<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
<TABLE>
<S> <C>
FOR THE QUARTER ENDED SEPTEMBER 30, 1995 COMMISSION FILE NO. 0-11223
</TABLE>
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>
<CAPTION>
Common Stock, $.008 par value 1,197,958
<S> <C>
CLASS OUTSTANDING ON SEPTEMBER 30, 1995
</TABLE>
===============================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance sheets at September 30, 1995 and December 31, 1994....... 3
Consolidated Statements of Operations for the three months ended September 30, 4
1995 and 1994 and the nine months ended September 30, 1995 and 1994...........
Consolidated Statement of Cash flows for the nine months ended September 30, 5
1995 and 1994.................................................................
Notes to Consolidated Financial Statements.................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 8
Operations....................................................................
PART II -- OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8K............................................... 12
Exhibit 11............................................................................. 13
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
<S> <C> <C>
Cash and due from banks:
Noninterest bearing...................................... $ 28,512,600 $ 26,602,778
Interest bearing......................................... 92,578 30,411
Federal funds sold......................................... 21,200,000 10,500,000
------------ ------------
Cash and cash equivalents.................................. 49,805,178 37,133,189
Held-to-maturity securities (market value of $125,568,000
and $111,868,000, respectively).......................... 126,708,175 120,734,590
Loans, net of allowance for loan losses of $859,000 and
$983,000, respectively................................... 98,718,130 102,679,810
------------ ------------
Securities available-for-sale 36,201,154 47,790,359
Valuation of securities available-for-sale............... (243,281) (787,438)
------------ ------------
Net securities available-for-sale.......................... 35,957,873 47,002,921
Premises and equipment, net................................ 1,468,236 1,648,731
Accrued interest receivable and other assets............... 5,772,633 5,805,579
------------ ------------
Total............................................ $318,430,225 $315,004,820
============ ============
LIABILITIES
Deposits:
Demand, non-interest bearing............................. $ 85,599,096 $115,198,311
Demand, interest-bearing................................. 13,721,849 16,797,279
Savings and money market................................. 107,515,513 107,674,530
Time certificates of deposit............................. 86,970,961 53,961,138
------------ ------------
Total deposits................................... 293,807,419 293,631,258
Convertible Notes.......................................... 4,740,566 4,770,984
Accrued interest payable and other liabilities............. 2,365,377 1,170,460
------------ ------------
Total liabilities................................ 300,913,362 299,572,702
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares
authorized; 1,307,139 and 1,297,314 issued and 1,197,958
and 1,188,133 outstanding................................ 10,457 10,379
Additional paid-in capital................................. 11,091,792 11,322,468
Retained earnings.......................................... 7,212,602 5,554,540
Treasury stock (109,181 and 165,455 shares)................ (655,085) (992,729)
Valuation of securities available-for-sale, net............ (142,903) (462,540)
------------ ------------
Total shareholders' equity....................... 17,516,863 15,432,118
------------ ------------
Total............................................ $318,430,225 $315,004,820
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS NINE MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans (including fees)...................... $2,206,330 $2,413,454 $ 7,002,384 $ 7,140,434
Investment securities....................... 2,693,376 2,249,672 7,753,148 5,207,212
Federal funds sold and securities purchased
under agreements to resell............... 394,699 210,079 915,225 377,367
Interest bearing deposits in other banks.... 1,500 -- 4,500 --
---------- ---------- ----------- -----------
Total interest income............... 5,295,905 4,873,205 15,675,257 12,725,013
INTEREST EXPENSE:
Deposits.................................... 1,656,472 1,017,372 4,268,956 2,503,520
Convertible notes........................... 121,260 121,184 365,635 174,604
Federal funds purchased and securities sold
under agreements to repurchase........... 161 5,316 193,514 154,355
Stock repurchase agreement.................. -- 33,628 -- 100,882
---------- ---------- ----------- -----------
Total interest expense.............. 1,777,893 1,177,500 4,828,105 2,933,361
---------- ---------- ----------- -----------
Net interest income........................... 3,518,012 3,695,705 10,847,152 9,791,652
