SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1996 Commission File No. 0-11223
PROFESSIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 95-3701137
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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
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.
Common Stock, $.008 par value 1,341,182
----------------------------- ---------
Class Outstanding on September 30, 1996
<PAGE>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance sheets at September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Earnings for the three months 4
ended September30, 1996 and 1995 and the nine months
ended September 30, 1996 and 1995
Consolidated Statements of Cash flows for the nine months
ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8K 13
Exhibit 27. 15
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<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<S> <C> <C>
September 30, 1996 December 31, 1995
Cash and due from banks:
Noninterest bearing $22,453,111 $41,791,145
Interest bearing 1,076,018 1,008,528
Federal funds sold 4,400,000 42,400,000
Cash and cash equivalents 27,929,129 85,199,673
Securities available-for-sale at fair value 71,856,770 81,520,398
Held-to-maturity securities (Fair value of
$42,534,000 and $48,159,000, respectively)
43,445,839 48,517,017
Loans, net of allowance for loan losses of
$2,034,000 and $1,070,000 respectively 90,013,532 98,944,274
Premises and equipment, net 1,672,375 1,817,982
Accrued interest receivable and other assets 8,615,362 6,165,562
$243,533,007 $322,164,906
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $82,387,621 $97,641,982
Demand, interest-bearing 12,253,493 14,474,546
Savings and money market 87,542,555 97,209,310
Time certificates of deposit 39,990,683 88,139,864
Total deposits 222,174,352 297,465,702
Convertible Notes 4,843,210 4,766,658
Accrued interest payable and other liabilities 3,317,719 2,424,792
Total liabilities 230,335,281 304,657,152
Shareholders' Equity:
Common stock, $.008 par value; 12,500,000 shares
authorized; 1,410,649 and 1,388,169 issued and
1,341,182 and 1,278,988 outstanding 11,285 10,620
Additional paid-in capital 12,487,925 11,682,752
Retained earnings 2,181,590 6,983,628
Treasury stock (69,467 and 109,181) shares (537,251) (655,085)
Net unrealized loss on securities available-for-sale (945,823) (514,161)
Total shareholders' equity 13,197,726 17,507,754
$243,533,007 $322,164,906
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<S> <C> <C> <C> <C>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
1996 1995 1996 1995
Interest Income:
Loans $2,205,761 $2,206,330 $6,761,004 $7,002,384
Securities 1,916,574 2,693,376 5,964,771 7,753,148
Federal funds sold and securities
purchased under agreements to
resell 79,175 394,699 717,718 915,225
Interest-bearing deposits in other banks 5,644 1,500 18,244 4,500
Total interest income 4,207,154 5,295,905 13,461,737 15,675,257
Interest expense:
Deposits 825,480 1,656,472 3,327,656 4,268,956
Convertible notes 119,604 121,260 357,987 365,635
Federal funds purchased and
securities sold under agreements
to repurchase 107,665 161 171,592 193,514
Total interest expense 1,052,749 1,777,893 3,857,235 4,828,105
Net interest income 3,154,405 3,518,012 9,604,502 10,847,152
Less: provision for loan losses (836,000) (205,000) (4,256,000) (392,000)
Net interest income after provision for
loan losses 2,318,405 3,313,012 5,348,502 10,455,152
Other operating income:
Securities transactions - net
Available-for-sale securities 20,921 - 20,921 122,634
Merchant discount 56,490 53,676 168,410 147,473
Mortgage banking fees 35,601 15,631 97,018 40,055
Service charges on deposits 186,514 169,893 492,209 490,312
Other income 153,285 127,495 429,682 385,923
Total other operating income 452,811 366,695 1,208,240 1,186,397
Other operating expenses:
Salaries and employee benefits 1,600,954 1,329,652 4,605,157 4,292,593
Occupancy 345,358 344,193 1,036,224 1,021,078
Legal fees 431,211 182,932 2,430,574 505,560
Severance costs - - 1,006,000 -
Furniture and equipment 205,142 173,085 633,401 526,209
Professional services 267,403 155,444 704,484 494,921
Other assessment 63,191 62,701 225,561 201,334
Office supplies 64,680 62,429 225,837 202,664
Imprinted checks 22,941 31,684 111,597 89,312
Telephone 72,511 63,790 191,106 169,630
Donations 29,850 15,327 115,379 65,555
Audit, accounting and examinations 47,695 45,705 160,190 106,579
Postage 40,808 31,219 115,506 104,284
Messenger service 46,435 29,777 133,242 86,229
FDIC assessment - (17,416) 1,000 291,840
Other expense 234,521 237,895 814,012 721,699
Total other operating expenses 3,472,700 2,748,417 12,509,270 8,879,487
Income (loss) before taxes (701,484) 931,290 (5,952,528) 2,762,062
Provision for income taxes (94,000) 380,000 (1,894,700) 1,104,000
Net earnings (loss) $(607,484) $551,290 $(4,057,828) $1,658,062
Earnings (loss) per share:
Primary $(0.43) $0.33 $(2.96) $1.01
Fully diluted $(0.43) $0.30 $(2.96) $0.93
</TABLE>
See notes to consolidated financial statements
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<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Month Period Ended
September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(4,057,828) $1,658,061
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 466,812 389,354
Provision for loan losses 4,256,000 392,000
Gain on securities available-for-sale (20,921) (122,634)
