<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1995 COMMISSION FILE NO. 0-11223
PROFESSIONAL BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
PENNSYLVANIA 95-3701137
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
606 BROADWAY, SANTA MONICA CA 90401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 458-1521
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
COMMON STOCK, $.008 PAR VALUE 1,131,859
Class Outstanding on March 31, 1995
</TABLE>
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Balance Sheets at March 31, 1995 and December 31, 1994................. 1
Consolidated Statements of Operations for the three months ended March 31, 1995 and
1994............................................................................. 2
Consolidated Statement of Cash Flows for the three months ended March 31, 1995...... 3
Notes to Consolidated Financial Statements.......................................... 4
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 6
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8K............................................. 11
Exhibit 11
</TABLE>
i
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
Cash and due from banks:
Noninterest bearing.......................................... $ 22,662,735 $ 26,602,778
Interest bearing............................................. 41,679 30,411
Federal funds sold............................................. 31,100,000 10,500,000
-------------- -----------------
Cash and cash equivalents...................................... 53,804,414 37,133,189
Held-to-maturity securities (market value of $115,143,000 and
$111,868,000, respectively).................................. 118,742,079 120,734,590
Loans, net of allowance for loan losses of $1,019,000 and
$983,000, respectively....................................... 98,791,686 102,679,810
-------------- -----------------
Securities available-for-sale (market value of $37,346,000 and
$47,003,000, respectively)................................... 37,323,238 47,790,359
Less: Valuation of securities available-for-sale............. 23,243 (787,438)
-------------- -----------------
Net securities available-for-sale............................ 37,346,481 47,002,921
Premises and equipment, net.................................... 1,624,546 1,648,731
Accrued interest receivable and other assets................... 5,491,180 5,805,579
-------------- -----------------
Total................................................ $315,800,386 $ 315,004,820
============ ==============
LIABILITIES
Deposits:
Demand, non-interest bearing................................. 101,076,315 115,198,311
Demand, interest-bearing..................................... 15,681,119 16,797,279
Savings and money market..................................... 110,851,802 107,674,530
Time certificates of deposit................................. 65,606,382 53,961,138
-------------- -----------------
Total deposits................................................. 293,215,618 293,631,258
Convertible Notes.............................................. 4,797,685 4,770,984
Accrued interest payable and other liabilities................. 1,375,760 1,170,460
-------------- -----------------
Total liabilities.............................................. 299,389,063 299,572,702
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares authorized;
1,131,859 issued and outstanding............................. 10,379 10,379
Additional paid-in capital..................................... 11,322,468 11,322,468
Retained earnings.............................................. 6,057,552 5,554,540
Treasury stock (165,455 and 81,000) and shares subject to
repurchase
(0 and 84,455)............................................... (992,729) (992,729)
Valuation of securities available-for-sale, net................ 13,653 (462,540)
-------------- -----------------
Total shareholders' equity..................................... 16,411,323 15,432,118
-------------- -----------------
Total................................................ $315,800,386 $ 315,432,118
============ ==============
</TABLE>
1
<PAGE> 4
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED MARCH 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
INTEREST INCOME:
Loans (including fees).............................................. $2,327,264 $2,320,884
Investment securities............................................... 2,593,032 1,438,144
Federal funds sold and securities purchased under agreements to
resell............................................................ 130,368 27,264
Interest bearing deposits in other banks............................ -- --
--------- ---------
TOTAL INTEREST INCOME............................................... 5,050,664 3,786,292
INTEREST EXPENSE:
Deposits............................................................ 1,142,260 710,002
Convertible notes................................................... 122,188 --
Federal funds purchased and securities sold under agreement to
repurchase........................................................ 183,549 101,636
Stock repurchase agreement.......................................... -- 33,627
--------- ---------
TOTAL INTEREST EXPENSE.............................................. 1,447,997 845,265
--------- ---------
NET INTEREST INCOME................................................. 3,602,667 2,941,027
Less: Provision for loan losses..................................... (62,000) (80,000)
--------- ---------
Net interest income after provision for loan losses................. 3,540,667 2,861,027
OTHER OPERATING INCOME:
Securities transactions -- net:
Available-for-sale................................................ 25,732 6,517
Trading........................................................... -- (180,260)
Merchant discount................................................... 48,988 63,095
Mortgage banking fees............................................... 3,400 44,112