Less: Provision for loan losses............... (205,000) (373,425) (392,000) (653,425)
---------- ---------- ----------- -----------
Net interest income after provision for loan
losses...................................... 3,313,012 3,322,280 10,455,152 9,138,227
OTHER OPERATING INCOME:
Securities transactions -- net:
Available-for-sale....................... -- -- 122,634 6,517
Trading.................................. -- -- -- (219,045)
Merchant discount........................... 53,676 71,911 147,473 191,780
Mortgage banking fees....................... 15,631 12,637 40,055 93,064
169,893 160,588 490,312 457,919
Other income.................................. 127,495 140,146 385,923 389,883
---------- ---------- ----------- -----------
Total other operating income........ 366,695 385,282 1,186,397 920,118
---------- ---------- ----------- -----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits.............. 1,329,652 1,394,534 4,292,593 4,047,610
Occupancy................................... 344,193 374,693 1,021,078 1,068,343
Professional services....................... 201,149 184,698 601,500 524,630
Legal fees.................................. 182,932 141,382 505,560 496,474
FDIC assessment............................. (17,416) 135,697 291,840 440,529
Furniture and equipment..................... 143,956 149,706 421,471 403,569
Other assessment............................ 62,701 62,160 201,334 185,588
Telephone................................... 63,790 57,489 169,630 163,858
Office supplies............................. 62,429 60,268 202,664 153,805
Termination of caps on interest rate
contract................................. -- -- -- 385,000
Other expense............................... 375,031 429,997 1,171,818 1,209,949
---------- ---------- ----------- -----------
Total other operating expenses...... 2,748,417 2,990,624 8,879,488 9,079,355
---------- ---------- ----------- -----------
Income before taxes........................... 931,290 716,938 2,762,061 978,990
Provision for income taxes.................... 380,000 286,900 1,104,000 404,900
---------- ---------- ----------- -----------
Net income.................................... $ 551,290 $ 430,038 $ 1,658,061 $ 574,090
========== ========== =========== ===========
EARNINGS PER SHARE:
Primary..................................... $0.35 $0.27 $1.06 $0.43
Fully Diluted............................... $0.32 $0.26 $0.98 $0.43
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
SEPTEMBER 30,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................... $ 1,658,061 $ 574,090
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 389,354 371,071
Provision for loan losses.................................. 392,000 653,425
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........................ (16,828) (2,219)
Purchases of trading account securities.................... -- (8,897,969)
Sales of trading account securities........................ -- 8,678,924
Amortization of convertible note expense................... 79,898 34,972
Amortization of interest on stock repurchase agreement..... -- 100,882
Decrease (Increase) in accrued interest receivable and
other assets............................................. 352,583 (373,281)
Increase in accrued interest payable and other
liabilities.............................................. 1,194,917 213,967
Net amortization of premiums and discounts on securities
held-to-maturity......................................... (71,076) 182,927
Net amortization of premiums and discounts on securities
available-for-sale....................................... (276,221) (21,906)
------------ ------------
Net cash provided by operating activities............. 3,580,054 1,653,228
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held-to-maturity....... 8,693,643 11,111,926
Proceeds from maturities of securities available-for-sale..... 2,509,291 902,325
Proceeds from sales of securities available-for-sale.......... 17,429,218 9,840,862
Purchases of securities held-to-maturity...................... (14,596,152) (39,578,541)
Purchases of assets available-for-sale........................ (8,494,606) (18,575,354)
Principal disbursed on loans, net............................. 3,586,508 9,949,211
Purchase of bank premises and equipment, net.................. (208,859) (360,224)
------------ ------------
Net cash (used) provided by investing activities...... 8,919,043 (26,709,795)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings
accounts................................................... (32,833,662) 28,661,656
Net proceeds from issuing certificates of deposit............. 33,009,823 11,292,107
Net proceeds from convertible notes........................... -- 4,709,312
Fractional shares paid in lieu of stock dividend.............. (3,269) --
------------ ------------
Net cash provided by financing activities............. 172,892 44,663,075
------------ ------------
Net increase in cash and cash equivalents....................... 12,671,989 19,606,508
