled and retired at
the Effective Time and no consideration shall be issued in exchange therefor.
3.02 ALLOCATION OF MERGER CONSIDERATION; ELECTION
PROCEDURES. (a) ALLOCATION. Notwithstanding anything in this Agreement to the
contrary, the maximum number of Shares (the "CASH ELECTION NUMBER") to be
converted into the right to receive Cash Consideration in the Merger shall be
equal to (i) 50 percent of the number of Shares issued and outstanding
immediately prior to the Effective Time of the Merger less (ii) the sum of
(A) the number of Dissenter's Shares, if any, and (B) the number of Shares to be
cancelled in accordance with Section 3.01(c). The number of Shares to be
converted into the right to receive Stock Consideration in the Merger (the
"STOCK ELECTION NUMBER") shall be equal to the number of Shares issued and
outstanding immediately prior to the Effective Time of the Merger less the sum
of (i) the Cash Election Number, (ii) the number of Dissenters' Shares, if any,
and (iii) the number of Shares to be cancelled in accordance with
Section 3.01(c).
(b) ELECTION PROCEDURES.
(i) As of the Effective Time, FCB shall deposit, or shall cause to be
deposited, with an exchange agent selected by FCB, which may be a
subsidiary bank of FCB (the "EXCHANGE AGENT"), for the benefit of the
holders of Shares, certificates representing the shares of FCB Common
Stock and any Cash Consideration and any dividends or other
distributions with respect to the FCB Common Stock to be issued or
paid pursuant to Sections 3.01 and 3.04 in exchange for outstanding
Shares upon due surrender of the Certificates pursuant to the
provisions of this Article III (such cash and certificates for shares
of FCB Common Stock, together with the amount of any dividends or
other distributions payable with respect thereto, being hereinafter
referred to as the "EXCHANGE FUND").
(ii) Subject to allocation and proration in accordance with the
provisions of this Section 3.02, each record holder of Shares (other
than Excluded Shares) issued and outstanding immediately prior to the
Election Deadline (as defined below) shall be entitled (A) to elect
to receive in respect of each such Share (x) Cash Consideration (a
"CASH ELECTION") or (y) Stock Consideration (a "STOCK ELECTION") or
(B) to indicate that such record holder has no preference as to the
receipt of Cash Consideration or Stock Consideration for such Shares
(a "NON-ELECTION"). Shares in respect of which a Non-Election is made
(including shares in respect of which such an election is deemed to
have been made pursuant to this Section 3.02 and Dissenters' Shares,
if any (collectively, "NON-ELECTION SHARES") shall be deemed by FCB,
in its sole and absolute discretion, subject to Sections
3.02(b)(v)-(vi), to be, in whole or in part, Shares in respect of
which Cash Elections or Stock Elections have been made.
(iii) Elections pursuant to Section 3.02(b)(i) shall be made on a
form and with such other provisions to be reasonably agreed upon by
the Company and FCB (a "FORM OF ELECTION") to be provided by the
Exchange Agent for that purpose to holders of record of Shares (other
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<PAGE>
than holders of Excluded Shares), together with appropriate
transmittal materials, at the time of mailing to holders of record of
Shares of the Proxy Statement in connection with the shareholders
meeting referred to in Section 6.02. Elections shall be made by
mailing to the Exchange Agent a duly completed Form of Election. To
be effective, a Form of Election must be (x) properly completed,
signed and submitted to the Exchange Agent at its designated office,
by 5:00 p.m., on the business day that is two trading days prior to
the Closing Date (which date shall be publicly announced by FCB as
soon as practicable but in no event less than five trading days prior
to the Closing Date) (the "ELECTION DEADLINE") and (y) accompanied by
the Certificate(s) representing the Shares as to which the election
is being made (or by an appropriate guarantee of delivery of such
Certificate(s) by a commercial bank or trust company in the United
States or a member of a registered national security exchange or of
the National Association of Securities Dealers, Inc., provided that
such Certificates are in fact delivered to the Exchange Agent within
three trading days after the date of execution of such guarantee of
delivery). The Company shall use its best efforts to make a Form of
Election available to all Persons who become holders of record of
Shares (other than Excluded Shares) between the date of mailing
described in the first sentence of this Section 3.02(b)(iii) and the
Election Deadline. FCB shall determine, in its sole and absolute
discretion, which authority it may delegate in whole or in part to
the Exchange Agent and whether Forms of Election have been properly
completed, signed and submitted or revoked. The decision of FCB (or
the Exchange Agent, as the case may be) in such matters shall be
conclusive and binding. Neither FCB nor the Exchange Agent will be
under any obligation to notify any Person of any defect in a Form of
Election submitted to the Exchange Agent. A holder of Shares that
does not submit an effective Form of Election prior to the Election
Deadline shall be deemed to have made a Non-Election.
(iv) An election may be revoked, but only by written notice received
by the Exchange Agent prior to the Election Deadline. Any
Certificate(s) representing Shares that have been submitted to the
Exchange Agent in connection with an election shall be returned
without charge to the holder thereof in the event such election is
revoked as aforesaid and such holder requests in writing the return
of such Certificate(s). Upon any such revocation, unless a duly
completed Form of Election is thereafter submitted in accordance with
paragraph (b)(ii), such Shares shall be Non-Election Shares. In the
event that this Agreement is terminated pursuant to the provisions
hereof and any Shares have been transmitted to the Exchange Agent
pursuant to the provisions hereof, such Shares shall promptly be
returned without charge to the Person submitting the same.
(v) In the event that the aggregate number of Shares in respect of
which Cash Elections have been made (collectively, the "CASH ELECTION
SHARES") exceeds the Cash Election Number, all shares in respect of
which Stock Elections have been made (the "STOCK ELECTION SHARES")
and all Non-Election Shares in respect of which Stock Elections are
deemed to have been made (it being understood that in such case all
Non-Election Shares shall be deemed to be Shares in respect of which
Stock Elections have been made) shall be converted into the right to
receive Stock Consideration, and all Cash Election Shares shall be
converted into the right to receive Stock Consideration or Cash
Consideration in the following manner:
(A) Cash Election Shares shall be deemed converted to Stock
Election Shares, on a pro-rata basis for each record holder of
Shares with respect to those Shares, if any, of such record
holder that are Cash Election Shares, so that the number of Cash
Election Shares so converted, when added to the other Stock
Election Shares, shall equal as closely as practicable the Stock
Election Number, and all such Cash Election Shares so converted
shall be converted into the right to receive Stock Consideration
(and cash in lieu of fractional interests); and
Annex A-7
<PAGE>
(B) any remaining Cash Election Shares shall be converted into
the right to receive Cash Consideration.
(vi) In the event that the aggregate number of Stock Election Shares
exceeds the Stock Election Number, all Cash Election Shares and all
Non-Election Shares in respect of which Cash Elections are deemed to
have been made (it being understood that in such case all
Non-Election Shares shall be deemed to be Shares in respect of which
Cash Elections have been made) shall be converted into the right to
receive Cash Consideration, and all Stock Election Shares shall be
converted into the right to receive Stock Consideration or Cash
Consideration in the following manner:
(A) Stock Election Shares shall be deemed converted into Cash
Election Shares, on a pro-rata basis for each record holder of
Shares with respect to those Shares, if any, of such record
holder that are Stock Election Shares, so that the number of
Stock Election Shares so converted, when added to the other Cash
Election Shares, shall equal as closely as practicable the Cash
Election Number, and all such Shares so converted shall be
converted into the right to receive the Cash Consideration; and
(B) the remaining Stock Election Shares shall be converted into
the right to receive the Stock Consideration (and cash in lieu of
fractional interests).
(vii) In the event that neither clause (v) nor clause (vi) of this
Section 3.02(b) is applicable, Non-Election Shares shall be deemed
Stock Election Shares such that the total Stock Election Shares
equals the Stock Election Number and any remaining Non-Election
Shares shall be deemed Cash Election Shares and (x) all Cash Election
Shares and all Non-Election Shares in respect of which Cash Elections
are deemed to have been made shall be converted into the right to
receive Cash Consideration, and (y) all Stock Election Shares and all
Non-Election Shares in respect of which Stock Elections are deemed to
have been made shall be converted into the right to receive Stock
Consideration (and cash in lieu of fractional interests).
(viii) Notwithstanding the foregoing, if necessary to permit the
delivery of the tax opinions referred to in Sections 7.02(c) and
7.03(c) hereof, FCB shall, after consultation with the Company and
prior to the delivery of such tax opinions, reduce the Cash Election
Number to such number of Shares as FCB reasonably determines is
necessary to permit the delivery of such tax opinions; provided that,
in no event shall FCB be required to issue more than 700,000 shares
of FCB Common Stock.
(ix) The Exchange Agent, in consultation with FCB and the Company,
shall make all computations to give effect to this Section 4.2.
3.03 RIGHTS AS SHAREHOLDERS; STOCK TRANSFERS. At the Effective Time,
holders of Company Common Stock shall cease to be, and shall have no rights as,
shareholders of the Company, other than to receive the consideration provided
under this Article III. After the Effective Time, there shall be no transfers on
the stock transfer books of the Company or the Surviving Corporation of shares
of Company Common Stock.
Annex A-8
<PAGE>
3.04 FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of FCB Common Stock and no certificates or scrip therefor, or
other evidence of ownership thereof, will be issued in the Merger; instead, FCB
shall pay to each holder of Company Common Stock who would otherwise be entitled
to a fractional share of FCB Common Stock (after taking into account all Old
Certificates delivered by such holder) an amount in cash (without interest)
determined by multiplying such fraction by the last sale price of FCB Common
Stock, as reported by the Nasdaq Tape (as reported in THE WALL STREET JOURNAL
or, if not reported therein, in another authoritative source), for the trading
day immediately preceding the Effective Date.
3.05 EXCHANGE PROCEDURES.
(a) After the Effective Date, FCB shall send or cause to be sent as promptly
as practicable to each former holder of record of Shares immediately prior to
the Effective Time who has not returned a valid election, transmittal materials
for use in exchanging such shareholder's Certificates for the consideration set
forth in this Article III. FCB shall cause certificates representing the shares
of FCB Common Stock ("New Certificates") into which shares of a shareholder's
Company Common Stock are converted on the Effective Date and/or any check in
respect of any Cash Consideration, fractional share interests or dividends or
distributions which such person shall be entitled to receive to be delivered to
such shareholder upon delivery to the Exchange Agent of the Certificates
representing such Shares (or indemnity reasonably satisfactory to FCB and the
Exchange Agent, if any of such certificates are lost, stolen or destroyed) owned
by such shareholder. The Exchange Agent shall process materials received and
issue New Certificates as promptly as practicable after receipt of such
materials. No interest will be paid on any such cash to be paid in lieu of
fractional share interests or in respect of dividends or distributions which any
such person shall be entitled to receive pursuant to this Article III upon such
delivery.
(b) Notwithstanding the foregoing, neither the Exchange Agent nor any party
hereto shall be liable to any former holder of Company Common Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(c) At the election of FCB, no Cash Consideration, dividends or other
distributions with respect to FCB Common Stock with a record date occurring
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate representing Shares converted in the Merger into shares of such FCB
Common Stock until the holder thereof shall be entitled to receive New
Certificates in exchange therefor in accordance with the procedures set forth in
Section 3.02 and this Section 3.05, and no such shares of Company Common Stock
shall be eligible to vote until the holder of Certificates is entitled to
receive New Certificates in accordance with the procedures set forth in this
Section 3.05. After becoming so entitled in accordance with Section 3.02 and
this Section 3.05, the record holder thereof also shall be entitled to receive
any such dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of FCB Common Stock such
holder had the right to receive upon surrender of the Old Certificate.