Service charges on deposits......................................... 153,020 141,717
Other income........................................................ 122,118 121,688
--------- ---------
TOTAL OTHER OPERATING INCOME........................................ 353,258 196,869
--------- ---------
OTHER OPERATING EXPENSES:
Salaries and employee benefits...................................... 1,525,703 1,282,114
Occupancy........................................................... 343,083 352,277
Professional services............................................... 183,298 183,551
Legal fees.......................................................... 161,991 166,655
FDIC assessment..................................................... 154,628 152,416
Furniture and equipment............................................. 143,206 123,575
Other assessment.................................................... 70,519 57,422
Telephone........................................................... 59,536 51,740
Office supplies..................................................... 59,231 50,860
Termination of caps on interest rate contract....................... -- 352,040
Other expense....................................................... 374,419 377,815
--------- ---------
TOTAL OTHER OPERATING EXPENSES...................................... 3,075,614 3,150,465
--------- ---------
Income before taxes................................................. 818,311 (92,569)
Provision for income taxes.......................................... 315,300 (37,951)
--------- ---------
NET INCOME.......................................................... $ 503,011 $ (54,618)
========= =========
Earnings per share:
Primary........................................................... $ 0.34 $ 0.00
Fully Diluted..................................................... $ 0.32 $ 0.00
</TABLE>
2
<PAGE> 5
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
MARCH 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)........................................... $ 503,011 $ (54,618)
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization.......................... 129,923 120,902
Provision for loan losses.............................. 62,000 80,000
Valuation of interest rate exchange agreement.......... -- 352,040
Credit for deferred taxes.............................. -- (74,183)
Gain on securities available-for-sale.................. (25,733) (6,517)
Gain on trading securities............................. -- (11,347)
Decrease in deferred loan fees, net.................... (12,108) (10,350)
Purchases of trading account securities................ -- (8,897,969)
Sales of trading account securities.................... -- 6,731,116
Valuation of trading account securities................ -- 191,637
Amortization of convertible note expense............... 26,701 --
Amortization of interest on stock repurchase
agreement........................................... -- 33,627
Decrease (Increase) in accrued interest receivable and
other assets........................................ (20,088) (392,453)
Increase (Decrease) in accrued interest payable and
other liabilities................................... 205,300 (621,249)
Net amortization of premiums and discounts on
securities
held-to-maturity.................................... 2,457 249,184
Net amortization of premiums and discounts on
securities available-for-sale....................... (148,507) 1,192
------------ ------------
Net cash provided (used) by operating activities............ 722,956 (2,308,988)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held-to-maturity..... 1,990,054 4,644,734
Proceeds from maturities of securities available-for-sale... 616,208 149,620
Proceeds from sales of securities available-for-sale........ 10,025,153 4,940,442
Purchases of assets available-for-sale...................... -- (5,000,000)
Principal disbursed on loans, net........................... 3,838,232 4,617,989
Purchase of bank premises and equipment, net................ (105,738) 113,598
------------ ------------
Net cash provided by investing activities................... 16,363,909 9,466,383
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts........ (12,060,884) (12,528,236)
Net proceeds from issuing certificates of deposit........... 11,645,244 1,717,911
Net proceeds from repurchase agreements..................... -- 6,880,000
Other....................................................... -- 4,953
------------ ------------
Net cash used by financing activities....................... (415,640) (3,925,372)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................... 16,671,225 3,232,023
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................. 37,133,189 32,911,337
------------ ------------
CASH AND CASH EQUIVALENTS, MARCH 31,.......................... $ 53,804,414 $ 36,143,360
============ ============
Supplemental disclosure of noncash items:
Valuation of securities available-for-sale.................. $ 13,653 $ --
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 6
PROFESSIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The unaudited consolidated financial statements have been prepared in
accordance with the instructions of Form 10-Q and therefore do not include all
footnotes normally required for complete financial disclosure. While
Professional Bancorp, Inc. (the "Company") believes that the disclosures
presented are sufficient to make the information not misleading, reference may
be made to the Company's Annual Report on Form 10-K for the year ended December
31, 1994.
The accompanying consolidated balance sheets, statements of operations and
statement of cash flows reflect all material adjustments necessary for fair
presentation for the Company's financial position of March 31, 1995 and December
31, 1994 and the results of operations for the three months ended March 31, 1995
and 1994. All such adjustments are of a normal recurring nature.
