<PAGE> 1
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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
<TABLE>
<S> <C>
FOR THE QUARTER ENDED JUNE 30, 1995 COMMISSION FILE NO. 0-11223
</TABLE>
PROFESSIONAL BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
PENNSYLVANIA
(STATE OR OTHER JURISDICTION OF 95-3701137
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
606 BROADWAY
SANTA MONICA, CA 90401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 458-1521
</TABLE>
------------------------
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 1,188,133
CLASS OUTSTANDING ON JUNE 30, 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 June 30, 1995 and December 31, 1994............. 1
Consolidated Statements of Operations for the three months ended June, 1995
and 1994 and the six months ended June 30, 1995 and 1994....................... 2
Consolidated Statement of Cash flows for the six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders............................. 11
Item 5. Other Information............................................................... 11
Item 6. Exhibits and Reports on Form 8K................................................. 11
Exhibit 11.............................................................................. 13
</TABLE>
i
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
Assets:
Cash and due from banks:
Noninterest bearing......................................... $ 31,463,287 $ 26,602,778
Interest bearing............................................ 21,386 30,411
Federal funds sold............................................ 24,500,000 10,500,000
------------ ------------
Cash and cash equivalents..................................... 55,984,673 37,133,189
Held-to-maturity securities (market value of $129,714,000 and
$111,868,000, respectively)................................. 130,597,032 120,734,590
Loans, net of allowance for loan losses of $835,000 and
$983,000, respectively...................................... 103,993,291 102,679,810
------------ ------------
Securities available-for-sale................................. 37,150,180 47,790,359
Valuation of securities available-for-sale.................. 38,362 (787,438)
------------ ------------
Net securities available-for-sale........................... 37,188,542 47,002,921
Premises and equipment, net................................... 1,524,581 1,648,731
Accrued interest receivable and other assets.................. 5,534,761 5,805,579
============ ============
Total............................................... $334,822,880 $315,004,820
Liabilities:
Deposits:
Demand, non-interest bearing............................. 91,645,828 115,198,311
Demand, interest-bearing................................. 15,029,328 16,797,279
Savings and money market................................. 119,604,802 107,674,530
Time certificates of deposit............................. 84,322,379 53,961,138
------------ ------------
Total deposits...................................... 310,602,337 293,631,258
Convertible Notes............................................. 4,824,385 4,770,984
Accrued interest payable and other liabilities................ 2,372,195 1,170,460
------------ ------------
Total liabilities................................... 317,798,917 299,572,702
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares authorized;
1,188,133 issued and outstanding............................ 10,829 10,829
Additional paid-in capital.................................... 11,322,018 11,322,018
Retained earnings............................................. 6,661,311 5,554,540
Treasury stock (165,455 shares)............................... (992,729) (992,729)
Valuation of securities available-for-sale, net............... 22,534 (462,540)
------------ ------------
Total shareholders' equity.......................... 17,023,963 15,432,118
============ ============
Total............................................... $334,822,880 $315,004,820
</TABLE>
1
<PAGE> 4
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS SIX MONTH PERIODS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ------------------------
1995 1994 1995 1994
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans (including fees)....................... $2,468,790 $2,406,096 $ 4,796,054 $4,726,980
Investment securities........................ 2,466,740 1,519,396 5,059,772 2,957,540
Federal funds sold and securities purchased
under agreements to resell................ 390,158 140,024 520,526 167,288
Interest bearing deposits in other banks..... 3,000 -- 3,000 --
---------- ---------- ----------- ----------
TOTAL INTEREST INCOME................ 5,328,688 4,065,516 10,379,352 7,851,808
INTEREST EXPENSE:
Deposits..................................... 1,470,224 776,146 2,612,484 1,486,148
Convertible notes............................ 122,187 53,420 244,375 53,420
Federal funds purchased and securities sold
under agreements to repurchase............ 9,804 47,403 193,353 149,039
Stock repurchase agreement................... -- 33,627 -- 67,254
---------- ---------- ----------- ----------
TOTAL INTEREST EXPENSE............... 1,602,215 910,596 3,050,212 1,755,861