(d) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of the Company for six months after the Effective Time shall be
paid to FCB. Any shareholders of the Company who have not theretofore complied
with this Article III shall thereafter look only to FCB for payment of the
shares of FCB Common Stock, cash, cash in lieu of any fractional shares and
unpaid dividends and distributions on FCB Common Stock deliverable in respect of
each share of Company Common Stock such shareholder holds as determined pursuant
to this Agreement, in each case, without any interest thereon.
3.06 ANTI-DILUTION PROVISIONS. In the event FCB changes (or establishes a
record date for changing) the number of shares of FCB Common Stock issued and
outstanding prior to the Effective Date as a result of a stock split, stock
dividend, recapitalization or similar transaction with respect to the
outstanding FCB Common Stock and the record date therefor shall be prior to the
Effective Date, the Exchange Ratio shall be proportionately adjusted. If,
between the date hereof and the Effective Time, FCB shall merge, be acquired or
consolidate with, by or into any other corporation (a "BUSINESS COMBINATION")
and the terms
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thereof shall provide that FCB Common Stock shall be converted into or exchanged
for the shares of any other corporation or entity, then provision shall be made
as part of the terms of such Business Combination so that shareholders of the
Company who would be entitled to receive shares of FCB Common Stock pursuant to
this Agreement shall be entitled to receive, in lieu of each share of FCB Common
Stock issuable to such shareholders as provided herein, the same kind and amount
of securities or assets as shall be distributable upon such Business Combination
with respect to one share of FCB Common Stock (provided that nothing herein
shall be construed so as to release the acquiring entity in any such Business
Combination from its obligations under this Agreement as the successor to FCB).
3.07 OPTIONS. At the Effective Time, each outstanding option to purchase
shares of Company Common Stock under the Company Stock Plan (each, a "COMPANY
STOCK OPTION"), whether vested or unvested, shall be converted into an option to
acquire, on the same terms and conditions as were applicable under such Company
Stock Option, the number of shares of FCB Common Stock equal to (a) the number
of shares of Company Common Stock subject to the Company Stock Option,
multiplied by (b) the Exchange Ratio (such product rounded down to the nearest
whole number) (a "REPLACEMENT OPTION"), at an exercise price per share (rounded
up to the nearest whole cent) equal to the quotient of (y) the exercise price
per share of Company Common Stock subject to the Company Stock Option divided by
(B) the Exchange Ratio. Notwithstanding the foregoing, each Company Stock Option
which is intended to be an "incentive stock option" (as defined in Section 422
of the Code) shall be adjusted in accordance with the requirements of
Section 424 of the Code. At or prior to the Effective Time, the Company shall
take all action, if any, necessary with respect to the Company Stock Plan to
permit the replacement of the outstanding Company Stock Options by FCB pursuant
to this Section. At the Effective Time, FCB shall assume the Company Stock
Plans; PROVIDED, that such assumption shall be only in respect of the
Replacement Options and that FCB shall have no obligation with respect to any
awards under the Company Stock Plans other than the Replacement Options and
shall have no obligation to make any additional grants or awards under such
assumed Company Stock Plans. After the Effective Time, FCB shall file a
registration statement on Form S-8 with respect to the shares of FCB Common
Stock issuable in connection with the Replacement Options.
3.08 WARRANTS. At the Effective Time, each outstanding warrant to purchase
shares of Company Common Stock under the Company Warrant Agreement (each, a
"COMPANY WARRANT"), whether vested or unvested, shall be converted into a
warrant to acquire, on the same terms and conditions as were applicable under
such Company Warrant, the number of shares of FCB Common Stock equal to (a) the
number of shares of Company Common Stock subject to the Company Warrant,
multiplied by (b) the Exchange Ratio (such product rounded down to the nearest
whole number) (a "REPLACEMENT WARRANT"), at an exercise price per share (rounded
down to the nearest whole cent) equal to the quotient of (y) the exercise price
per share of the Company Warrant subject to the Company Warrant Agreement
divided by (z) the Exchange Ratio.
ARTICLE IV
ACTIONS PENDING ACQUISITION
4.01 FOREBEARANCES OF THE COMPANY. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement, without the prior
written consent of FCB, the Company will not, and will cause each of its
Subsidiaries not to:
(a) ORDINARY COURSE. Conduct the business of the Company and its
Subsidiaries other than in the ordinary and usual course or fail to use
reasonable best efforts to preserve intact their business organizations and
assets and maintain their rights, franchises and existing relations with
customers, suppliers, employees and business associates, take any action that
would adversely affect or delay the ability of the Company, FCB or any of their
respective Subsidiaries to perform any of their obligations on a timely basis
Annex A-10
<PAGE>
under this Agreement, or take any action that is reasonably likely to have a
Material Adverse Effect on the Company or its Subsidiaries, taken as a whole.
(b) CAPITAL STOCK. Other than pursuant to Rights Previously Disclosed and
outstanding on the date hereof, (i) issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of Company
Common Stock or any Rights or issue any shares of preferred stock, (ii) enter
into any Agreement with respect to the foregoing or (iii) permit any additional
shares of Company Common Stock to become subject to new grants of employee or
director stock options, other Rights or similar stock-based employee rights.
(c) DIVIDENDS, ETC. (a) Make, declare, pay or set aside for payment any
dividend on or in respect of, or declare or make any distribution on any shares
of Company Common Stock or (b) directly or indirectly adjust, split, combine,
redeem, reclassify, purchase or otherwise acquire, any shares of its capital
stock.
(d) COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Enter into or amend or renew
any employment, consulting, severance or similar agreements or arrangements with
any director, officer or employee of the Company or its Subsidiaries, or grant
any salary or wage increase or increase any employee benefit (including
incentive or bonus payments), except (i) for normal individual increases in
compensation to employees in the ordinary course of business consistent with
past practice; provided that no such increase shall result in an annual
adjustment of more than 5%, (ii) for other changes that are required by
applicable law, (iii) to satisfy Previously Disclosed contractual obligations
existing as of the date hereof or (iv) for grants of awards to newly hired
employees consistent with past practice.
(e) HIRING. Hire any person as an employee of the Company or any of its
Subsidiaries or promote any employee, except (i) to satisfy Previously Disclosed
contractual obligations as of the date hereof and (ii) to replace non-officer
employees to fill vacancies arising after the date hereof.
(f) BENEFIT PLANS. Enter into, establish, adopt or amend (except (i) as
may be required by applicable law or (ii) to satisfy Previously Disclosed
contractual obligations existing as of the date hereof) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust Agreement (or similar
arrangement) related thereto, in respect of any director, officer or employee of
the Company or its Subsidiaries, or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder.
(g) DISPOSITIONS. Except as Previously Disclosed, sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any of its assets,
deposits, business or properties except in the ordinary course of business and
in a transaction that is not material to it and its Subsidiaries taken as a
whole.
(h) ACQUISITIONS. Except as Previously Disclosed, acquire (other than by
way of foreclosures or acquisitions of control in a bona fide fiduciary capacity
or in satisfaction of debts previously contracted in good faith, in each case in
the ordinary and usual course of business consistent with past practice) all or
any portion of, the assets, business, deposits or properties of any other entity
except in the ordinary course of business consistent with past practice and in a
transaction that is not material to the Company and its Subsidiaries, taken as a
whole.
(i) CAPITAL EXPENDITURES. Except as Previously Disclosed, make any capital
expenditures other than capital expenditures in the ordinary course of business
consistent with past practice in amounts not exceeding $10,000 individually or
$50,000 in the aggregate.
(j) GOVERNING DOCUMENTS. Amend the Company Articles, Company By-Laws or
the articles of association or by-laws (or similar governing documents) of any
of the Company's Subsidiaries.
(k) ACCOUNTING METHODS. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by generally
accepted accounting principles.
Annex A-11
<PAGE>
(l) CONTRACTS. Enter into, renew or terminate, or make any payment not
then required under, any contract or Agreement that calls for aggregate annual
payments of $25,000 or more and which is not terminable at will in 60 days or
less notice without payment of a premium or penalty, other than loans and other
transactions made in the ordinary course of the banking business.
(m) CLAIMS. Except as Previously Disclosed, enter into any settlement or
similar Agreement with respect to, or take any other significant action with
respect to the conduct of, any action, suit, proceeding, order or investigation
to which the Company or any of its Subsidiaries becomes a party after the date
of this Agreement, which settlement, Agreement or action involves payment by the
Company or its Subsidiaries of amount in excess of $25,000.
(n) ADVERSE ACTIONS. (a) Take any action which the Company either knows or
reasonably should know that such action would, or would be reasonably likely to,
prevent or impede the Merger from qualifying as a reorganization within the
meaning of Section 368 of the Code; or (b) knowingly take any action that is
intended or is reasonably likely to result in (i) any of its representations and
warranties set forth in this Agreement being or becoming untrue in any material
respect at any time at or prior to the Effective Time, (ii) any of the
conditions to the Merger set forth in Article VII not being satisfied or
(iii) a violation of any provision of this Agreement except, in each case, as
may be required by applicable law or regulation.
(o) RISK MANAGEMENT. Except as required by applicable law or regulation,
(i) implement or adopt any material change in its interest rate and other risk
management policies, procedures or practices; (ii) fail to follow its existing
policies or practices with respect to managing its exposure to interest rate and
other risk; or (iii) fail to use commercially reasonable means to avoid any
material increase in its aggregate exposure to interest rate risk.
(p) Indebtedness. Incur any indebtedness for borrowed money (other than
Federal Funds borrowings) or assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other person.
(q) Loans. (a) Make any loan, loan commitment or renewal or extension
thereof to any person which would, when aggregated with all outstanding loans,
commitments for loans or renewals or extensions thereof made by PBI to such
person and any affiliate or immediate family member of such person, exceed
$250,000 without submitting complete loan package information to the chief
credit officer of FCB for review with a right of comment at least two full
business days prior to taking such action.
(b) (i) Sell or dispose of any loan, or (ii) except as required by the
OCC, write-down or charge-off the book value of any loan.
(r) INVESTMENTS. (a) (i) Other than in the ordinary course of business
consistent with past practice in individual amounts not to exceed $100,000 or in
securities transactions as provided in (ii) below, make any investment either by
contributions to capital, property transfers, or purchase of any property or
assets of any person, or (ii) other than purchases of direct obligations of the
United States of America or obligations of U.S. government agencies which are
entitled to the full faith and credit of the United States of America, in any
case with a remaining maturity at the time of purchase of two years or less,
purchase or acquire securities of any type; provided, however, that in the case
of investment securities, the Company may purchase (or permit a Subsidiary to
purchase) investment securities if, within one business day after the Company
requests in writing (which shall describe in detail the investment securities to
be purchased and the price thereof) that the other consent to making of any such
purchase, FCB has approved such request in writing or has not responded in
writing to such request.
(b) Sell or dispose of any investment, except as may be required by the
OCC.
(s) TAXES. Take any action to change or modify any existing federal or
California tax accounting methods of the Company.
Annex A-12
<PAGE>
(t) COMMITMENTS. Agree or commit to do any of the foregoing.
4.02 FOREBEARANCES OF FCB. From the date hereof until the Effective Time,
except as expressly contemplated by this Agreement, without the prior written
consent of the Company, FCB will not, and will cause each of its Subsidiaries
not to:
(a) ORDINARY COURSE. Take any action reasonably likely to have an adverse
effect on FCB's ability to perform any of its material obligations under this
Agreement.
(b) ADVERSE ACTIONS. (a) Take any action while knowing that such action
would, or is reasonably likely to, prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368 of the Code; or
(b) knowingly take any action that is intended or is reasonably likely to result
in (i) any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time at or prior to the
Effective Time, (ii) any of the conditions to the Merger set forth in
Article VII not being satisfied, (iii) a material violation of any provision of
this Agreement or (iv) a material delay in the consummation of the Merger
except, in each case, as may be required by applicable law or regulation.