NOTE 2 -- EARNINGS PER SHARE
Earnings per share are based on the number of common shares outstanding
during each year and the assumed exercise of dilutive employee stock options
(less the number of treasury shares assumed to be purchased using the average
market price of the Company's common stock). Earnings per share for the three
month periods ending March 31, 1995 and 1994 are based on the modified treasury
stock method. The modified treasury stock method counts all outstanding warrants
and stock options as outstanding and then assumes the proceeds are used to
repurchase up to 20% of the outstanding shares at the average market price for
the period. The remaining proceeds are then assumed to be invested in U.S.
Treasury securities yielding 6.0% for the three months ended March 31, 1995 and
1994. Primary earnings per share are based upon 1,638,776 and 1,711,340 shares
for the three months ended March 31, 1995 and 1994, respectively. Fully diluted
earnings per share are based upon 2,049,490 and 1,711,340 shares for the three
months ended March 31, 1995 and 1994, respectively. Common shares exclude 81,000
of weighted average treasury shares for 1994.
NOTE 3 -- INTEREST RATE EXCHANGE AGREEMENTS
In November 1993, First Professional Bank (the "Bank") entered into an
interest rate exchange agreement with an investment banking institution for a
notional (principal) amount of $15,000,000. The effective date of the swap was
May 26, 1994 and covers a period of five years. Under the terms of the basic
swap, the Company's subsidiary, First Professional Bank, N.A., would pay a rate
of prime less 190 basis points while receiving the three month London Interbank
Offering Rate (LIBOR). The swap originally included limits or caps on the three
month LIBOR to be received by the Bank, requiring mark-to-market accounting with
unrealized gains or losses included in earnings. These limits or caps were
discontinued during the second quarter of 1994 and the Bank recorded a pre-tax
loss of $385,000. Of this loss, $352,000 was recognized during the first quarter
of 1994, with the remaining $33,000 recognized during the second quarter.
NOTE 4 -- LOANS AND THE RELATED ALLOWANCE FOR LOAN LOSSES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114 ("Statement No. 114"). Under
the provisions of Statement No. 114, a loan is considered impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. Statement No. 114 requires creditors to measure impairment of a loan
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, or 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, a
creditor shall recognize an impairment by creating a valuation allowance with a
corresponding charge to provision for loan losses expense. This statement also
applies to restructured loans and
4
<PAGE> 7
PROFESSIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
changes the definition of in-substance foreclosures to apply only to loans where
the creditor has taken physical possession of the borrower's assets.
In October 1994, the FASB issued Statement No. 118, Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures, that amends
Statement 114 and eliminates its provisions regarding how a creditor should
report income on an impaired loan. As a result of the amendment, creditors may
now continue to use existing methods for recognizing income on impaired loans
including methods that are required by certain banking regulators.
The Company adopted Statements 114 and 118 on January 1, 1995.
5
<PAGE> 8
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company posted earnings of 503,000 during the first three months of
1995 compared to a loss of $55,000 during the first three months of 1994. The
first quarter of 1995 included a gain from securities transactions of $26,000
while the first quarter of 1994 included a loss from securities transactions of
$174,000 and a negative mark-to-market valuation of an interest rate swap
structure of $352,000 (see Note 3). Pre-tax earnings excluding securities
transactions and the swap valuation totaled $793,000 for the first quarter of
1995 compared to $433,000 for the first quarter of 1994.
Deposits have historically declined during the first quarter and decreased
0.1% to $293.2 million at March 31, 1995 compared to $293.6 million at December
31, 1994. However, deposits were higher at March 31, 1995 by 27.3% or $62.9
million compared to March 31, 1994. Savings and money market accounts continued
to represent the largest category of deposits comprising 37.8% of total deposits
at March 31, 1995 compared to 36.7% at December 31, 1994 and 42.9% at March 31,
1994. Time certificates of deposit (TCD's) comprised 22.4% of deposits at March
31, 1995 compared to 18.4% at December 31, 1994 and 13.3% of deposits at March
31, 1994. Noninterest bearing deposits continued to form a solid deposit base
comprising 34.5% of deposits at March 31, 1995 compared to 39.2% at December 31,
1994 and 38.0% at March 31, 1994.
The Company continued to experience a low level of loan demand as gross
loans totaled $99,910,000 at March 31, 1995 compared to $103,745,000 at December
31, 1994 for an annual rate of decline of 15%. The decrease was due primarily to
a decrease in commercial loans. Management expects minimal loan demand during
the second quarter of 1995.