Cash and cash equivalents, beginning of year.................... 37,133,189 13,941,962
------------ ------------
Cash and cash equivalents, September 30,........................ 49,805,178 33,548,470
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ITEMS:
Valuation of securities available-for-sale.................... $ (142,903) $ (48,887)
Conversion of notes to common stock........................... $ 110,316 $ --
</TABLE>
See notes to consolidated financial statements
5
<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 September 30, 1995 and
December 31, 1994 and the results of operations for the three months ended
September 30, 1995 and 1994 and the nine months ended September 30, 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 nine month periods ending September 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%. For the three and nine
month periods ending September 30, 1995, primary earnings per share are based
upon 1,720,538 and 1,720,481 shares, respectively. For the three and nine month
periods ending September 30, 1995, fully diluted earnings per share are based
upon 2,141,963 and 2,141,906 shares, respectively. For the three and nine month
periods ending September 30, 1994, primary earnings per share are based upon
1,796,907 shares. Fully diluted earnings per share are based upon 2,228,157
shares for the three months ended September 30, 1994 and 2,002,402 shares for
the nine months ended September 30, 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
6
<PAGE> 7
PROFESSIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company posted earnings of $1,658,000 during the first nine months of
1995 compared to earnings of $574,000 during the first nine months of 1994. The
Company posted earnings of $551,000 during the third quarter of 1995 compared to
$430,000 during the third quarter of 1994. Earnings in 1995 have been 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
$2,639,000 for the nine months ended September 30, 1995 or 67% higher than the
core earnings of $1,583,000 recorded for the same period in 1994.
Deposit growth was flat as deposits totaled $293.8 million at September 30,
1995 compared to $293.6 million at December 31, 1994. Deposits totaled $281.1
million at September 30, 1994. Savings and money market accounts continued to
represent the largest category of deposits comprising 36.6% of total deposits at
September 30, 1995 compared to 36.7% at December 31, 1994 and 48.3% at September
30, 1994. Time certificates of deposit (TCD's) demonstrated the strongest growth
among deposit types and comprised 29.6% of deposits at September 30, 1995
compared to 18.4% at December 31, 1994 and 14.3% of deposits at September 30,
1994. Growth in certificates of deposit has occurred as clients of the Bank have
become more interest rate sensitive. Noninterest bearing deposits comprised
29.1% of deposits at September 30, 1995 compared to 39.2% at December 31, 1994
and 32.4% at September 30, 1994.
The Company experienced a decline in loan demand as gross loans totaled
$99,664,000 at September 30, 1995 compared to $103,745,000 at December 31, 1994
for an annual rate of decrease of 5%. The decrease was due primarily to a
decrease in commercial loans. Management expects minimal loan demand during the
fourth 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 as of September
30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
---------------------- -----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------- ---------- -------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial....................................... $74,390 74.6% $ 83,239 80.2%
Real estate secured
Commercial..................................... 14,328 14.4 8,863 8.6
------- ----- -------- -----
Subtotal............................... 88,718 89.0 92,102 88.8
Equity lines of credit........................... 6,866 6.9 7,195 6.9
Installment...................................... 1,847 1.9 2,119 2.1
Other lines of credit............................ 2,119 2.1 2,072 2.0
Lease financing.................................. 114 0.1 257 0.2
------- ----- -------- -----
Total.................................. $99,664 100.0% $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
September 30, 1995, nonperforming loans (loans put on nonaccrual status) totaled
$5,747,000 or 5.77% of total loans. At December 31, 1994, nonperforming loans
totaled $2,663,000 or 2.57% of total loans. Included in nonperforming loans are
two loans totaling $3,299,000 with respect to which management is involved in
discussions expected to result in a resolution of these two loans without a
material adverse effect on the Company's fourth quarter performance. At
September 30, 1995, nonperforming assets (nonperforming loans plus Other Real
Estate Owned) totaled $5,838,000 or 1.83% of total assets and 5.86% 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 decreased to $801,000 at September 30, 1995 compared to $964,000
at December 31, 1994.