(c) COMMITMENTS. Agree or commit to do any of the foregoing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 DISCLOSURE SCHEDULES. On or prior to the date hereof, FCB has
delivered to the Company a schedule and the Company has delivered to FCB a
schedule (respectively, its "DISCLOSURE SCHEDULE") setting forth, among other
things, items the disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in a provision hereof or
as an exception to one or more representations or warranties contained in
Section 5.03 or 5.04 or to one or more of its covenants contained in
Article IV; PROVIDED, that (a) no such item is required to be set forth in a
Disclosure Schedule as an exception to a representation or warranty if its
absence would not be reasonably likely to result in the related representation
or warranty being deemed untrue or incorrect under the standard established by
Section 5.02, and (b) the mere inclusion of an item in a Disclosure Schedule as
an exception to a representation or warranty shall not be deemed an admission by
a party that such item represents a material exception or fact, event or
circumstance or that such item is reasonably likely to result in a Material
Adverse Effect.
5.02 STANDARD. No representation or warranty of the Company or FCB
contained in Section 5.03 or 5.04 shall be deemed untrue or incorrect, and no
party hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, event or circumstance unless such
fact, circumstance or event, individually or taken together with all other
facts, events or circumstances inconsistent with any representation or warranty
contained in Section 5.03 or 5.04, has had or is reasonably likely to have a
Material Adverse Effect on the party making such representation or warranty.
5.03 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Subject to Sections
5.01 and 5.02 and except as Previously Disclosed, the Company hereby represents
and warrants to FCB:
(a) ORGANIZATION, STANDING AND AUTHORITY. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company is duly qualified to do business and
is in good standing in the State of California and any other foreign
jurisdictions where its ownership or leasing of property or assets or the
conduct of its business requires it to be so qualified. The Company is a bank
holding company registered under the BHC Act. The Company Bank is duly licensed
by the OCC as a commercial bank and its deposits are insured by the FDIC through
the Bank Insurance Fund in the manner and to the fullest extent provided by law.
Annex A-13
<PAGE>
(b) COMPANY CAPITAL STOCK. As of the date hereof, the authorized capital
stock of the Company consists solely of 12,500,000 shares of Company Common
Stock, of which no more than 2,030,754 shares were outstanding as of the date
hereof. As of the date hereof, 69,467 shares of the Company Common Stock were
held in treasury by the Company or otherwise owned by the Company or its
Subsidiaries. The outstanding shares of Company Common Stock have been duly
authorized and are validly issued and outstanding, fully paid and nonassessable,
and subject to no preemptive rights (and were not issued in violation of any
preemptive rights). As of the date hereof, there are no shares of Company Common
Stock authorized and reserved for issuance, the Company does not have any Rights
issued or outstanding with respect to Company Common Stock, and the Company does
not have any commitment to authorize, issue or sell any Company Common Stock or
Rights, except pursuant to this Agreement, any Company Stock Option, the Company
Stock Plan, the Company Warrant Agreement and the Company Warrants. The number
of shares of Company Common Stock which are issuable and reserved for issuance
upon exercise of Company Stock Options and Company Warrants as of the date
hereof are Previously Disclosed in the Company's Disclosure Schedule.
(c) SUBSIDIARIES.
(i)(A) The Company has Previously Disclosed a list of all of its
Subsidiaries together with the jurisdiction of organization of each such
Subsidiary, (B) the Company owns, directly or indirectly, all the issued and
outstanding equity securities of each of its Subsidiaries, (C) no equity
securities of any of its Subsidiaries are or may become required to be
issued (other than to it or its wholly-owned Subsidiaries) by reason of any
Right or otherwise, (D) there are no contracts, commitments, understandings
or arrangements by which any of such Subsidiaries is or may be bound to sell
or otherwise transfer any equity securities of any such Subsidiaries (other
than to it or its wholly-owned Subsidiaries), (E) there are no contracts,
commitments, understandings, or arrangements relating to its rights to vote
or to dispose of such securities and (F) all the equity securities of each
Subsidiary held by the Company or its Subsidiaries are fully paid and,
except pursuant to 12 U.S.C. Section55 in the case of the Company Bank,
nonassessable and are owned by the Company or its Subsidiaries free and
clear of any Liens.
(ii) The Company does not own beneficially, directly or indirectly, any
equity securities or similar interests of any Person, or any interest in a
partnership or joint venture of any kind, other than its Subsidiaries.
(iii) Each of the Company's Subsidiaries has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization, and is duly qualified to do business and in good standing in
the jurisdictions where its ownership or leasing of property or the conduct
of its business requires it to be so qualified.
(d) CORPORATE POWER. The Company and each of its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and the Company has the
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and to consummate the transactions contemplated hereby.
(e) CORPORATE AUTHORITY. Subject in the case of this Agreement to receipt
of the requisite approval of the principal terms of the Agreement of merger set
forth in this Agreement by the holders of a majority of the outstanding shares
of Company Common Stock entitled to vote thereon (which is the only shareholder
vote required thereon), this Agreement and the transactions contemplated hereby
and thereby have been authorized by all necessary corporate action of the
Company and the Company Board on or prior to the date hereof. This Agreement is
a valid and legally binding obligation of the Company, enforceable in accordance
with its terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
or by general equity principles). The Company Board has received the written
opinion of the Endicott Financial Advisors, L.L.C. to the effect that as of the
date hereof the
Annex A-14
<PAGE>
consideration to be received by the holders of Company Common Stock in the
Merger is fair to the holders of Company Common Stock from a financial point of
view.
(f) REGULATORY APPROVALS; NO DEFAULTS.
(i) No consents or approvals of, or filings or registrations with, any
Governmental Authority or with any third party are required to be made or
obtained by the Company or any of its Subsidiaries in connection with the
execution, delivery or performance by the Company of this Agreement or to
consummate the Merger except for (A) filings of applications or notices
with, and approvals or waivers by, the Federal Reserve Board, as required,
(B) filings with the SEC and state securities authorities and the approval
of this Agreement by the shareholders of the Company, (C) the filing of an
Agreement of merger with the California Secretary pursuant to the CGCL and
the filing of articles of merger with the Pennsylvania Department pursuant
to the PBCL. As of the date hereof, the Company is not aware of any reason
why the approvals set forth in Section 7.01(b) will not be received in a
timely manner and without the imposition of a condition, restriction or
requirement of the type described in Section 7.01(b).
(ii) Subject to receipt of the approvals referred to in the preceding
paragraph, and the expiration of related waiting periods, and required
filings under federal and state securities laws, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby and thereby do not and will not (A) constitute a breach
or violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license,
or Agreement, indenture or instrument of the Company or of any of its
Subsidiaries or to which the Company or any of its Subsidiaries or
properties is subject or bound, (B) constitute a breach or violation of, or
a default under, the Company Articles or the Company By-Laws, or
(C) require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, Agreement,
indenture or instrument.
(g) FINANCIAL REPORTS AND REGULATORY DOCUMENTS.
(i) The Company's Annual Reports on Form 10-K for the fiscal years ended
December 31, 1997, 1998 and 1999, and all other reports, registration
statements, definitive proxy statements or information statements filed or
to be filed by it or any of its Subsidiaries subsequent to December 31, 1997
under the Securities Act, or under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, in the form filed or to be filed (collectively, the Company's
"Regulatory Documents") with the SEC as of the date filed, (A) complied or
will comply in all material respects as to form with the applicable
requirements under the Securities Act, the Exchange Act or the securities
regulations of the SEC, as the case may be, and (B) did not and will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and each of the balance sheets contained in or incorporated by
reference into any such Regulatory Document (including the related notes and
schedules thereto) fairly presents, or will fairly present, the financial
position of the Company and its Subsidiaries as of its date, and each of the
statements of income and changes in shareholders' equity and cash flows or
equivalent statements in such Regulatory Documents (including any related
notes and schedules thereto) fairly presents, or will fairly present, the
results of operations, changes in shareholders' equity and cash flows, as
the case may be, of the Company and its Subsidiaries for the periods to
which they relate, in each case in accordance with generally accepted
accounting principles consistently applied during the periods involved,
except in each case as may be noted therein, subject to normal year-end
audit adjustments in the case of unaudited statements.
(ii) Since December 31, 1999, (A) the Company and its Subsidiaries have
conducted their respective businesses in the ordinary and usual course
consistent with past practice (excluding the incurrence of expenses related
to this Agreement and the transactions contemplated hereby) and
Annex A-15
<PAGE>
(B) no event has occurred or circumstance arisen that, individually or taken
together with all other facts, circumstances and events (described in any
paragraph of this Section or otherwise), is reasonably likely to have a
Material Adverse Effect with respect to the Company.
(h) LITIGATION. No litigation, claim or other proceeding before any court
or governmental agency is pending against the Company or any of its Subsidiaries
and, to the Company's knowledge, no such litigation, claim or other proceeding
has been threatened and there are no facts which could reasonably give rise to
such litigation, claim or other proceeding.
(i) REGULATORY MATTERS.
(i) Neither the Company nor any of its Subsidiaries or any of their
properties is a party to or is subject to any order, decree, Agreement,
memorandum of understanding or similar arrangement with, or a commitment
letter or similar submission to, or extraordinary supervisory letter from,
any federal or state governmental agency or authority charged with the
supervision or regulation of financial institutions or issuers of securities
or engaged in the insurance of deposits (including, without limitation, the
Federal Reserve) or the supervision or regulation of it or any of its
Subsidiaries (collectively, the "Regulatory Authorities"). The Company and
its Subsidiaries have paid all assessments made or imposed by any Regulatory
Authority.
(ii) Neither the Company nor any of its Subsidiaries has been advised
by, nor has any knowledge of facts which could give rise to an advisory
notice by, any Regulatory Authority that such Regulatory Authority is
contemplating issuing or requesting (or is considering the appropriateness
of issuing or requesting) any such order, decree, Agreement, memorandum of
understanding, commitment letter, supervisory letter or similar submission.
(j) COMPLIANCE WITH LAWS. THE COMPANY AND EACH OF ITS SUBSIDIARIES:
(i) is in compliance with all applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure
Act and all other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to own or
lease their properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to the Company's knowledge, no
suspension or cancellation of any of them is threatened; and
(iii) has received, since December 31, 1997, no notification or
communication from any Governmental Authority (A) asserting that the Company
or any of its Subsidiaries is not in compliance with any of the statutes,
regulations or ordinances which such Governmental Authority enforces or
(B) threatening to revoke any license, franchise, permit or governmental
authorization (nor, to the Company's knowledge, do any grounds for any of
the foregoing exist).
(k) Material Contracts; Defaults. Except for those agreements and other
documents filed as exhibits to its Regulatory Documents, neither it nor any of
its Subsidiaries is a party to, bound by or subject to any Agreement, contract,
arrangement, commitment or understanding (whether written or oral) (i) that is a
"material contract" within the meaning of Item 601(b)(10) of the SEC's
Regulation S-K or (ii) that materially restricts the conduct of business by it
or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is
in default under any contract, Agreement, commitment, arrangement, lease,
insurance policy or other instrument to which it is a party, by which its
respective assets, business, or operations may be bound or affected, or under
which it or its respective assets, business, or operations receives benefits,
and there has not occurred any event that, with the lapse of time or the giving
of notice or both, would
Annex A-16
<PAGE>
constitute such a default. Except as Previously Disclosed, no power of attorney
or similar authorization given directly or indirectly by the Company or its
Subsidiaries is currently outstanding.
(l) NO BROKERS. No action has been taken by the Company that would give
rise to any valid claim against any party hereto for a brokerage commission,
finder's fee or other like payment with respect to the transactions contemplated
by this Agreement.
(m) EMPLOYEE BENEFIT PLANS.