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>
MARCH 31, DECEMBER 31,
---------------------- -----------------------
1995 1994
---------------------- -----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------- ---------- -------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial............................. $78,330 78.4% $ 83,239 80.2%
Real estate secured
Commercial........................... 9,945 10.0 8,863 8.6
------- ----- -------- -----
Subtotal..................... 88,275 88.4 92,102 88.8
Equity lines of credit................. 7,229 7.2 7,195 6.9
Installment............................ 2,008 2.0 2,119 2.1
Other lines of credit.................. 2,155 2.2 2,072 2.0
Lease financing........................ 214 0.2 257 0.2
------- ----- -------- -----
Total........................ $99,881 100.0% $103,745 100.0%
</TABLE>
The Bank does not originate mortgage loans or accept trust deeds on
property outside the State of California as primary collateral for a loan. At
March 31, 1995, nonperforming loans (loans put on nonaccrual status) totaled
$2,609,000 or 2.61% of total loans. At December 31, 1994, nonperforming loans
totaled $2,663,000 or 2.57% of total loans. At March 31, 1995, nonperforming
assets (nonperforming loans plus Other Real Estate Owned) totaled $2,715,000 or
.86% of total assets and 2.72% of total loans. At December 31, 1994,
nonperforming assets totaled $2,769,000 or .88% of total assets and 2.67% of
total loans. Additionally, accruing loans 90 days or more past due increased to
$1,497,000 at March 31, 1995 compared to $964,000 at December 31, 1994. The
increase was due primarily to delays in loan documentation for loan renewals.
The Company implemented Statement of Financial Standards No. 114
"Accounting by Creditors for Impairment of a Loan" (Statement 114) and Statement
of Financial Standards No. 118 "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures" (Statement 118) effective January 1,
1995. Under the provisions of Statement 114, a loan is considered impaired when,
based on current
6
<PAGE> 9
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Statement 114 requires creditors to measure impairment of a loan based on the
present value of future cash flows discounted at the loan's effective interest
rate (or, alternatively, the observable market price of the loan or the fair
value of the collateral). If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to bad debt expense.
This statement also applies to restructured loans and eliminates the requirement
to classify loans that are in-substance foreclosures as foreclosed assets except
for loans where the creditor has physical possession of the underlying
collateral but not legal title. Statement No. 118 amended Statement 114 and
eliminated its provisions regarding how a creditor should report income on an
impaired loan. As a result of the amendment, creditors may now continue to use
existing methods for recognizing income on impaired loans, including methods
that are required by certain banking regulators. Statement 118 also clarified
the disclosure requirements of Statement 114. The adoption of Statement 114, as
amended by Statement 118, had no material impact on the Company's consolidated
financial statements as the Company's existing policy of measuring loan
impairment is consistent with methods prescribed in these standards.
For the Company, impaired loans generally include loans classified as
nonaccrual and troubled debt restructurings. At March 31, 1995, the Company had
no troubled debt restructurings.
The Company had approximately $2.6 million in impaired loans as of March
31, 1995. The carrying value of impaired loans for which there is a related
allowance for credit losses was $743,000, with the amount of allowance for
credit losses allocated to these loans of $366,000. There were $1,857,000 in
impaired loans for which there was no related allowance for credit losses. The
average recorded investment in impaired loans during the first three months of
1995 was $2.6 million with no interest income recorded during the period.
The Bank continued to actively manage its liquidity and on March 31, 1995,
the Bank sold $31.1 million in Federal funds. In addition, at March 31, 1995 the
Bank had approximately $37.3 million market value available in the Bank's Assets
available-for-sale account.
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 less goodwill) of 3.0 percent 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 percent plus an
additional cushion of 100 to 200 basis points. The OCC has not advised the Bank
of any specific minimum Tier 1 capital leverage ratio applicable to it.
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 percent 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 percent plus an additional cushion of 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.
Risk-based capital standards were implemented on December 31, 1990. Since
December 31, 1992, banking organizations are expected to meet a minimum ratio
for qualifying total capital to risk-weighted assets of 8.00%, 4.00% of which
must be Tier 1 capital.