---------- ---------- ----------- ----------
NET INTEREST INCOME............................ 3,726,473 3,154,920 7,329,140 6,095,947
Less: Provision for loan losses................ (125,000) (200,000) (187,000) (280,000)
---------- ---------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES....................................... 3,601,473 2,954,920 7,142,140 5,815,947
OTHER OPERATING INCOME:
Securities transactions -- net:
Available-for-sale........................ 96,902 -- 122,634 6,517
Trading................................... -- (38,785) -- (219,045)
Merchant discount............................ 44,809 56,774 93,797 119,869
Mortgage banking fees........................ 21,024 36,315 24,424 80,427
Service charges on deposits.................. 167,399 155,614 320,419 297,331
Other income................................. 136,310 128,049 258,428 249,737
---------- ---------- ----------- ----------
TOTAL OTHER OPERATING INCOME......... 466,444 337,967 819,702 534,836
---------- ---------- ----------- ----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits............... 1,437,238 1,370,962 2,962,941 2,653,076
Occupancy.................................... 333,802 341,373 676,885 693,650
Professional services........................ 217,053 156,381 400,351 339,932
Legal fees................................... 160,637 188,437 322,628 355,092
FDIC assessment.............................. 154,628 152,416 309,256 304,832
Furniture and equipment...................... 134,309 130,288 277,515 253,863
Other assessment............................. 68,114 66,006 138,633 123,428
Telephone.................................... 46,304 54,629 105,840 106,369
Office supplies.............................. 81,004 25,838 140,235 76,698
Termination of caps on interest rate
contract.................................. -- 32,960 -- 385,000
Other expense................................ 422,368 418,976 796,787 796,791
---------- ---------- ----------- ----------
TOTAL OTHER OPERATING EXPENSES....... 3,055,457 2,938,266 6,131,071 6,088,731
---------- ---------- ----------- ----------
Income before taxes............................ 1,012,460 354,621 1,830,771 262,052
Provision for income taxes..................... 408,700 155,951 724,000 118,000
========== ========== =========== ==========
NET INCOME..................................... $ 603,760 $ 198,670 $ 1,106,771 $ 144,052
Earnings per share:
Primary...................................... $ 0.38 $ 0.14 $ 0.71 $ 0.14
Fully Diluted................................ $ 0.35 $ 0.14 $ 0.65 $ 0.14
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 5
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED
JUNE 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................................... $ 1,106,771 $ 144,052
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 260,114 244,212
Provision for loan losses.................................... 187,000 280,000
Credit for deferred taxes.................................... -- (74,183)
Gain on securities available-for-sale........................ (122,634) (6,517)
Loss on trading securities................................... -- 219,045
Decrease in deferred loan fees, net.......................... (11,474) (4,511)
Purchases of trading account securities...................... -- (8,897,969)
Sales of trading account securities.......................... -- 8,678,924
Amortization of convertible note expense..................... 53,401 --
Amortization of interest on stock repurchase agreement....... -- 67,254
Decrease (Increase) in accrued interest receivable and other
assets...................................................... 755,893 (138,667)
Increase (Decrease) in accrued interest payable and other
liabilities................................................. 1,201,735 (369,708)
Net amortization of premiums and discounts on securities
held-to-maturity............................................ (76,526) 284,551
Net amortization of premiums and discounts on securities
available-for-sale.......................................... (194,568) (10,714)
------------ ------------
Net cash provided by operating activities....................... 3,159,712 415,769
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held-to-maturity......... 4,810,236 7,634,220
Proceeds from maturities of securities available-for-sale....... 1,196,968 439,153
Proceeds from sales of securities available-for-sale............ 17,429,218 9,840,862
Purchases of securities held-to-maturity........................ (14,596,152) (10,956,011)
Purchases of securities available-for-sale...................... (8,494,606) (18,575,354)
Principal disbursed on loans, net............................... (1,489,007) 3,788,170
Purchase of bank premises and equipment, net.................... (135,964) (150,024)
------------ ------------
Net cash used by investing activities........................... (1,279,307) (7,978,984)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings
accounts..................................................... (13,390,162) 21,986,413
Net proceeds from issuing certificates of deposit............... 30,361,241 10,599,040