(i) All benefit and compensation plans, contracts, policies or
arrangements covering current employees or former employees of the Company
and its subsidiaries (the "Employees") and current or former directors of
the Company, including, but not limited to, "employee benefit plans" within
the meaning of Section 3(3) of ERISA, and deferred compensation, stock
option, stock purchase, stock appreciation rights, stock based, incentive
and bonus plans (the "Benefit Plans"), are Previously Disclosed in the
Disclosure Schedule. True and complete copies of all Benefit Plans,
including, but not limited to, any trust instruments and insurance contracts
forming a part of any Benefit Plans, and all amendments thereto have been
provided or made available to the Company.
(ii) All employee benefit plans, other than "multiemployer plans" within
the meaning of Section 3(37) of ERISA, covering Employees (the "Plans"), to
the extent subject to ERISA, are in substantial compliance with ERISA. The
Company is not a party to any "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA ("Pension Plan") and which is intended to
be qualified under Section 401(a) of the Code. There is no material pending
or threatened litigation relating to the Plans. Neither the Company nor any
of its Subsidiaries has engaged in a transaction with respect to any Plan
that, assuming the taxable period of such transaction expired as of the date
hereof, could subject the Company or any Subsidiary to a tax or penalty
imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an
amount which would be material.
(iii) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by the Company or any of its Subsidiaries with
respect to any ongoing, frozen or terminated "single-employer plan", within
the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which
is considered one employer with the Company under Section 4001 of ERISA or
Section 414 of the Code (an "ERISA Affiliate'). Neither the Company, any of
its Subsidiaries nor an ERISA Affiliate has contributed to a "multiemployer
plan", within the meaning of Section 3(37) of ERISA, at any time on or after
September 26, 1980. No notice of a "reportable event," within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan or by any
ERISA Affiliate within the 12-month period ending on the date hereof or will
be required to be filed in connection with the transactions contemplated by
this Plan.
(iv) All contributions required to be made under the terms of any Plan
have been timely made or have been reflected on the consolidated financial
statements of the Company included in the Regulatory Documents. Neither any
Pension Plan nor any single-employer plan of an ERISA Affiliate has an
"accumulated funding deficiency" (whether or not waived) within the meaning
of Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate
has an outstanding funding waiver. Neither the Company nor any of its
Subsidiaries has provided, or is required to provide, security to any
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant
to Section 401(a)(29) of the Code.
(v) Under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities," within
the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of
the actuarial assumptions contained in the Plan's most recent actuarial
valuation), did not exceed the then
Annex A-17
<PAGE>
current value of the assets of such Plan, and there has been no material
change in the financial condition of such Plan since the last day of the
most recent plan year.
(vi) Neither the Company nor any of its Subsidiaries has any obligations
for retiree health and life benefits under any Benefit Plan. The Company or
its Subsidiaries may amend or terminate any such Benefit Plan at any time
without incurring any liability thereunder.
(vii) The consummation of the transactions contemplated by this
Agreement will not (A) entitle any employees of the Company or any of its
Subsidiaries to severance pay, (B) accelerate the time of payment or vesting
or trigger any payment of compensation or benefits under, increase the
amount payable or trigger any other material obligation pursuant to, any of
the Benefit Plans or (C) result in any breach or violation of, or a default
under, any of the Benefit Plans. Without limiting the foregoing, as a result
of the consummation of the transactions contemplated by this Agreement, none
of FCB, the Company, or any of its Subsidiaries will be obligated to make a
payment to an individual that would be a "parachute payment" to a
"disqualified individual" as those terms are defined in Section 280G of the
Code, without regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
(n) LABOR MATTERS. Neither the Company nor any of its Subsidiaries is a
party to or is bound by any collective bargaining Agreement, contract or other
Agreement or understanding with a labor union or labor organization, nor is the
Company or any of its Subsidiaries the subject of a proceeding asserting that it
or any such Subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel the Company or
any such Subsidiary to bargain with any labor organization as to wages or
conditions of employment, nor is there any strike or other labor dispute
involving it or any of its Subsidiaries pending or, to the Company's knowledge,
threatened, nor is the Company aware of any activity involving its or any of its
Subsidiaries' employees seeking to certify a collective bargaining unit or
engaging in other organizational activity.
(o) ENVIRONMENTAL MATTERS. (i) The Company and each of its Subsidiaries
has complied at all times with applicable Environmental Laws; (ii) no real
property (including buildings or other structures) currently or formerly owned
or operated by the Company or any of its Subsidiaries, or any property in which
the Company or any of its Subsidiaries has held a security interest, lien or a
fiduciary or management role ("Loan Property"), has been contaminated with, or
has had any release of, any Hazardous Substance; (iii) neither the Company nor
any of its Subsidiaries could be deemed the owner or operator of any Loan
Property under any Environmental Law which such Loan Property has been
contaminated with, or has had any release of, any Hazardous Substance;
(iv) neither the Company nor any of its Subsidiaries is subject to liability for
any Hazardous Substance disposal or contamination on any third party property;
(v) neither the Company nor any of its Subsidiaries has received any notice,
demand letter, claim or request for information alleging any violation of, or
liability under, any Environmental Law; (vi) neither the Company nor any of its
Subsidiaries is subject to any order, decree, injunction or other Agreement with
any Governmental Authority or any third party relating to any Environmental Law;
(vii) to the best of the Company's knowledge, there are no circumstances or
conditions (including the presence of asbestos, underground storage tanks, lead
products, polychlorinated biphenyls, prior manufacturing operations,
dry-cleaning, or automotive services) involving the Company or any of its
Subsidiaries, any currently or formerly owned or operated property, or any Loan
Property, that could reasonably be expected to result in any claims, liability
or investigations against the Company or any of its Subsidiaries, result in any
restrictions on the ownership, use, or transfer of any property pursuant to any
Environmental Law, or adversely affect the value of any Loan Property, and
(viii) the Company has delivered to FCB copies of all environmental reports,
studies, sampling data, correspondence, filings and other environmental
information in its possession or reasonably available to it relating to the
Company, any Subsidiary of the Company, any currently or formerly owned or
operated property or any Loan Property.
Annex A-18
<PAGE>
As used herein, the term "Environmental Law" means any federal, state or
local law, regulation, order, decree, permit, authorization, opinion, common law
or agency requirement relating to: (A) the protection or restoration of the
environment, health, safety, or natural resources, (B) the handling, use,
presence, disposal, release or threatened release of any Hazardous Substance or
(C) noise, odor, wetlands, indoor air, pollution, contamination or any injury or
threat of injury to persons or property in connection with any Hazardous
Substance and the term "Hazardous Substance" means any substance in any
concentration that is: (A) listed, classified or regulated pursuant to any
Environmental Law; (B) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (C) any other substance which is or may be
the subject of regulatory action by any Governmental Authority in connection
with any Environmental Law.
(p) TAX MATTERS.
(i)(A) All Tax Returns that are required to be filed (taking into
account any extensions of time within which to file) by or with respect to
the Company and its Subsidiaries have been duly filed, (B) all Taxes shown
to be due on the Tax Returns referred to in clause (A) have been paid in
full, (C) the Tax Returns referred to in clause (A) have been examined by
the Internal Revenue Service or the appropriate Tax authority or the period
for assessment of the Taxes in respect of which such Tax Returns were
required to be filed has expired, (D) all deficiencies asserted or
assessments made as a result of such examinations have been paid in full,
(E) no issues that have been raised by the relevant taxing authority in
connection with the examination of any of the Tax Returns referred to in
clause (A) are currently pending, and (F) no waivers of statutes of
limitation have been given by or requested with respect to any Taxes of the
Company or its Subsidiaries. The Company has made available to FCB true and
correct copies of the United States federal income Tax Returns filed by the
Company and its Subsidiaries for each of the three most recent fiscal years
ended on or before December 31, 1999. Neither the Company nor any of its
Subsidiaries has any liability with respect to income, franchise or similar
Taxes that accrued on or before the end of the most recent period covered by
the Company's Regulatory Documents filed prior to the date hereof in excess
of the amounts accrued with respect thereto that are reflected in the
financial statements included in the Company's Regulatory Documents filed on
or prior to the date hereof. Neither the Company nor any of its Subsidiaries
is a party to any Tax allocation or sharing Agreement, is or has been a
member of an affiliated group filing consolidated or combined Tax returns
(other than a group the common parent of which is or was the Company) or
otherwise has any liability for the Taxes of any person (other than the
Company and its Subsidiaries). As of the date hereof, neither the Company
nor any of its Subsidiaries has any reason to believe that any conditions
exist that might prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368 of the Code.
(ii) No Tax is required to be withheld pursuant to Section 1445 of the
Code as a result of the transaction contemplated by this Agreement.
(q) RISK MANAGEMENT INSTRUMENTS. Except as Previously Disclosed, neither
the Company nor any of its Subsidiaries is a party or has agreed to enter into
an exchange traded or over-the-counter equity, interest rate, foreign exchange
or other swap, forward, future, option, cap, floor or collar or any other
contract that is not included on the balance sheet and is a derivatives contract
(including various combinations thereof)(each, a "Derivatives Contract") or owns
securities that (i) are referred to generically as "structured notes," "high
risk mortgage derivatives," "capped floating rate notes" or "capped floating
rate mortgage derivatives" or (ii) are likely to have changes in value as a
result of interest or exchange rate changes that significantly exceed normal
changes in value attributable to interest or exchange rate changes. All of such
Derivatives Contracts or other instruments, are legal, valid and binding
obligations of the Company or one of its Subsidiaries enforceable in accordance
with their terms (except as enforcement may be limited by general principles of
equity whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally),
Annex A-19
<PAGE>
and are in full force and effect. The Company and each of its Subsidiaries have
duly performed in all material respects all of their material obligations
thereunder to the extent that such obligations to perform have accrued; and, to
the Company's knowledge, there are no breaches, violations or defaults or
allegations or assertions of such by any party thereunder which would have or
would reasonably be expected to have a Material Adverse Effect on the Company.
(r) BOOKS AND RECORDS. The books and records of the Company and its
Subsidiaries have been fully, properly and accurately maintained in all material
respects, and there are no material inaccuracies or discrepancies of any kind
contained or reflected therein, and they fairly present the financial position
of the Company and its Subsidiaries.
(s) INSURANCE. The Company has Previously Disclosed all of the insurance
policies, binders, or bonds maintained by the Company or its Subsidiaries
("Insurance Policies"). The Company and its Subsidiaries are insured with
reputable insurers against such risks and in such amounts as the management of
the Company reasonably has determined to be prudent in accordance with industry
practices. All the Insurance Policies are in full force and effect; the Company
and its Subsidiaries are not in material default thereunder; and all claims
thereunder have been filed in due and timely fashion.
(t) ALLOWANCE FOR LOAN LOSSES. The Company's Allowance for Loan Losses
("ALL") is, and shall be as of the Effective Date, in compliance with the
Company's existing methodology for determining the adequacy of its ALL as well
as the standards established by applicable Governmental Authorities and the
Financial Accounting Standards Board and is and shall be adequate under all such
standards.
(u) TRANSACTIONS WITH AFFILIATES. Neither the Company nor the Company Bank
has any transactions with Affiliates within the meaning of Sections 23A and 23B
of the Federal Reserve Act.
(v) ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Company nor any of its
Subsidiaries has incurred or discharged, or is legally obligated with respect
to, any material indebtedness, liability (including, without limitation, a
liability arising out of an indemnification, guarantee, hold harmless or similar
arrangement) or obligation (accrued or contingent, whether due or to become due,
and whether or not subordinated to the claims of its general creditors), that is
material to the Company on a consolidated basis, or that, when combined with all
similar liabilities, would be material to the Company on a consolidated basis,
except for items reflected on or for which reserves have been established in the
unaudited consolidated balance sheet of the Company as of March 31, 2000 in
accordance with GAAP, and except for liabilities incurred in the ordinary and
usual course of its business consistent with past practice of business
subsequent to March 31, 2000. No Agreement pursuant to which any loans or other
assets have been or shall be sold by the Company entitled the buyer of such
loans or other assets, unless there is material breach of a representation or
covenant by the Company, to cause the Company or its Subsidiaries to repurchase
such loan or other asset or the buyer to pursue any other form of recourse
against the Company or its Subsidiaries. No cash, stock or other dividend or any
other distribution with respect to (i) the stock of the Company, or (ii) except
as disclosed in writing to FCB as of the date hereof or hereafter, its
Subsidiaries, have been declared, set aside or paid. No shares of the stock of
the Company or its Subsidiaries have ben purchased, redeemed or otherwise
acquired, directly or indirectly, by the Company since December 31, 1999, and no
agreements have been made to do the foregoing.