7
<PAGE> 10
The following tables present the capital ratios for a bank holding company
and bank, and various federal regulatory capital ratios of the Company and the
Bank at March 31, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
COMPANY
----------------------------- MINIMUM WELL-
MARCH 31, DECEMBER 31, CAPITAL CAPITALIZED
1995 1994 RATIOS RATIOS
---------- ------------ -------- -------------
<S> <C> <C> <C> <C>
CAPITAL RATIOS:
Tier 1 risk-based............ 12.13% 11.91% 4.00% 6.00%
Total risk-based............. 17.14 16.96 8.00 10.00
Leverage..................... 5.30 5.03 4.00 5.00
</TABLE>
<TABLE>
<CAPTION>
BANK
----------------------------- MINIMUM WELL-
MARCH 31, DECEMBER 31, CAPITAL CAPITALIZED
1995 1994 RATIOS RATIOS
---------- ------------ -------- -------------
<S> <C> <C> <C> <C>
CAPITAL RATIOS:
Tier 1 risk-based............ 15.74% 15.63% 4.00% 6.00%
Total risk-based............. 16.50 16.38 8.00 10.00
Leverage..................... 6.84 6.58 4.00 5.00
</TABLE>
- ---------------
(1) The minimum required by the FRB is 3%; for all but the most highly-rated
bank holding companies, the FRB expects a leverage ratio of 3% plus 100 to
200 basis points.
At March 31, 1995 the Company and the Bank exceeded all applicable federal
capital standards. Additionally, the Company and the Bank exceeds the required
minimum ratios for "well-capitalized" institutions. The Bank has approximately
$5,694,000 of capital in excess of the required minimum ratios for
"well-capitalized" institutions while the Company has approximately $919,000 of
capital in excess of the required minimum ratios for "well-capitalized
institutions. The Company does not currently intend to raise additional capital.
RESULTS OF OPERATIONS
Earnings for the three months ended March 31, 1995 increased by $558,000 to
$503,000 compared to a net loss of $55,000 for the same period in 1994, Earnings
per share, as calculated using the modified treasury stock method, increased to
$0.32 per fully diluted share compared to ($0.00) per share for the first
quarter of 1994. Adjusting for securities transactions and swap valuation,
pre-tax earnings ("Core Earnings") totaled $793,000 for the first quarter of
1995 compared to $433,000 for the first quarter of 1994. Core earnings increased
due to an improved net interest margin from 4.94% to 5.23% and strong growth in
deposits and earning assets.
Net interest income before provision for credit losses for the three months
ended March 31, 1995 was $3,603,000, an increase of $662,000 (22%) over the
amount recorded during the same period in 1994. The Company's net interest
margin increased to 5.23% for the quarter ended March 31, 1995 from 4.94% for
the quarter ended March 31, 1994. The net interest margin improved primarily due
to the growth in deposits which were then placed in higher yielding investment
securities. The increases in net interest-earning assets and interest-bearing
liabilities from the first quarter of 1994 to the first quarter of 1995 were due
to the growth of the Company. Limiting the increase in interest income as
interest rates rise are two interest rate swaps totaling $40 million notional
(principal) amount. These swaps were initiated in January 1993 in order to lock
in a specific return on the Company's variable rate loan portfolio. Under the
terms of the two swaps, the Company receives a fixed rate of 7.215% for three
years ending January 1996, while the Company pays the prime rate over the same
period of time. At the prime rate of 9% in effect beginning February 1, 1995,
the expense of the two swaps approximates $60,000 per month. From January 1993
to March 31, 1995, the two swaps have increased net interest income by $267,000
including $119,000 during the first three months of 1994. The two swaps
decreased net interest income by $161,000 during the first quarter of 1995.
8
<PAGE> 11
In November 1993, the Bank entered into a swap with a notional amount of
$15,000,000. the effective date of the swap is May 26, 1994 and it 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 $385,000 was recorded. Net
interest income from May 1994 to March 31, 1995 was reduced by the swap by
$110,000 including $34,000 during the first quarter of 1995. At the date of this
report, the Company is paying 7.10% and receiving 6.1875%.
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. The Company has less flexibility in lowering the rates paid
on deposits and lower interest rates tend to reduce the Company's net interest
margin. At March 31, 1995, the Company was a party to three interest rate floor
agreements, all of which were entered into during December 1994 and January
1995. The agreements entitle the Company to receive from counterparties on a
monthly basis the amounts, if any by which the one-month LIBOR rate falls below
6%. The floor agreements are for a period of three years on a notional amount of
$60 million. The average premium paid for the floor agreements was approximately
20 basis points ($120,000) and is being amortized over three years. From
December 1994 to March 31, 1995, net interest income was reduced by the floors
by $5,000 including $4,000 during the first three months of 1995.