Net proceeds from convertible notes............................. -- 4,709,312
Other........................................................... -- 6,667
------------ ------------
Net cash provided by financing activities......................... 16,971,079 37,301,432
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 18,851,484 29,738,217
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................... 37,133,189 13,941,962
------------ ------------
CASH AND CASH EQUIVALENTS, JUNE 30,............................... 55,984,673 43,680,179
=========== ===========
Supplemental disclosure of noncash items:
Valuation of securities available-for-sale...................... $ 22,534 $ --
</TABLE>
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 June 30, 1995 and December
31, 1994 and the results of operations for the three months ended June 30, 1995
and 1994 and the six months ended June 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
and six month periods ending June 30, 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%. Primary earnings per share are based upon
1,796,907 shares for the three and six month periods ending June 30, 1994 and
1,720,460 shares for the three and six month periods ending June 30, 1995. Fully
diluted earnings per share are based upon 1,977,402 and 1,887,653 shares for the
three and six month periods ended June 30, 1994, respectively and upon 2,151,710
shares for the three and six month periods ended June 30, 1995. 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. 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.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company posted earnings of $1,107,000 during the first six months of
1995 compared to earnings of $144,000 during the first six months of 1994. The
Company posted earnings of $604,000 during the second quarter of 1995 compared
to $199,000 during the second quarter of 1994. Earnings in 1995 were positively
impacted by securities gains of $123,000 while earnings in 1994 were negatively
impacted by $213,000 in securities losses and a charge of $385,000 from the
termination of an interest rate swap structure (see Note 3). Pre-tax earnings
excluding securities transactions and the swap charge ("core earnings") totaled
$1,708,000 for the six months ended June 30, 1995 or 99% higher than the core
earnings of $860,000 recorded in the year earlier period.
Deposits increased 5.8% to $310.6 million at June 30, 1995 compared to
$293.6 million at December 31, 1994 and 13.5% over the $273.7 million in
deposits recorded at June 30, 1994. Savings and money market accounts continued
to represent the largest category of deposits comprising 38.5% of total deposits
at June 30, 1995 compared to 36.7% at December 31, 1994 and 46.1% at June 30,
1994. Time certificates of deposit (TCD's) demonstrated the strongest growth
among deposit types and comprised 27.1% of deposits at June 30, 1995 compared to
18.4% at December 31, 1994 and 14.4% of deposits at June 30, 1994. Noninterest
bearing deposits comprised 29.5% of deposits at June 30, 1995 compared to 39.2%
at December 31, 1994 and 34.5% at June 30, 1994.
The Company experienced a slight increase in loan demand as gross loans
totaled $104,788,000 at June 30, 1995 compared to $103,745,000 at December 31,
1994 for an annual rate of increase of 2%. The increase was due primarily to an
increase in real estate secured commercial loans. Management expects minimal
loan demand during the third 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>
JUNE 30, 1995 DECEMBER 31, 1994
----------------------- -----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.............................. $ 80,483 76.8% $ 83,239 80.2%
Real estate secured
Commercial............................ 12,832 12.2 8,863 8.6
-------- ----- -------- -----
Subtotal...................... 93,315 89.1 92,102 88.8
Equity lines of credit.................. 7,026 6.7 7,159 6.9
Installment............................. 2,011 1.9 2,119 2.1
Other lines of credit................... 2,261 2.2 2,072 2.0
Lease financing......................... 175 0.2 257 0.2
-------- ----- -------- -----
Total......................... $104,788 100.0% $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
June 30, 1995, nonperforming loans (loans put on nonaccrual status) totaled
$2,093,000 or 2.00% of total loans. At December 31, 1994, nonperforming loans
totaled $2,663,000 or 2.57% of total loans. At June 30, 1995, nonperforming
assets (nonperforming loans plus Other Real Estate Owned) totaled $2,199,000 or
.86% of total assets and 2.72% of total loans. At December 31, 1994,
nonperforming assets totaled $2,769,000 or .66% of total assets and 2.10% of
total loans. Additionally, accruing loans 90 days or more past due increased to
$1,277,000 at June 30, 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
6
<PAGE> 9
Creditors for Impairment of a Loan -- Income Recognition and Disclosures"
(Statement 118) effective January 1, 1995. For the Company, impaired loans
generally include loans classified as nonaccrual and troubled debt
restructurings. At June 30, 1995, the Company had 1 troubled debt restructuring
totaling $199,000.