(w) TRUST BUSINESS. Neither the Company nor the Company Bank serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor for any fiduciary accounts.
(x) TAKEOVER. The Company has taken all action required to be taken by it
in order to exempt this Agreement and the transactions contemplated hereby and
thereby from, and this Agreement and the transactions contemplated hereby and
thereby are exempt from, the requirements of any "moratorium," "control share,"
"fair price," "affiliated transaction," "business combination" or other
anti-takeover laws and regulations of the Commonwealth of Pennsylvania.
Annex A-20
<PAGE>
5.04 REPRESENTATIONS AND WARRANTIES OF FCB. Subject to Sections 5.01 and
5.02 and except as Previously Disclosed, FCB hereby represents and warrants to
the Company as follows:
(a) ORGANIZATION, STANDING AND AUTHORITY. FCB is duly organized, validly
existing and in good standing under the laws of the State of California. FCB is
duly qualified to do business and is in good standing in the states of the
United States and foreign jurisdictions where its ownership or leasing of
property or assets or the conduct of its business requires it to be so
qualified. FCB has in effect all federal, state, local, and foreign governmental
authorizations necessary for it to own or lease its properties and assets and to
carry on its business as it is now conducted.
(b) FCB STOCK.
(i) As of the date hereof, the authorized capital stock of FCB consists
solely of 15,000,000 shares of FCB Common Stock, of which no more than
3,894,517 shares were outstanding as of the date hereof, and 5,000,000
shares of FCB Preferred Stock, of which no shares were outstanding as of the
date hereof.
(ii) The shares of FCB Common Stock to be issued in exchange for shares
of Company Common Stock in the Merger, when issued in accordance with the
terms of this Agreement, will be duly authorized, validly issued, fully paid
and nonassessable and the issuance thereof is not subject to any preemptive
right.
(c) SUBSIDIARIES. Each of FCB's Significant Subsidiaries has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization, and is duly qualified to do business and in
good standing in the jurisdictions where its ownership or leasing of property or
the conduct of its business requires it to be so qualified and it owns, directly
or indirectly, all the issued and outstanding equity securities of each of its
Significant Subsidiaries.
(d) CORPORATE POWER. FCB and each of its Significant Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and FCB has the corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.
(e) CORPORATE AUTHORITY. This Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action of FCB and the FCB
Board. This Agreement is a valid and legally binding Agreement of FCB
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles).
(f) REGULATORY APPROVALS; NO DEFAULTS.
(i) No consents or approvals of, or filings or registrations with, any
Governmental Authority or with any third party are required to be made or
obtained by FCB or any of its Subsidiaries in connection with the execution,
delivery or performance by FCB of this Agreement or to consummate the Merger
except for (A) filings of applications or notices with, and approvals or
waivers by, the Federal Reserve Board, as required; (B) the approval of the
listing on Nasdaq of FCB Common Stock to be issued in the Merger; (C) the
filing and declaration of effectiveness of the Registration Statement;
(D) such filings as are required to be made or approvals as are required to
be obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of FCB Stock in the Merger; (E) the filing of
an Agreement of merger with the California Secretary pursuant to the CGCL
and (F) the filing of articles of merger with the Pennsylvania Department
pursuant to the PBCL. As of the date hereof, FCB is not aware of any reason
why the approvals set forth in Section 7.01(b) will not be received in a
timely manner and without the imposition of a condition, restriction or
requirement of the type described in Section 7.01(b).
Annex A-21
<PAGE>
(ii) Subject to receipt, or the making, of the consents, approvals and
filings referred to in the preceding paragraph and expiration of the related
waiting periods, the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby do not and will
not (A) constitute a breach or violation of, or a default under, or give
rise to any Lien, any acceleration of remedies or any right of termination
under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or Agreement, indenture or instrument of FCB
or of any of its Subsidiaries or to which FCB or any of its Subsidiaries or
properties is subject or bound, (B) constitute a breach or violation of, or
a default under, the articles of incorporation or by-laws (or similar
governing documents) of FCB or any of its Subsidiaries, or (C) require any
consent or approval under any such law, rule, regulation, judgment, decree,
order, governmental permit or license, Agreement, indenture or instrument.
(g) FINANCIAL REPORTS AND SEC DOCUMENTS; MATERIAL ADVERSE EFFECT.
(i) Except for an S-4 Registration Statement, which became effective
May 5, 2000, and a Current Report on Form 8-K, FCB has not filed any
reports, registration statements, definitive proxy statements or information
statements under the Securities Act or under Section 13(a), 13(c), 14 or
15(d) of the Exchange Act. Such S-4 registration statement, as of the
effective date, and as to other filings, in the form filed or to be filed
(collectively, FCB's "SEC DOCUMENTS") with the SEC, as of the date filed,
(A) complied or will comply in all material respects as to form with the
applicable requirements under the Securities Act or the Exchange Act, as the
case may be, and (B) did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and each of the
balance sheets contained in or incorporated by reference into any such SEC
Document (including the related notes and schedules thereto) fairly
presents, or will fairly present, the financial position of FCB and its
Subsidiaries as of its date, and each of the statements of income and
changes in shareholders' equity and cash flows or equivalent statements in
such SEC Documents (including any related notes and schedules thereto)
fairly presents, or will fairly present, the results of operations, changes
in shareholders' equity and changes in cash flows, as the case may be, of
FCB and its Subsidiaries for the periods to which they relate, in each case
in accordance with GAAP consistently applied during the periods involved,
except in each case as may be noted therein, subject to normal year-end
audit adjustments in the case of unaudited statements.
(ii) Since June 30, 2000, no event has occurred or circumstance arisen
that, individually or taken together with all other facts, circumstances and
events (described in any paragraph of Section 5.04 or otherwise), is
reasonably likely to have a Material Adverse Effect with respect to it.
(h) TAX MATTERS. As of the date hereof, FCB has no reason to believe that
any conditions exist that might prevent or impede the Merger from qualifying as
a reorganization within the meaning of Section 368 of the Code.
ARTICLE VI
COVENANTS
6.01 REASONABLE BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each of the Company and FCB agrees to use its reasonable best efforts
in good faith to take, or cause to be taken, all actions, and to do, or cause to
be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger and the Bank Merger
as promptly as practicable and otherwise to enable consummation of the
transactions contemplated hereby, including the satisfaction of the conditions
set forth in Article VII hereof, and shall cooperate fully with the other party
hereto to that end.
Annex A-22
<PAGE>
6.02 SHAREHOLDER APPROVAL. The Company agrees to take, in accordance with
applicable law and the Company Articles and Company By-Laws, all action
necessary to convene as soon as commercially reasonable an appropriate meeting
of its shareholders to consider and vote upon the approval of the principal
terms of the Merger and adoption of this Agreement and any other matters
required to be approved by the Company's shareholders for consummation of the
Merger (including any adjournment or postponement, the "COMPANY MEETING"), in
each case within 45 calendar days after the Registration Statement is declared
effective. Except with the prior approval of FCB, no other matters shall be
submitted for the approval of the Company shareholders. The Company Board shall
at all times prior to and during such meeting recommend such approval and shall
take all reasonable lawful action to solicit such approval by its shareholders.
6.03 REGISTRATION STATEMENT.
(a) FCB agrees to prepare a registration statement on Form S-4 or other
applicable form (the "REGISTRATION STATEMENT") to be filed by FCB with the SEC
in connection with the issuance of FCB Common Stock in the Merger (including the
proxy statement and prospectus and other proxy solicitation materials of the
Company constituting a part thereof (the "PROXY STATEMENT") and all related
documents). The Company shall prepare and furnish such information as may be
reasonably required in connection with the above referenced documents based on
its knowledge of and access to the information required for said documents, and
the Company shall have the right to review such Registration Statement prior to
its filing. The Company agrees to cooperate, and to cause its Subsidiaries to
cooperate, with FCB and FCB's counsel and accountants, in requesting and
obtaining appropriate opinions, consents and letters from its financial advisor
and independent auditor in connection with the Registration Statement and the
Proxy Statement. The Company and FCB agree to file, or cause to be filed, the
Registration Statement and the Proxy Statement in preliminary form with the SEC
as promptly as reasonably practicable but in no event later than 60 calendar
days after the date hereof. Each of the Company and FCB agrees to use all
reasonable efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as reasonably practicable after filing
thereof. FCB also agrees to use all reasonable efforts to obtain all necessary
state securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement. After the Registration
Statement is declared effective under the Securities Act, the Company shall
promptly mail at its expense the Proxy Statement to its shareholders.
(b) Each of the Company and FCB agrees, as to itself and its Subsidiaries,
that none of the information supplied or to be supplied by it for inclusion or
incorporation by reference in (i) the Registration Statement shall, at the time
the Registration Statement and each amendment or supplement thereto, if any,
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the Proxy
Statement and any amendment or supplement thereto shall, at the date of mailing
to shareholders and at the time of the Company Meeting, as the case may be,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or any statement which, in the light of the circumstances under
which such statement is made, shall be false or misleading with respect to any
material fact, or which shall omit to state any material fact necessary in order
to make the statements therein not false or misleading or necessary to correct
any statement in any earlier statement in the Proxy Statement or any amendment
or supplement thereto. Each of the Company and FCB further agrees that if it
shall become aware prior to the Effective Date of any information furnished by
it that would cause any of the statements in the Proxy Statement to be false or
misleading with respect to any material fact, or to omit to state any material
fact necessary to make the statements therein not false or misleading, to
promptly inform the other party thereof and to take the necessary steps to
correct the Proxy Statement.
6.04 PRESS RELEASES. Each of the Company and FCB agrees that it shall not,
without the prior approval of the other party, issue any press release or
written statement for general circulation relating to the transactions
contemplated hereby, except as otherwise required by applicable law or
regulation or
Annex A-23
<PAGE>
American Stock Exchange or Nasdaq rules, as the case may be (provided that the
issuing party shall nevertheless provide the other party with notice of, and the
opportunity to review, any such press release or written statement).
6.05 ACCESS; INFORMATION.
(a) Each of the Company and FCB agrees that upon reasonable notice and
subject to applicable laws relating to the exchange of information, each party
shall afford the other party and the other party's officers, employees, counsel,
accountants and other authorized representatives, such access during normal
business hours throughout the period prior to the Effective Time to the books,
records (including, without limitation, tax returns and work papers of
independent auditors), properties, personnel and to such other information as
the requesting party may reasonably request and, during such period, it shall
furnish promptly to the requesting party all information concerning the
business, properties and personnel of it as the requesting party may reasonably
request.
(b) The Company agrees that, subject to applicable laws, it shall cooperate
in good faith with FCB on mutually identified operating issues which the parties
agree have priority.
(c) Each party agrees that it shall not, and shall cause its representatives
not to, use any information obtained pursuant to this Section 6.05 (as well as
any other information obtained prior to the date hereof in connection with the
entering into of this Agreement) for any purpose unrelated to the consummation
of the transactions contemplated by this Agreement. Subject to the requirements
of law, each party shall keep confidential, and shall cause its representatives
to keep confidential, all information and documents obtained pursuant to this
Section 6.05 (as well as any other information obtained prior to the date hereof
in connection with the entering into of this Agreement) unless such information
(i) was already known to such party, (ii) becomes available to such party from
other sources not known by such party to be bound by a confidentiality
obligation, (iii) is disclosed with the prior written approval of the party to
which such information pertains or (iv) is or becomes readily ascertainable from
published information or trade sources. In the event that this Agreement is
terminated or the transactions contemplated by this Agreement shall otherwise
fail to be consummated, each party shall promptly cause all copies of documents
or extracts thereof containing information and data as to another party hereto
either to be returned to the party which furnished the same or to be destroyed.
No investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant or
Agreement in this Agreement, or the conditions to either party's obligation to
consummate the transactions contemplated by this Agreement.
6.06 AFFILIATES. The Company shall cooperate and use its commercially
reasonable efforts to identify those persons who may be deemed to be
"affiliates" of the Company within the meaning of Rule 145 promulgated by the
SEC under the Securities Act. The Company shall use its commercially reasonable
efforts to cause each person so identified to deliver to FCB, no later than
40 days prior to the Effective Date, a written Agreement (which Agreement shall
be substantially in the form of Exhibit A hereto.
6.07 CERTAIN POLICIES. Prior to the Effective Date, the Company and its
Subsidiaries shall, consistent with GAAP and the rules and regulations of the
SEC, modify or change its loan, OREO, accrual, reserve, tax, litigation and real
estate valuation policies and practices (including loan classifications and
levels of reserves) so as to be applied on a basis that is consistent with that
of FCB.
6.08 NASDAQ LISTING. FCB agrees to use its reasonable best efforts to
list, prior to the Effective Date, on the Nasdaq, subject to official notice of
issuance, the shares of FCB Common Stock to be issued to the holders of Company
Common Stock in the Merger.
6.09 REGULATORY APPLICATIONS.
Annex A-24
<PAGE>
(a) FCB and the Company and their respective Subsidiaries shall cooperate
and use their respective reasonable best efforts to prepare all documentation,
to effect all filings and to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Authorities necessary to
consummate the transactions contemplated by this Agreement (including the
consolidation of any Company Bank branches with FCB Bank branches or the closure
of any Company Bank branches, in each case as FCB in its sole discretion shall
deem necessary); and any initial filings with Governmental Authorities (other
than the Registration Statement) shall be made by FCB promptly after the
execution hereof. Each of FCB and the Company shall have the right to review in
advance, and to the extent practicable each shall consult with the other, in
each case subject to applicable laws relating to the exchange of information,
with respect to all material written information submitted to any third party or
any Governmental Authority in connection with the transactions contemplated by
this Agreement. In exercising the foregoing right, each of the parties hereto
agrees to act reasonably and as promptly as practicable. Each party hereto
agrees that it shall consult with the other party hereto with respect to the
obtaining of all material permits, consents, approvals and authorizations of all
third parties and Governmental Authorities necessary or advisable to consummate
the transactions contemplated by this Agreement and each party shall keep the
other party appraised of the status of material matters relating to completion
of the transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its Subsidiaries to any third party or Governmental
Authority.
6.10 INDEMNIFICATION.
(a) Following the Effective Date, except as set forth in Exhibit C hereto,
FCB shall indemnify, defend and hold harmless each present and former director
and officer of the Company and its Subsidiaries (each, an "INDEMNIFIED PARTY")
against all costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities (collectively, "COSTS") incurred
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement or any related
Agreement, but excluding any Costs arising out of any violation or alleged
violation of the Exchange Act or the rules and regulations thereunder with
respect to insider trading) to the fullest extent that the Company is permitted
to indemnify (and advance expenses to) its directors or officers under the laws
of the Commonwealth of Pennsylvania, the Company Articles and the Company
By-Laws as in effect on the date hereof; PROVIDED that any determination
required to be made with respect to whether an officer's or director's conduct
complies with the standards set forth under Pennsylvania law, the Company
Articles and the Company By-Laws shall be made by independent counsel selected
by FCB; and PROVIDED, FURTHER, that in the absence of applicable Pennsylvania
judicial precedent to the contrary, such counsel, in making such determination,
shall presume such officer's or director's conduct complied with such standard
and FCB shall have the burden to demonstrate that such officer's or director's
conduct failed to comply with such standard.
(b) For a period of three years from the Effective Time, FCB shall use its
commercially reasonable efforts to provide that portion of director's and
officer's liability insurance that serves to reimburse the present and former
officers and directors (determined as of the Effective Time) of the Company or
any of its Subsidiaries (as opposed to the portion that serves to reimburse the
Company) with respect to claims against such directors and officers arising from
facts or events which occurred before the Effective Time, which insurance shall
contain at least the same coverage and amounts, and contain terms and conditions
no less advantageous, as that coverage currently provided by the Company;
PROVIDED, HOWEVER, that in no event shall FCB be required to expend more than
150 percent of the current amount expended by the Company (the "INSURANCE
AMOUNT") to maintain or procure such directors and officers insurance coverage;
PROVIDED, FURTHER, that if FCB unable to maintain or obtain the insurance called
for by this Section 6.10(b), FCB shall use its commercially reasonable efforts
to obtain as much comparable insurance as is available
Annex A-25
<PAGE>
for the Insurance Amount; PROVIDED, FURTHER, that officers and directors of the
Company or any Subsidiary may be required to make application and provide
customary representations and warranties to FCB's insurance carrier for the
purpose of obtaining such insurance.
(c) Any Indemnified Party wishing to claim indemnification under
Section 6.10(a), upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify FCB thereof; PROVIDED that
the failure so to notify shall not affect the obligations of FCB under
Section 6.10(a) unless and to the extent that FCB is actually prejudiced as a
result of such failure.
(d) If FCB or any of its successors or assigns shall consolidate with or
merge into any other entity and shall not be the continuing or surviving entity
of such consolidation or merger or shall transfer all or substantially all of
its assets to any other entity, then and in each case, proper provision shall be
made so that the successors and assigns of FCB shall assume the obligations set
forth in this Section 6.10.
6.11 BENEFIT PLANS.
(a) FCB shall maintain for a period of two years immediately following the
Effective Date, employee benefit plans, programs, policies and arrangements for
employees of the Company and its Subsidiaries which in the aggregate are no less
favorable than the employee benefit plans, programs, policies and arrangements
of FCB for similarly situated employees of FCB. FCB shall cause each employee
benefit plan, program, policy or arrangement of FCB in which employees of the
Company and its Subsidiaries are eligible to participate to take into account
for purposes of eligibility and vesting thereunder the service of such employees
with the Company and its Subsidiaries to the same extent as such service was
credited for such purpose by the Company and its Subsidiaries.
(b) FCB shall honor, and the Surviving Corporation shall continue to be
obligated to perform, in accordance with their terms, all benefit obligations
to, and contractual rights of, current and former employees of the Company and
its Subsidiaries existing as of the Effective Date, as well as all employment or
severance agreements, plans or policies of the Company and its Subsidiaries
which are Previously Disclosed in the Company's Disclosure Schedule.
(c) If employees of the Company and its Subsidiaries become eligible to
participate in a medical, dental or health plan of FCB, FCB shall cause such
plan to (i) waive any preexisting condition limitations for conditions covered
under the applicable medical, health or dental plans of FCB and its
Subsidiaries, (ii) honor any deductible, co-payment and out-of-pocket expenses
incurred by the employees and their beneficiaries under such plans during the
portion of the calendar year prior to such participation and (iii) waive any
waiting period limitation or evidence of insurability requirement which would
otherwise be applicable to such employee on or after the Effective Time to the
extent such employee had satisfied any similar limitation or requirement under
an analogous Plan prior to the Effective Time.
(d) It is the intention of FCB to permit the Company to establish a
reasonable amount to be applied to "stay" bonuses not to exceed $300,000.
(e) The provisions of this Section 6.11 are intended to be for the benefit
of and shall be enforceable by, each director and employee of the Company and
its Subsidiaries.
6.12 NOTIFICATION OF CERTAIN MATTERS. Each of the Company and FCB shall
give prompt notice to the other of any fact, event or circumstance known to it
that (i) is reasonably likely, individually or taken together with all other
facts, events and circumstances known to it, to result in any Material Adverse
Effect with respect to it or (ii) would cause or constitute a material breach of
any of its representations, warranties, covenants or agreements contained
herein.
6.13 NON-COMPETE AGREEMENTS. Each of the non-officer directors of the
Company and the Company Bank shall have executed and delivered to FCB
non-compete agreements substantially in the form included in Exhibit B hereto.
Annex A-26
<PAGE>
6.14 [Omitted.]
6.15 DIRECTORS TO VOTE FOR MERGER. Each Director of the Company and the
Company Bank has executed and delivered on the date hereof a director voting
Agreement substantially in the form of Exhibit B hereto.
6.16 APPOINTMENT OF DIRECTOR .As of the Effective Time, FCB agrees to
appoint Gene F. Gaines as a director.
6.17 ADVISORY BOARD. As of the Effective Time, FCB Bank agrees to appoint
an advisory board composed of such members of the Company Board and the Company
Bank board of directors as agree to serve thereon.
6.18 ACQUISITION PROPOSALS. The Company agrees that it shall not, and
shall cause its Subsidiaries and its and its Subsidiaries' officers, directors,
agents, advisors and affiliates not to, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person
relating to, any Acquisition Proposal, except to the extent legally required for
the discharge by the Company Board of its fiduciary duties as advised by counsel
to the Company Board. The Company shall immediately cease and cause to be
terminated any activities, discussions or negotiations conducted prior to the
date of this Agreement with any parties other than FCB with respect to any of
the foregoing and shall use its reasonable best efforts to enforce any
confidentiality or similar Agreement relating to an Acquisition Proposal. The
Company shall promptly (within 24 hours) advise FCB following the receipt by the
Company of any Acquisition Proposal and the substance thereof (including the
identity of the person making such Acquisition Proposal), and advise FCB of any
developments with respect to such Acquisition Proposal immediately upon the
occurrence thereof.
6.19 SPECIAL REVIEW. Without limiting the generality of Section 6.05(a),
prior to the Effective Time, the Company agrees that FCB and FCB's
representatives shall have the right to conduct a review to determine (i) that
the assets, books and records of the Company reflect a condition which meets the
standards set forth in Section 7.03(c) and (d) hereof, or failing that, will in
a material way adversely impact FCB after consummation of the transactions
contemplated hereby; (ii) that there are no liabilities not recorded on the
books and records of the Company (existing, threatened or contingent) which
total in excess of $2,000,000 and which FCB reasonably determines to be
unacceptable; (iii) that the methodology for determining, and the allowance for
loan losses of the Company as determined by its grading of loans and leases
between the date hereof and the Effective Time, shall have been consistent with
the past practices of the Company and in accordance with GAAP and applicable
regulatory requirements; and (iv) the accuracy of the representations and
warranties and the satisfaction of the conditions to closing as provided
hereunder.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each of FCB and the Company to consummate the Merger is
subject to the fulfillment or written waiver by FCB and the Company prior to the
Effective Time of each of the following conditions:
(a) Shareholder Approvals. This Agreement and the Merger shall have been
duly adopted by the requisite vote of the shareholders of the Company.
(b) Regulatory Approvals. All regulatory approvals required to consummate
the transactions contemplated hereby, shall have been obtained and shall remain
in full force and effect and all statutory waiting periods in respect thereof
shall have expired and no such approvals shall contain any conditions,
restrictions or requirements which the FCB Board reasonably determines in good
faith would (i) following the Effective Time, have a Material Adverse Effect on
FCB and its Subsidiaries taken as a whole or
Annex A-27
<PAGE>
(ii) reduce the benefits of the transactions contemplated hereby to such a
degree that FCB would not have entered into this Agreement had such conditions,
restrictions or requirements been known at the date hereof.
(c) NO INJUNCTION. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, judgment, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and prohibits consummation of the
transactions contemplated by this Agreement.
(d) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
(e) LISTING. The shares of FCB Common Stock to be issued in the Merger
shall have been approved for listing on the Nasdaq, subject to official notice
of issuance.