8
<PAGE> 9
The Company implemented Statement 114 and 118 effective January 1, 1995.
For the Company, impaired loans generally include loans classified as nonaccrual
and troubled debt restructurings. At September 30, 1995, the Company had
troubled debt restructurings totaling $1,262,000, of which $204,000 is on
nonaccrual and $795,000 of which should be paid off by December 31, 1995.
The Company had approximately $6.8 million in impaired loans as of
September 30, 1995. The carrying value of impaired loans for which there is a
related allowance for credit losses was $2,098,000, with the amount of allowance
for credit losses allocated to these loans of $333,000. There were $4,708,000 in
impaired loans for which there was no related allowance for credit losses. The
average recorded investment in impaired loans during the first nine months of
1995 was $3.8 million with no interest income recorded during the period.
The Bank continued to actively manage its liquidity and on September 30,
1995, the Bank sold $21.2 million in Federal funds. In addition, at September
30, 1995 the Bank had approximately $36.0 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 September 30, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
COMPANY
------------------------------ MINIMUM WELL-
SEPTEMBER 30, DECEMBER 31, CAPITAL CAPITALIZED
1995 1994 RATIOS RATIOS
------------- ------------ ------- -----------
<S> <C> <C> <C> <C>
CAPITAL RATIOS:
Tier 1 risk-based........................ 13.46% 11.91% 4.00% 6.00%
Total risk-based......................... 18.40 16.96 8.00 10.00
Leverage................................. 5.45 5.03 3.00 5.00
</TABLE>
<TABLE>
<CAPTION>
BANK
------------------------------ MINIMUM WELL-
SEPTEMBER 30, DECEMBER 31, CAPITAL CAPITALIZED
1995 1994 RATIOS RATIOS
------------- ------------ ------- -----------
<S> <C> <C> <C> <C>
CAPITAL RATIOS:
Tier 1 risk-based........................ 17.08% 15.63% 4.00% 6.00%
Total risk-based......................... 17.74 16.38 8.00 10.00
Leverage................................. 6.88 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.
9
<PAGE> 10
At September 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 $6,070,000 of capital in excess of the required minimum ratios for
"well-capitalized" institutions while the Company has approximately $1,445,000
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. On September 30, 1995 $110,300, net of expenses, of
the Company's 8.50% subordinated convertible notes converted into 9,825 shares
of common stock leaving $5,619,000 convertible notes outstanding.
RESULTS OF OPERATIONS
Earnings for the nine months ended September 30, 1995 increased by
$1,084,000 to $1,658,000 compared to earnings of $574,000 for the same period in
1994. Earnings per share, as calculated using the modified treasury stock
method, increased to $0.98 per fully diluted share compared to $0.43 per share
for the first nine 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 $2,639,000 for the first nine months of 1995 compared to $1,583,000 for
the first nine months of 1994. Core earnings increased as a $28.1 million
increase in average earning assets offset the slight decline in the net interest
margin from 5.13% to 5.12%.