The Company had approximately $2.3 million in impaired loans as of June 30,
1995. The carrying value of impaired loans for which there is a related
allowance for credit losses was $249,000, with the amount of allowance for
credit losses allocated to these loans of $127,000. There were $2,043,000 in
impaired loans for which there was no related allowance for credit losses. The
average recorded investment in impaired loans during the first six months of
1995 was $2.5 million with no interest income recorded during the period.
The Bank continued to actively manage its liquidity and on June 30, 1995,
the Bank sold $24.5 million in Federal funds. In addition, at June 30, 1995 the
Bank had approximately $37.2 million market value available in the Bank's
securities 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.
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 June 30, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
COMPANY
------------------------- MINIMUM WELL-
JUNE 30, DECEMBER 31, CAPITAL CAPITALIZED
1995 1994 RATIOS RATIOS
-------- ------------ ------- -----------
<S> <C> <C> <C> <C>
CAPITAL RATIOS:
Tier 1 risk-based............... 12.26% 11.91% 4.00% 6.00%
Total risk-based................ 17.01 16.96 8.00 10.00
Leverage........................ 5.44 5.03 3.00 5.00
</TABLE>
<TABLE>
<CAPTION>
BANK
------------------------- MINIMUM WELL-
JUNE 30, DECEMBER 31, CAPITAL CAPITALIZED
1995 1994 RATIOS RATIOS
-------- ------------ ------- -----------
<S> <C> <C> <C> <C>
CAPITAL RATIOS:
Tier 1 risk-based............... 15.84% 15.63% 4.00% 6.00%
Total risk-based................ 16.45 16.38 8.00 10.00
Leverage........................ 6.99 6.58 3.00 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.
7
<PAGE> 10
At June 30, 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
$6,204,000 of capital in excess of the required minimum ratios for
"well-capitalized" institutions while the Company has approximately $1,362,000
of capital in excess of the required minimum ratios for "well-capitalized"
institutions. The Company does not currently intend to raise additional capital.
On June 5, 1995 the Company declared a 5% stock dividend. The record date
for the stock dividend was June 23, 1995 and was paid on July 21, 1995. As a
result of the stock dividend, the outstanding shares of common stock increased
from 1,131,859 to 1,188,133.
RESULTS OF OPERATIONS
Earnings for the six months ended June 30, 1995 increased by $963,000 to
$1,107,000 compared to earnings of $144,000 for the same period in 1994.
Earnings per share, as calculated using the modified treasury stock method,
increased to $0.65 per fully diluted share compared to $0.14 per share for the
first six months of 1994. Pre-tax earnings in 1994 were impacted by $213,000 in
securities losses and a charge of $385,000 to terminate a cap feature on an
interest rate exchange contract. Securities transactions contributed $123,000
pre-tax to earnings in 1995. Adjusting for securities transactions and the
termination charge, pre-tax earnings ("Core Earnings") totaled $1,708,000 for
the six months of 1995 compared to $860,000 for the first six months of 1994.
Core earnings increased due to an improved net interest margin from 4.98% to
5.22% and strong growth in deposits and earning assets.
Net interest income before provision for credit losses for the six months
ended June 30, 1995 was $7,329,000 an increase of $662,000 (20%) over the amount
recorded during the same period in 1994. The Company's net interest margin
increased to 5.22% for the six months ended June 30, from 4.98% for the six
months ended June 30, 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 June 30, 1994 to June 30, 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 8.75% in effect beginning July 7, 1995, the expense of the two swaps
approximates $51,000 per month. From January 1993 to June 30, 1995, the two
swaps have increased net interest income by $79,000 including $144,000 during
the first six months of 1994. The two swaps decreased net interest income by
$350,000 during the first six months of 1995.
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 June 30, 1995 was reduced by the swap by
$146,000 including $69,000 during the first six months of 1995 and $13,000
during the first six months of 1994. As of the date of this report, the Company
is paying 6.85% and receiving 6.125%.