7.02 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the
Company to consummate the Merger is also subject to the fulfillment or written
waiver by the Company prior to the Effective Time of each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
FCB set forth in this Agreement, subject in all cases to the standard set forth
in Section 5.02, shall be true and correct as of the date of this Agreement and
as of the Effective Date as though made on and as of the Effective Date (except
that representations and warranties that by their terms speak as of the date of
this Agreement or some other date shall be true and correct as of such date),
and the Company shall have received a certificate, dated the Effective Date,
signed on behalf of FCB by the Chief Executive Officer and the Chief Financial
Officer of FCB to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF FCB. FCB shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and the Company shall have received
a certificate, dated the Effective Date, signed on behalf of FCB by the Chief
Executive Officer and the Chief Financial Officer of FCB to such effect.
(c) OPINION OF THE COMPANY'S COUNSEL. The Company shall have received an
opinion of a qualified professional firm selected by the Company and reasonably
acceptable to FCB, dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, (i) the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368 of the Code, (ii) each of FCB and the Company will be a
party to the reorganization within the meaning of Section 368 of the Code and
(iii) no gain or loss will be recognized by shareholders of the Company who
receive shares of FCB Common Stock in exchange for shares of Company Common
Stock, except with respect to cash received. In rendering its opinion, such firm
may require and rely upon representations contained in letters or certificates
from the Company, FCB and others.
7.03 CONDITIONS TO OBLIGATION OF FCB. The obligation of FCB to consummate
the Merger is also subject to the fulfillment or written waiver by FCB prior to
the Effective Time of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in this Agreement, subject in all cases to the standard
set forth in Section 5.02, shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on and as of the Effective
Date (except that representations and warranties that by their terms speak as of
the date of this Agreement or some other date shall be true and correct as of
such date) and FCB shall have received a certificate, dated the Effective Date,
signed on behalf of the Company by the Chief Executive Officer and the Chief
Financial Officer of the Company to such effect.
Annex A-28
<PAGE>
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and FCB shall have
received a certificate, dated the Effective Date, signed on behalf of the
Company by the Chief Executive Officer and the Chief Financial Officer of the
Company to such effect.
(c) OPINION OF FCB'S COUNSEL. FCB shall have received an opinion of
Sullivan & Cromwell, special counsel to FCB, dated the Effective Date, to the
effect that, on the basis of facts, representations and assumptions set forth in
such opinion, (i) the Merger will be treated for federal income tax purposes as
a reorganization within the meaning of Section 368 of the Code and (ii) each of
FCB and the Company will be a party to the reorganization within the meaning of
Section 368 of the Code. In rendering its opinion, Sullivan & Cromwell may
require and rely upon representations contained in letters or certificates from
the Company, FCB and others.
(d) CAPITALIZATION. At the Effective Time, the total (A) of (i) Company
Common Stock, excluding shares issued subsequent to the date hereof upon
exercise of stock options, warrants or the conversion of debt; (ii) Additional
paid-in-capital; (iii) Accumulated deficit and (iv) Treasury Stock, each as
determined in accordance with GAAP, shall not be less than the total (B) of
(i) $17,250,000 and (ii) the product of $200,000 and the number of months in the
period April 1, 2000 through the Effective Time less (iii) all out-of-pocket
third party expenses actually incurred during the period from July 1, 2000 to
the Effective Time relating to the transactions contemplated by this Agreement,
but only to the extent that such expenses would not otherwise have been
incurred; provided that the aggregate of such expenses, exclusive of employee
severance expense, shall not exceed $550,000. For purposes of the above
computation, any provision for loan losses and any provision for income taxes,
in each case since March 31, 2000, will be added back to total (A).
(e) ASSET QUALITY. At the Effective Time, the total of (i) the product of
Watch loans and 1.4%; (ii) the product of Special Mention loans and 5%;
(iii) the product of Substandard loans and 15%; (iv) the product of Doubtful
loans and 50%; and (v) Loss loans (in each instance of (i) through (v) the loan
classification will be determined by mutual Agreement or by a mutually agreed
upon third party); and (vi) net charge-offs since May 31, 2000 shall not be
greater than $19,000,000.
(f) SPECIAL REVIEW. FCB shall have completed the review contemplated by
Section 6.19 hereof and reached the determination contemplated therein.
ARTICLE VIII
TERMINATION
8.01 TERMINATION. This Agreement may be terminated, and the Merger may be
abandoned:
(a) MUTUAL CONSENT. At any time prior to the Effective Time, by the mutual
consent of FCB and the Company, if the Board of Directors of each so determines
by vote of a majority of the members of its entire Board.
(b) BREACH. At any time prior to the Effective Time, by FCB or the
Company, if its Board of Directors so determines by vote of a majority of the
members of its entire Board, in the event of either: (i) a breach by the other
party of any representation or warranty contained herein (subject to the
standard set forth in Section 5.02), which breach cannot be or has not been
cured within 30 days after the giving of written notice to the breaching party
of such breach; or (ii) a breach by the other party of any of the covenants or
agreements contained herein, which breach cannot be or has not been cured within
30 days after the giving of written notice to the breaching party of such
breach, provided that such breach (whether under (i) or (ii)) would be
reasonably likely, individually or in the aggregate with other breaches, to
result in a Material Adverse Effect.
Annex A-29
<PAGE>
(c) DELAY. At any time prior to the Effective Time, by FCB or the Company,
if its Board of Directors so determines by vote of a majority of the members of
its entire Board, in the event that the Merger is not consummated by March 31,
2001, except to the extent that the failure of the Merger then to be consummated
arises out of or results from the knowing action or inaction of the party
seeking to terminate pursuant to this Section 8.01(c).
(d) NO APPROVAL. By the Company or FCB, if its Board of Directors so
determines by a vote of a majority of the members of its entire Board, in the
event (i) the approval of any Governmental Authority required for consummation
of the Merger and the other transactions contemplated by this Agreement shall
have been denied by final nonappealable action of such Governmental Authority or
(ii) the stockholder approval required by Section 7.01(a) herein is not obtained
at the Company Meeting.
(e) FAILURE TO RECOMMEND. At any time prior to the Company Meeting, by FCB
if the Company Board shall have failed to make its recommendation referred to in
Section 6.02, withdrawn such recommendation or modified or changed such
recommendation in a manner adverse in any respect to the interests of FCB.
(f) FCB STOCK. By the Company, if the Company Board determines by a vote
of a majority of the members of the entire Company Board if the FCB Closing
Average is less than $12.32. If the Company elects to exercise its termination
right pursuant to the immediately preceding sentence, it shall give written
notice to FCB no later than the end of the first Business Day following the
Determination Date. Prior to the Effective Date, FCB shall have the option of
adjusting the Exchange Ratio to equal the product obtained by multiplying
(i) the quotient obtained by dividing (A) $8.00 by (B) the FCB Closing Average
and (ii) 0.85. If FCB makes an election contemplated by the preceding sentence,
it shall give prompt written notice of such election and the revised Exchange
Ratio, whereupon no termination shall have occurred pursuant to this
Section 8.01(f) and this Agreement shall remain in effect in accordance with its
terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to the "Exchange Ratio" shall thereafter be deemed
to refer to the Exchange Ratio as adjusted pursuant to this Section 8.01(f).
8.02 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article VIII,
no party to this Agreement shall have any liability or further obligation to any
other party hereunder except (i) as set forth in Section 9.01 and (ii) that
termination will not relieve a breaching party from liability for any breach of
this Agreement prior to such termination.
ARTICLE IX
MISCELLANEOUS
9.01 SURVIVAL. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time (other than
Sections 6.10 and 6.11 and this Article IX, which shall survive the Effective
Time) or the termination of this Agreement if this Agreement is terminated prior
to the Effective Time (other than Sections 6.03(b), 6.05(c), 8.02, and this
Article IX, which shall survive such termination).
9.02 WAIVER; AMENDMENT. Prior to the Effective Time, any provision of this
Agreement may be (i) waived by the party benefitted by the provision, or
(ii) amended or modified at any time, by an Agreement in writing between the
parties hereto executed in the same manner as this Agreement, except that after
the Company Meeting, this Agreement may not be amended if it would violate the
CGCL or the PBCL or reduce the consideration to be received by the Company
shareholders in the Merger.
9.03 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
Annex A-30
<PAGE>
9.04 GOVERNING LAW. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of California applicable to contracts
made and to be performed entirely within such State (except to the extent that
mandatory provisions of Federal law are applicable).
9.05 EXPENSES. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby.
9.06 NOTICES. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
If to the Company, to:
Professional Bancorp, Inc.
606 Broadway
Santa Monica, California 90401
Attention: Gene F. Gaines
Facsimile: (310) 458-4508
With a copy to:
Horgan, Rosen, Beckham & Coren
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365-4335
Attention: Gary M. Horgan
Facsimile: (818) 340-6190
If to First Community Bancorp, to:
6110 El Tordo
Rancho Santa Fe, California 92067
Attention: James A. Boyce
Facsimile: (858) 756-2980
With a copy to:
Sullivan & Cromwell
1888 Century Park East, Suite 2100
Los Angeles, California 90067-1725
Attention: Stanley F. Farrar
Facsimile: (310) 712-8800
9.07 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and this Agreement supersedes any and all other
oral or written agreements heretofore made. Except for Section 6.11, nothing in
this Agreement expressed or implied, is intended to confer upon any person,
other than the parties hereto or their respective successors, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
9.08 INTERPRETATION; EFFECT. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of, or
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and are not part of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
* * *
Annex A-31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
PROFESSIONAL BANCORP, INC.
By: *
---------------------------------
Name: Gene Gaines
Title: President and CEO
FIRST COMMUNITY BANCORP
By: *
---------------------------------
Name: Arnold Hahn
Title: Chief Financial Officer
Annex A-32
<PAGE>
ANNEX B
August 7, 2000
Board of Directors
Professional Bancorp, Inc.
606 Broadway
Santa Monica, CA
Attention: Mr. Gene Gaines
Chairman, President and Chief Executive Officer
Directors:
You have requested our opinion as to the fairness, from a financial point of
view, of the merger consideration being paid to the holders of the outstanding
shares of common stock, par value $0.008 per share (the "Professional Shares"),
of Professional Bancorp Inc. ("Professional") pursuant to the Agreement and Plan
of Merger, dated as of August 7, 2000 (the "Merger Agreement"), between
Professional and First Community Bancorp ("First Community").
Pursuant to the Merger Agreement, Professional will merge with and into
First Community (the "Merger") and each Professional Share issued and
outstanding immediately prior to the Merger Effective Date (subject to certain
exceptions) shall be cancelled and extinguished and converted into the right to
receive, at the election of each holder of Professional Shares, either $8.00 in
cash or 0.550 shares of First Community, per Professional Share, subject to a
maximum aggregate limitation on the amount of First Community Shares of 50% (the
"Merger Consideration"). It is our understanding that the merger will be
accounted for using the purchase method under generally accepted accounting
principles.
The investment banking business of Endicott Financial Advisors, L.L.C.
("Endicott") includes the valuation of financial institutions and their
securities in connection with mergers and acquisitions and other corporate
transactions.
In connection with this opinion, we have reviewed and considered, among
other things: (a) the Merger Agreement; (b) audited consolidated financial
statements and management's discussion and analysis of the financial condition
and results of operations for Professional for the three fiscal years ended
December 31, 1999; (c) audited consolidated financial statements and
management's discussion and analysis of the financial condition and results of
operations for First Community for the three fiscal years ended
December 31,1999; (d) unaudited consolidated financial statements and
management's discussion and analysis of the financial condition and results of
operations for each of Professional and First Community for the quarters ended
March 31, 2000 and June 30, 2000; (e) financial analyses and forecasts for
Professional and for First Community; (f) the views of senior management of
Professional and First Community of their respective past and current business
operations, results thereof, financial condition and future prospects;
(g) certain reported price and trading activity for Professional, including a
comparison of certain financial and stock market information with similar
information for certain other companies the securities of which are publicly
traded; (h) the financial terms of recent business combinations in the banking
industry; (i) the pro forma impact of the transaction on First Community;
(j) the current market environment generally and the banking environment in
particular; and (k) such other information, financial studies, analyses and
investigations and financial, economic and market criteria as we considered
relevant.