Net interest income before provision for credit losses for the nine months
ended September 30, 1995 was $10,847,000 an increase of $1,056,000 (11%) over
the amount recorded during the same period in 1994. The Company's net interest
margin decreased to 5.12% for the nine months ended September 30, 1995 from
5.13% for the nine months ended September 30, 1994. The net interest margin
remained constant as a shift in deposits to the higher yielding certificates of
deposit was offset by the Company's variable rate securities which have
gradually reset to higher coupon rates. Negatively impacting net interest income
were 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 at the date of this filing, the expense of the two swaps
approximates $51,000 per month. From January 1993 to September 30, 1995, the two
swaps have decreased net interest income by $96,000 including $524,000 during
the first nine months of 1995. The two swaps decreased net interest income by
$99,000 during the first nine months of 1994.
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 September 30, 1995 was reduced by the swap by
$177,000 including $100,000 during the first nine months of 1995 and $44,000
during the first nine months of 1994. As of the date of this report, the Company
is paying 6.85% and receiving 5.9375%.
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 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 LIBOR rate falls below 6%. The
floor agreements were for a period of three years. The average premium paid for
the floor agreements was approximately
10
<PAGE> 11
20 basis points ($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 amount is being amortized over the original three year term. From December
1994 to September 30, 1995, net interest income was increased by the floors by
$79,000 and $80,000 during the first nine 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 September 30, 1995 the Company's held-to-maturity portfolio totaled
$126,708,000 compared to $120,735,000 at December 31, 1994 and $123,156,000 at
September 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 ($28.4 million) and 30 year variable rate ($71.6
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 October 1, 1995, the variable rate securities have
current coupon rates between 6.0% 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
September 30, 1995, the yield on the one-year Treasury Bill was 5.68%. 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 $14.4 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 September 30, 1995 the Company's available-for-sale portfolio totaled
$35.6 million compared to $47.0 million at December 31, 1994 and $33.5 million
at September 30, 1994. At September 30, 1995, the Company's available-for-sale
portfolio consisted of the following securities: 1) $18,787,000 in
Collateralized Mortgage Obligation ("CMO") Premium Amortization Class ("PAC")
bonds with variable rate structures based on one-month LIBOR; 2) $4,240,000 in a
variable rate FNMA Remic CMO which contains various collateral and is based on
the one-month LIBOR; 3) $8,246,000 in a GNMA 30 year variable rate pass-through
security with a 6.125% coupon resetting on January 1, 1996; and 4) a $5,000,000
par value 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 nine months of 1994 to 6.32% for the first nine months of 1995.
Other operating income, excluding securities transactions totaled
$1,063,000 for the first nine months of 1995 compared to $1,133,000 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 nine months of 1995, other operating expenses decreased
$200,000 or 2.2% compared to the same period in 1994. The decrease was due to
the expense of $385,000 incurred during the first nine months of
11
<PAGE> 12
1994 for the termination of interest rate caps which were a feature in an
interest rate contract. Also, the Bank received a rebate on deposit insurance of
$175,000 from the FDIC. Excluding the valuation expense and the FDIC rebate,
other operating expenses increased 4.1% from the first nine months of 1994. This
increase approximated the growth rate of assets which increased 4.7% from
September 30, 1994 to September 30, 1995 and was primarily concentrated in
salaries and employee benefits which increased $245,000 or 6.1% from the same
period in 1994. A majority of this increase was related to staffing as full-time
equivalent employees averaged 100 for the first nine months of 1995 compared to
93 over the same period in 1994. The other category with a significant increase
was professional services which increased $77,000 or 14.7% from the first nine
months of 1994. This category includes expenses for audits, consultants,
recruiting fees and other services. Within this category, recruiting fees
increased $45,000 to $55,000 as several officer positions were filled.
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.
During October 1995, FASB announced that certain elements of Statement of
Financial Accounting Standards No. 115 entitled "Accounting for Certain
Investments in Debt and Equity Securities (Statement 115) would be suspended for
a period of time ending December 31, 1995. The October 1995 announcement allows
financial institutions to make a one-time transfer of securities between the
available-for-sale and held-to-maturity portfolios, by December 31, 1995 without
penalty. The Company has not yet determined which securities if any will be
transferred but any such reassignment is not expected to have a material effect
on the financial position or results of the Company.