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. The Company entered into three interest rate floor agreements during
December 1994 and January 1995. The agreements entitled 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 were 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 was being
amortized over three years. In May, 1995, the Company sold the floor
8
<PAGE> 11
contracts for total consideration of $623,000. This amount is being amortized
over the original three year term. From December 1994 to June 30, 1995, net
interest income was increased by the floors by $21,000 including $22,000 during
the first six 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 June 30, 1995 the Company's held-to-maturity portfolio totaled
$130,597,000 compared to $120,735,000 at December 31, 1994 and $97,930,000 at
June 30, 1994. The Company's held-to-maturity portfolio consisted primarily of
Government National Mortgage Association ("GNMA") pass-through securities
including 15 year fixed rate ($29.6 million) and 30 year variable rate ($73.9
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 July 1, 1995, the variable rate securities have
current coupon rates between 5.875% and 7.375% 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
June 30, 1995, the yield on the one-year Treasury Bill was 5.64%. As interest
rates move, 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%. The
Company's held-to-maturity portfolio also contains $14.5 million in Small
Business Administration securities ("SBAs"). These securities represent the
guaranteed portions of loan pools and carry variable rates. The coupon rates are
between prime minus 2% and prime plus .875% and either carry caps or are
uncapped.
At June 30, 1995 the Company's available-for-sale portfolio totaled $37.2
million compared to $47.0 million at December 31, 1994 and $33.9 million at June
30, 1994. At June 30, 1995, the Company's available-for-sale portfolio consisted
of the following securities: 1) $19,499,000 in Collateralized Mortgage
Obligation ("CMO") Premium Amortization Class ("PAC") bonds with variable rate
structures based on one-month LIBOR, $4,291,000 of which carries a fixed rate of
5% until July 25, 1995; 2) $4,313,000 in a variable rate FNMA Remic CMO which
contains various collateral and is based on the one-month LIBOR; 3) $8,495,000
in a GNMA 30 year variable rate pass-through security; and 4) a $5,000,000
Treasury Bill maturing in December 1995. Overall, as interest rates rose, the
yield on the Company's investment securities increased from 4.96% during the
first six months of 1994 to 6.32% for the first six months of 1995.
Other operating income, excluding securities transactions totaled $697,000
for the first six months of 1995 compared to $747,000 for the same period in
1994. The slight increase 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 six months of 1995, other operating expenses increased
$42,000 or 0.7% compared to the same period in 1994. The decrease was due to the
expense of $385,000 incurred during the first six months of 1994 for the
termination of interest rate caps which were a feature in an interest rate
contract. Excluding the
9
<PAGE> 12
valuation expense, other operating expenses increased 7.5% from the first six
months of 1994. This increase was significantly below the growth rate of assets
which increased 13.2% from June 30, 1994 to June 30, 1995 and was primarily
concentrated in salaries and employee benefits which increased $310,000 or 11.7%
from the same period in 1994. A majority of this increase was related to
staffing as full-time equivalent employees totaled 102 at June 30, 1995 compared
to 95 at June 30, 1994.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. The Annual Meeting of Shareholders was held April 26, 1995. The
following persons were nominated and elected to the board of directors to serve
until the 1996 Annual Meeting of Shareholders:
<TABLE>
<S> <C>
Richard A. Berger Melinda McIntyre-Kolpin
H. Leon Brooks, M.D. Ray T. Oyakawa, M.D.
James B. Jacobson Lynn O. Poulson, J.D.
Ronald L. Katz, M.D. David G. Rodeffer, M.P.H.
Joel W. Kovner, Dr. P.H., M.P.H.
</TABLE>
2. Ratified the appointment of KPMG Peat Marwick LLP as independent public
accountants for 1995.
ITEM 5. OTHER INFORMATION.
On August 3, 1995, H. Leon Brooks, M.D. resigned from the board of
directors. Subsequent to his resignation, H. Leon Brooks, M.D. sold 100,000
shares of Professional Bancorp, Inc. common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended June
30, 1995.
11
<PAGE> 14
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: August 14, 1995 PROFESSIONAL BANCORP, INC.