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all of the financial
information, analyses and other information reviewed by and discussed with us.
We have not made any independent evaluation or appraisal of the specific assets,
the collateral securing assets or the liabilities of Professional or First
Community or any of their
<PAGE>
subsidiaries, or the collectibility of any such assets (relying, where relevant
on the analyses and estimates of Professional and First Community), nor have we
been furnished with any such appraisals. With respect to the financial forecast
and cost savings information reviewed with Professional and First Community
management, we have assumed that they reflect the best currently available
estimates and judgments of the senior management of Professional and First
Community as to the future performance of Professional and First Community. We
have also assumed that there has been no material change in Professional's or
First Community's assets, financial condition, results of operations, business
or prospects since the date of the last financial statements made available to
us. We have also assumed without independent verification that the aggregate
consolidated allowance for loan losses for Professional and First Community were
adequate to cover such losses. We have also assumed that obtaining all
regulatory and other approvals and third-party consents required for
consummation of the merger will not have an adverse impact on First Community or
on the anticipated benefits of the merger. We have further assumed that the
conditions precedent in the Merger Agreement are not waived.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We have not undertaken to reaffirm or revise
this opinion or otherwise comment upon any events occurring after the date
hereof.
We have acted as Professional's financial advisor in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon consummation of the Merger. We will also receive a fee for
rendering this opinion.
It is understood that this opinion is for the information of the Board of
Directors of Professional and, except for inclusion in its entirety in a proxy
statement required to be circulated to shareholders in connection with the
Merger, may not be quoted, referred to or reproduced at any time or in any
manner, without Endicott's written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration is fair from a financial point of view to
the holders of Professional Shares.
Very Truly Yours,
ENDICOTT FINANCIAL ADVISORS, L.L.C.
Annex B-2
<PAGE>
ANNEX C
DISSENTERS' RIGHTS UNDER SUBCHAPTER D OF
CHAPTER 15 OF THE PENNSYLVANIA BUSINESS
CORPORATION LAW OF 1988, AS AMENDED
1571 APPLICATION AND EFFECT OF SUBCHAPTER.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this 1 part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on transfer
of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting
at which a plan specified in any of section 1930, 1931(d), 1932(c) or
1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or
solely into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles,
the plan or the terms of the transaction entitle all shareholders of the
class to vote thereon and require for the adoption of
Annex C-1
<PAGE>
the plan or the effectuation of the transaction the affirmative vote of a
majority of the votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the
other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter regardless
of the fact, if it be the case, that the acquisition was accomplished by the
issuance of voting shares of the corporation to be outstanding immediately
after the acquisition sufficient to elect a majority or more of the
directors of the corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholder to dissenters rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute, if a
proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value of
their shares by complying with the terms of this subchapter, and
(2) A copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
1572 DEFINITIONS. The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects, taking into account all
relevant factors, but excluding any appreciation or depreciation in anticipation
of the corporate action.
Annex C-2
<PAGE>
"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors, including the average
rate currently paid by the corporation on its principal bank loans.
1573 RECORD AND BENEFICIAL HOLDERS AND OWNERS.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a business
corporation who is not the record holder may assert dissenters rights with
respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
1574 NOTICE OF INTENTION TO DISSENT. If the proposed corporate action is
submitted to a vote at a meeting of shareholders of a business corporation, any
person who wishes to dissent and obtain payment of the fair value of his shares
must file with the corporation, prior to the vote, a written notice of intention
to demand that he be paid the fair value for his shares if the proposed action
is effectuated, must effect no change in the beneficial ownership of his shares
from the date of such filing continuously through the effective date of the
proposed action and must refrain from voting his shares in approval of such
action. A dissenter who fails in any respect shall not acquire any right to
payment of the fair value of his shares under this subchapter. Neither a proxy
nor a vote against the proposed corporate action shall constitute the written
notice required by this section.
1575 NOTICE TO DEMAND PAYMENT.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. The time set for receipt of the
demand and deposit of certificated shares shall be not less than 30 days from
the mailing of the notice.
1576 FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC.
Annex C-3
<PAGE>
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares. If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectuation of the proposed
corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
1577 RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES.
(a) Failure to effectuate corporate action. Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment. If the corporation does not remit the amount of
its estimate of the fair value of the shares as provided by subsection (c), it
shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenter had after
making demand for payment of their fair value.
1578 ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES.
(a) General rule. If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) relating to payment of fair value of shares) and the
dissenter believes that the
Annex C-4
<PAGE>
amount stated or remitted is less than the fair value of his shares, he may send
to the corporation his own estimate of the fair value of the shares, which shall
be deemed a demand for payment of the amount or the deficiency.
(b) Effect of failure to file estimate. Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
1579 VALUATION PROCEEDINGS GENERALLY.
(a) General rule. Within 60 days after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares); If any demands for
payment remain unsettled, the business corporation may file in court an
application for relief requesting that the fair value of the shares be
determined by the court.
(b) Mandatory joinder of dissenters. All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. If the corporation
fails to file an application as provided in subsection (a), any dissenter who
made a demand and who has not already settled his claim against the corporation
may do so in the name of the corporation at any time within 30 days after the
expiration of the 60-day period. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an application shall
be paid the corporation's estimate of the fair value of the shares and no more,
and may bring an action to recover any amount not previously remitted.
1580 COSTS AND EXPENSES OF VALUATION PROCEEDINGS.
(a) General rule. The costs and expenses of any proceeding under
section 1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against the business corporation
except that any part of the costs and expenses may be apportioned and assessed
as the court deems appropriate against all or some of the dissenters who are
parties and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with
Annex C-5
<PAGE>
the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
Annex C-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Five of First Community Bancorp's articles of incorporation provides
that First Community Bancorp shall eliminate the liability of its directors for
monetary damages to the fullest extent permissible under California law. Article
Five also provides that First Community Bancorp is authorized to provide
indemnification for its agents. If agents of First Community Bancorp breach a
duty to First Community Bancorp and its shareholders, then Article Five
authorizes First Community Bancorp, to the extent permissible under California
Law, to indemnify such agents in excess of the indemnification expressly
permitted by Section 317 of the California General Corporation Law. Section 317
sets forth the provisions pertaining to the indemnification of corporate
"agents." For purposes of this law, an agent is any person who is or was a
director, officer, employee or other agent of a corporation, or is or was
serving at the request of First Community Bancorp in such capacity with respect
to any other corporation, partnership, joint venture, trust or other enterprise.
Section 317 mandates First Community Bancorp's indemnification of agents where
the agent's defense is successful on the merits. In other cases, Section 317
allows First Community Bancorp to indemnify agents for expenses, including
amounts paid to defend, settle or otherwise dispose of a threatened or pending
action, if the indemnification is authorized by (1) a majority vote of a quorum
of First Community Bancorp's board of directors consisting of directors who are
not party to the proceedings; (2) approval of the shareholders, with the shares
owned by the person to be indemnified not being entitled to vote thereon; or
(3) the court in which the proceeding is or was pending upon application by
designated parties. Under certain circumstances, First Community Bancorp can
indemnify an agent even when the agent is found liable. Section 317 also allows
First Community Bancorp to advance expenses to its agents for certain actions
upon receiving an undertaking by the agent that he or she will reimburse First
Community Bancorp if the agent is found liable.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
First Community Bancorp, pursuant to the foregoing provisions or otherwise,
First Community Bancorp understands that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. If a claim for indemnification against such
liabilities (other than the payment by First Community Bancorp of expenses
incurred or paid by a director, officer or controlling person of First Community
Bancorp in the successful defense of any action, suit or proceeding)is asserted
by such director, officer or controlling person in connection with the
securities being registered, First Community Bancorp will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against a public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. An Exhibit Index, containing a list of all exhibits filed with
this Registration Statement, is included beginning on page II-3.
(b) FINANCIAL STATEMENT SCHEDULES. Not applicable.
(c) REPORT, OPINION OR APPRAISAL. Not applicable.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) that, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the registration statement shall be deemed
to be a new
II-1
<PAGE>
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) that prior to any public reoffering of the securities registered hereunder
through the use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(3) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933, as amended, and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(4) that insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described under Item 20 above,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) to respond to requests for information that is incorporated by reference
into the Proxy Statement-Prospectus pursuant to Items 4, 10(b), 11 or 13 of
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the Effective Date of the registration statement through the date of
responding to the request.
(6) to supply by means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved therein, that was not
the subject of and included in the registration statement when it became
effective.
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
2.1* Agreement and Plan of Merger by and between First Community
Bancorp and Professional Bancorp, Inc., Date as of
August 7, 2000.
5.1** Opinion of Sullivan & Cromwell.
8.1** Opinion of Sullivan & Cromwell as to certain federal income
tax matters.
8.2 Opinion of Jeffer, Mangels, Butler & Marmaro LLP as to
certain federal income tax matters.
23.1 Consent of KPMG LLP relating to First Community.
23.2 Consent of KPMG LLP relating to Professional Bancorp, Inc.
23.3 Consent of Moss Adams LLP relating to Professional Bancorp,
Inc.
23.4** Consent of Sullivan & Cromwell (included in Exhibits 5.1 and
8.1).
23.5** Consent of Jeffer, Mangels, Butler & Marmaro LLP (included
in Exhibit 8.2).
99.1 Form of Professional Bancorp, Inc. proxy.
</TABLE>
------------------------
* Included as Annex A to the proxy statement/prospectus.
** To be filed by amendment.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rancho Santa Fe, State of
California on September 28, 2000.
<TABLE>
<S> <C> <C>
FIRST COMMUNITY BANCORP
By: /s/ MATTHEW P. WAGNER
-----------------------------------------
Name: Matthew P. Wagner
Title: President and Chief Executive
Officer
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Arnold C. Hahn, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign and
file any and all amendments (including post-effective amendments) to this
Registration Statement, with all exhibits thereto, and other documents in
connection therewith, with the SEC, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on September 28, 2000:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MATTHEW P. WAGNER
------------------------------------------- President and Chief Executive Officer
Matthew P. Wagner (Principal Executive Officer)
/s/ ARNOLD C. HAHN
------------------------------------------- Executive Vice President and Chief Financial
Arnold C. Hahn Officer (Principal Financial Officer)
/s/ JOHN M. EGGEMEYER
------------------------------------------- Director and Chairman of the Board
John M. Eggemeyer
/s/ ARNOLD C. HAHN
------------------------------------------- Executive Vice President and Chief Financial
Arnold C. Hahn Officer (Principal Accounting Officer)
/s/ WILLIAM T. POWERS
------------------------------------------- Director and President and Chief Executive
William T. Powers Officer of First Community Bank of the Desert
/s/ ROBERT A. SCHOELLHORN
------------------------------------------- Director
Robert A. Schoellhorn
/s/ DALE E. WALTER
------------------------------------------- Director
Dale E. Walter
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DAVID S. WILLIAMS
------------------------------------------- Director
David S. Williams
/s/ JAMES A. BOYCE
------------------------------------------- Director and President and Chief Executive
James A. Boyce Officer of Rancho Santa Fe National Bank
/s/ ROBERT E. HERRMANN
------------------------------------------- Director and Secretary
Robert E. Herrmann
/s/ PAUL I. STEVENS
------------------------------------------- Director
Paul I. Stevens
/s/ ROBERT A. STINE
------------------------------------------- Director
Robert A. Stine
</TABLE>
II-5