The Company has three classifications for securities purchased and
management determines the appropriate classification 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, the securities are classified as
held-to-maturity and are carried at historical cost, adjusted for accretion of
discounts and amortization of premiums. Securities purchased to be held for
indefinite periods of time and not intended to be held to maturity are
classified as available-for-sale and carried at market value with the variance
to book value adjusted for tax and added or subtracted from shareholders'
equity. The valuation on securities available-for-sale does not effect capital
for regulatory purchases. Securities held for indefinite periods of time include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to seasonal funding needs
or changes in interest rates. The Company has also established a trading account
for securities that the Company intends to hold for a short period of time.
Securities placed in the trading account typically are of maturities that differ
from the maturities of securities held-to-maturity. Securities held as trading
assets are stated at market value.
At March 31, 1995 the Company's held-to-maturity portfolio totaled
$118,742,000 compared to $120,735,000 at December 31, 1994 and $89,999,000 at
March 31, 1994. The Company's held-to-maturity portfolio consisted primarily of
Government National Mortgage Association ("GNMA") pass-through securities
including 15 year fixed rate ($30.8 million) and 30 year variable rate ($75.4
million) securities. The fixed rate securities have coupon rates between 7% and
9% and were purchased in 1992 with between four and seven points of premium and
are subject to changes in yield in response to higher or lower levels of
principal prepayments. As of April 1, 1995, the variable rate securities have
current coupon rates between 5.875% and 6.50% and are repriced annually with the
repricing dates of the securities held spread out over the next 12 months. The
coupon rate is based on the 1 year Treasury Bill plus 150 basis points. At March
31, 1995, the yield on the one-year Treasury Bill was 6.48%. As interest rates
rise, the coupon rate will lag market rates as these securities reprice once per
year. In addition, the most the coupon can rise is 100 basis points per year.
These securities have interest rate caps of between 10.0% and 12.5%.
At March 31, 1995 the Company's available-for-sale portfolio totaled $37.3
million compared to $47.0 million at December 31, 1994 and $25.6 million at
March 31, 1994. At March 31, 1995, the Company's available-for-sale portfolio
consisted of the following securities: 1) $4,546,000 of a Collateralized
Mortgage Obligation ("CMO") Premium Amortization Class ("PAC") bond with a 7.50%
coupon and an average life of approximately 3.8 years; 2) $19,966,000 in CMO PAC
bonds with variable rate structures based on one-month LIBOR, $4,401,000 of
which carries a fixed rate of 5% until July 1995; 3) $4,376,000 in a variable
rate FNMA Remic CMO which contains various collateral and is based on the
one-month LIBOR; 4) $3,679,000 in GNMA 30 variable rate pass-through securities;
and 5) a $5,000,000 Treasury Bill maturing in
9
<PAGE> 12
December 1995. Overall, as interest rates rose, the yield on the Company's
investment securities increased from 4.84% during the first three months of 1994
to 6.27% for the first three months of 1995.
Other operating income, excluding securities transactions totaled $328,000
for the first three months of 1995 compared to $371,000 for the same period in
1994. The decrease was due primarily to a reduction in mortgage banking fees
which reflects the decline in mortgage refinancing. The Company's mortgage
banking operations consist solely of a broker function. The Bank, as broker,
packages all of the underwriting criteria and sends the material to a funding
institution. The funding institution then approves or declines the loan and if
approved, subsequently funds the loan directly. The Company earns the points and
any documentation fees charged on the loan but is otherwise not involved in the
loan.
For the first three months of 1995, other operating expenses decreased
$75,000 or 2.4% compared to the same period in 1994. The decrease was due to the
expense of $352,000 incurred during the first quarter of 1994 for the valuation
of interest rate caps which were a feature in an interest rate contract. The
feature was terminated in May, 1994 and an additional expense of $33,000 was
recorded during the second quarter of 1994. Excluding the valuation expense,
other operating expenses increased 9.9% from the first quarter of 1994. This
increase was significantly below the growth rate of assets which increased 24.6%
from the first quarter of 1994 to the first quarter of 1995 and was primarily
concentrated in salaries and employee benefits which increased $243,000 or 19.0%
from the first quarter. A majority of this increase was related to incentive
compensation reflecting the increase in income before taxes.
CURRENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("Statement 121"). Statement 121 provides guidance for
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill related both to assets to be held and used
by an entity and assets to be disposed of. Statement 121 is effective for
financial statements for fiscal years beginning after December 15, 1995.
Although the Bank has not yet adopted Statement 121, management does not expect
such adoption to have a material impact on the Bank's consolidated financial
statement.
The management of the Company is not aware of any trends, events,
uncertainties or recommendations by regulatory authorities that will have or
that are reasonably likely to have material effect on the liquidity, capital
resources or operations of the Company.
10
<PAGE> 13
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended March
31, 1995.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 12, 1995
PROFESSIONAL BANCORP, INC.
(Registrant)
--------------------------------------
Daniel S. Rader
Chief Financial Officer and Treasurer
11
<PAGE> 1
EXHIBIT 11 -- EARNINGS PER SHARE
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Computation for Statement of Operations:
Net earnings per statement of operations used in primary earnings
per share computation:
Net earnings.............................................. $ 503,011 $ (54,618)
Interest on borrowings, net of tax effect, on application of
assumed from exercise of warrants and options in excess of 20%
limitation..................................................... 60,929 53,278
---------- ----------
Net earnings as adjusted.................................. $ 563,940 $ (1,340)
========== ==========
Weighted average number of shares outstanding, as per primary
computation above.............................................. 1,131,859 1,216,314
Net shares issuable from assumed exercise of warrants and options,
as determined by the application of the Modified Treasury Stock
Method......................................................... 506,917 495,026
---------- ----------
Weighted average number of shares outstanding............. 1,638,776 1,711,340
========== ==========
Primary earnings per share.......................................... $ 0.34 $ (0.00)
========== ==========
FULLY DILUTED EARNINGS PER SHARE
Computation for Statement of Operations:
Net earnings per statement of operations used in fully diluted
earnings per share computation:
Net earnings.............................................. $ 503,011 $ (54,528)
Interest and amortized costs on convertible notes, net of tax
effect......................................................... 87,456 --
Interest on borrowings, net of tax effect, on application of
assumed from exercise of warrants and options in excess of 20%
limitation..................................................... 61,077 53,278
---------- ----------
Net earnings as adjusted.................................. $ 651,544 $ (1,250)
========== ==========
Weighted average number of shares outstanding, as per fully
diluted computation above 1,131,859 1,216,314
Net shares issuable from assumed exercise of warrants and options,
as determined by the application of the Modified Treasury Stock
Method......................................................... 506,917 495,026
Weighted average shares issuable from assumed conversion of
convertible notes.............................................. 410,714 --
---------- ----------
Weighted average number of shares outstanding............. 2,049,490 1,711,340
========== ==========
Fully diluted earnings per share.................................... $ 0.32 $ (0.00)
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> MAR-31-1995
<CASH> 22,662,735
<INT-BEARING-DEPOSITS> 41,679
<FED-FUNDS-SOLD> 31,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,346,481
<INVESTMENTS-CARRYING> 118,742,079
<INVESTMENTS-MARKET> 115,143,000
<LOANS> 99,881,000
<ALLOWANCE> 1,019,000
<TOTAL-ASSETS> 315,800,386
<DEPOSITS> 293,215,618
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,375,760
<LONG-TERM> 4,797,685
<COMMON> 10,379
0
0
<OTHER-SE> 16,400,944
<TOTAL-LIABILITIES-AND-EQUITY> 315,800,386
<INTEREST-LOAN> 2,327,264
<INTEREST-INVEST> 2,593,032
<INTEREST-OTHER> 130,368
<INTEREST-TOTAL> 5,050,664
<INTEREST-DEPOSIT> 1,142,260
<INTEREST-EXPENSE> 1,447,997
<INTEREST-INCOME-NET> 3,602,667
<LOAN-LOSSES> 62,000
<SECURITIES-GAINS> 25,732
<EXPENSE-OTHER> 3,075,614
<INCOME-PRETAX> 818,311
<INCOME-PRE-EXTRAORDINARY> 818,311
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 503,011
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 5.23
<LOANS-NON> 2,609,000
<LOANS-PAST> 1,497,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 983,000
<CHARGE-OFFS> 75,000
<RECOVERIES> 49,000
<ALLOWANCE-CLOSE> 1,019,000
<ALLOWANCE-DOMESTIC> 945,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 74,000
</TABLE>