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.
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
September 30, 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: November 2, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <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.................... $ 551,290 $ 430,037 $1,658,061 $ 574,317
Interest on borrowings, net of tax
effect, on application of assumed
from exercise of warrants and options
in excess of 20% limitation.......... 52,998 53,914 169,171 161,335
---------- ---------- ---------- ----------
Net earnings as adjusted........ $ 604,288 $ 483,951 $1,827,232 $ 735,652
========== ========== ========== ==========
Weighted average number of shares
outstanding, as per primary
computation above.................... 1,188,240 1,277,129 1,188,169 1,277,129
Net shares issuable from assumed
exercise of warrants and options, as
determined by the application of the
Modified Treasury Stock Method....... 532,298 519,778 532,312 519,778
---------- ---------- ---------- ----------
Weighted average number of
shares outstanding............ 1,720,538 1,796,907 1,720,481 1,796,907
========== ========== ========== ==========
Primary earnings per share................ $0.35 $0.27 $1.06 $0.41
===== ===== ===== =====
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.................... $ 551,290 $ 430,037 $1,658,061 $ 574,317
Interest and amortized costs on
convertible notes, net of tax
effect............................... 86,793 87,187 261,706 123,105
Interest on borrowings, net of tax
effect, on application of assumed
from exercise of warrants and options
in excess of 20% limitation.......... 52,998 54,152 169,171 161,335
---------- ---------- ---------- ----------
Net earnings as adjusted........ $ 691,081 $ 571,376 $2,088,938 $ 858,757
========== ========== ========== ==========
Weighted average number of shares
outstanding, as per fully diluted
computation above.................... 1,188,240 1,277,129 1,188,169 1,277,129
Net shares issuable from assumed
exercise of warrants and options, as
determined by the application of the
Modified Treasury Stock Method....... 532,298 519,778 532,312 519,778
Weighted average shares issuable from
assumed conversion of convertible
notes................................ 421,425 431,250 421,425 205,495
---------- ---------- ---------- ----------
Weighted average number of
shares outstanding............ 2,141,963 2,228,157 2,141,906 2,002,402
========== ========== ========== ==========
Fully diluted earnings per share.......... $0.32 $0.26 $0.98 $0.43
===== ===== ===== =====
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 28,512,600
<INT-BEARING-DEPOSITS> 92,578
<FED-FUNDS-SOLD> 21,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,957,873
<INVESTMENTS-CARRYING> 126,708,175
<INVESTMENTS-MARKET> 125,568,000
<LOANS> 99,663,456
<ALLOWANCE> 858,570
<TOTAL-ASSETS> 318,430,225
<DEPOSITS> 293,807,419
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,365,377
<LONG-TERM> 4,740,566
<COMMON> 10,457
0
0
<OTHER-SE> 17,506,406
<TOTAL-LIABILITIES-AND-EQUITY> 318,430,225
<INTEREST-LOAN> 7,002,384
<INTEREST-INVEST> 7,753,148
<INTEREST-OTHER> 919,725
<INTEREST-TOTAL> 15,675,257
<INTEREST-DEPOSIT> 4,268,956
<INTEREST-EXPENSE> 4,828,105
<INTEREST-INCOME-NET> 10,847,152
<LOAN-LOSSES> 392,000
<SECURITIES-GAINS> 122,634
<EXPENSE-OTHER> 8,879,488
<INCOME-PRETAX> 2,762,061
<INCOME-PRE-EXTRAORDINARY> 2,762,061
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,658,061
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 5.12
<LOANS-NON> 5,747,000
<LOANS-PAST> 801,000
<LOANS-TROUBLED> 1,262,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 983,000
<CHARGE-OFFS> 639,000
<RECOVERIES> 122,000
<ALLOWANCE-CLOSE> 859,000
<ALLOWANCE-DOMESTIC> 859,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 11,000
</TABLE>