(Registrant)
/s/ DANIEL S. RADER
-------------------------------------
Daniel S. Rader
Chief Financial Officer and Treasurer
12
<PAGE> 1
EXHIBIT 11 -- EARNINGS PER SHARE
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Computation for Statement of Operations:
Net earnings per statement of operatings used
in primary earnings per share computation:
Net earnings.......................... $ 603,760 $ 198,580 $1,106,771 $ 144,052
Interest on borrowings, net of tax effect, on
application of assumed from exercise of
warrants and options in excess of 20%
limitation................................. 58,027 54,965 119,428 107,545
---------- ---------- ---------- ----------
Net earnings as adjusted.............. $ 661,787 $ 253,545 $1,226,199 $ 251,597
========== ========== ========== ==========
Weighted average number of shares outstanding,
as per primary computation above........... 1,188,133 1,277,129 1,188,133 1,277,129
Net shares issuable from assumed exercise of
warrants and options, as determined by the
application of the Modified Treasury Stock
Method..................................... 532,327 519,778 532,327 519,778
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding......................... 1,720,460 1,796,907 1,720,460 1,796,907
========== ========== ========== ==========
Primary earnings per share...................... $ 0.38 $ 0.14 $ 0.71 $ 0.14
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE
Computation for Statement of Operations:
Net earnings per statement of operatings used
in fully diluted earnings per share
computation:
Net earnings.......................... $ 603,760 $ 198,580 $1,106,771 $ 144,052
Interest and amortized costs on convertible
notes, net of tax effect................... 87,456 35,917 174,913 35,917
Interest on borrowings, net of tax effect, on
application of assumed from exercise of
warrants and options in excess of 20%
limitation................................. 58,284 55,208 119,411 107,545
---------- ---------- ---------- ----------
Net earnings as adjusted.............. $ 749,500 $ 289,705 $1,401,095 $ 287,514
========== ========== ========== ==========
Weighted average number of shares outstanding,
as per fully diluted computation above..... 1,188,133 1,277,129 1,188,133 1,277,129
Net shares issuable from assumed exercise of
warrants and options, as determined by the
application of the Modified Treasury Stock
Method..................................... 532,327 519,778 532,327 519,778
Weighted average shares issuable from assumed
conversion of convertible notes............ 431,250 180,495 431,250 90,746
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding......................... 2,151,710 1,977,402 2,151,710 1,887,653
========== ========== ========== ==========
Fully diluted earnings per share................ $ 0.35 $ 0.14 $ 0.65 $ 0.14
========== ========== ========== ==========
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-1-1995
<PERIOD-END> JUN-30-1995
<CASH> 31,463,287
<INT-BEARING-DEPOSITS> 21,386
<FED-FUNDS-SOLD> 24,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,188,542
<INVESTMENTS-CARRYING> 130,597,032
<INVESTMENTS-MARKET> 129,714,000
<LOANS> 104,898,169
<ALLOWANCE> 835,000
<TOTAL-ASSETS> 334,822,880
<DEPOSITS> 310,602,337
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,372,195
<LONG-TERM> 4,824,385
<COMMON> 10,829
0
0
<OTHER-SE> 17,013,134
<TOTAL-LIABILITIES-AND-EQUITY> 334,822,880
<INTEREST-LOAN> 4,796,054
<INTEREST-INVEST> 5,059,772
<INTEREST-OTHER> 523,526
<INTEREST-TOTAL> 10,379,352
<INTEREST-DEPOSIT> 2,612,484
<INTEREST-EXPENSE> 3,050,212
<INTEREST-INCOME-NET> 7,329,140
<LOAN-LOSSES> 187,000
<SECURITIES-GAINS> 122,634
<EXPENSE-OTHER> 6,131,071
<INCOME-PRETAX> 1,830,771
<INCOME-PRE-EXTRAORDINARY> 1,830,771
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,106,771
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 5.22
<LOANS-NON> 2,093,000
<LOANS-PAST> 1,277,000
<LOANS-TROUBLED> 199,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 983,000
<CHARGE-OFFS> 401,000
<RECOVERIES> 66,000
<ALLOWANCE-CLOSE> 835,000
<ALLOWANCE-DOMESTIC> 835,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 13,000
</TABLE>