Amortization of convertible note expense 78,252 79,898
Decrease (increase) in accrued interest
receivable and other assets (1,910,354) 352,583
Increase in accrued interest payable and
other liabilities 892,927 1,194,917
Net amortization of premiums and discounts
on securities held-to-maturity 346,088 (71,076)
Net amortization of premiums and discounts
on securities available-for-sale 44,819 (276,221)
Net cash provided by operating activities 95,795 3,596,882
Cash flows from investing activities:
Proceeds from maturities of securities held-to-
maturity 5,739,094 8,693,643
Proceeds from maturities of securities
available-for-sale 8,974,771 2,509,291
Proceeds from sales of securities available-
for-sale 9,868,750 17,429,218
Purchases of securities held-to-maturity (1,014,004) (14,596,152)
Purchases of securities available-for-sale (9,904,845) (8,494,606)
Principal disbursed on loans, net 4,674,742 3,569,680
Purchase of bank premises and equipment, net (321,205) (208,859)
Net cash provided by investing activities 18,017,303 8,902,215
Cash flows from financing activities:
Net decrease in demand deposits and savings
accounts (27,142,169) (32,833,662)
Net proceeds from issuing certificates
of deposit (48,149,181) 33,009,823
Purchase of treasury shares (270,450) -
Fractional shares paid in lieu of stock
dividend (3,664) (3,269)
Exercise of options 181,822 -
Net cash provided (used) by financing
activities (75,383,642) 172,892
Net increase (decrease) in cash and cash
equivalents (57,270,544) 12,671,989
Cash and cash equivalents, beginning of year 85,199,673 37,133,189
Cash and cash equivalents, September 30, 27,929,129 49,805,178
Supplemental disclosure of cash flow
information-cash paid during the year for:
Interest $ 4,319,733 $ 4,555,578
Income Taxes $ 300 $ 964,734
Supplemental disclosure of noncash items:
Tax benefit from stock options exercised/sold $ 270,054 $ -
Change in unrealized losses on securities
available-for-sale $ (836,856) $ (142,903)
Conversion of notes $ 1,700 $ 110,316
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
PROFESSIONAL BANCORP, INC. 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, 1995.
The accompanying consolidated balance sheets, statements of earnings
and statements of cash flows reflect all material adjustments necessary for fair
presentation of the Company's financial position as of September 30, 1996 and
December 31, 1995 and the results of operations for the three months ended
September 30, 1996 and 1995 and the nine months ended September 30, 1996 and
1995. Interim operating results are not necessarily indicative of operating
results for a full year.
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). Due to the number of outstanding
options and warrants, earnings per share has been 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 ended
September 30, 1996, the earnings per share calculation, using the modified
treasury stock method is antidilutive; therefore, for the three and nine month
periods ended September 30, 1996, earnings per share are based on 1,353,954 and
1,362,153 shares, respectively, which represents the actual average outstanding
shares. For the three and nine month periods ended September 30, 1995, primary
earnings are based upon 1,806,565 and 1,806,505 shares, respectively. For the
three and nine month periods ended September 30, 1995, fully diluted earnings
are based upon 2,249,061 and 2,249,001 shares, respectively.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company posted a net loss of $4,058,000 during the first nine
months of 1996 compared to net earnings of $1,658,000 during the first nine
months of 1995. The Company posted a net loss of $607,000 during the third
quarter of 1996 compared to net earnings of $551,000 during the third quarter in
1995. The losses in 1996 were primarily due to a decline in net interest income
resulting from a reduced asset base, a provision for loan losses of $4,256,000
for the first nine months of 1996 and $836,000 in the third quarter, and costs
associated with the recent proxy contest and management changes. Costs
associated with a proxy contest and subsequent management changes totaling
$2,646,000 were charged in the quarter ended June 30, 1996.
Deposits decreased $75.3 million or 25.3% from December 31, 1995 to
September 30, 1996 and decreased $9.0 million or 3.9% from June 30, 1996 to
September 30, 1996. The decline in deposits while occurring in all deposit
categories was most prevalent among the Company's Time Certificates of deposit
(TCDs). TCDs declined $48.1 million or 54.6% from December 31, 1995 to September
30, 1996, but increased $4.9 million or 13.9% during the third quarter. Savings
and Money Market accounts have decreased $9.7 million or 9.9% during 1996 and
$9.3 million or 9.6% during the third quarter. Noninterest bearing demand
deposits ("DDAs") have decreased $15.3 million or 15.6% during 1996 and $3.3
million or 3.8% during the third quarter. While the decline in TCDs was reversed
during the third quarter, balances in other deposits declined. As the Board of
Directors and management refocus efforts to business development and client
retention, deposit levels are expected to stabilize and grow, although no
assurance can be given that such will occur. Savings and money market accounts
continued to represent the largest category of deposits comprising 39.4% of
total deposits at September 30, 1996 compared to 32.7% at December 31, 1995 and
36.6% at September 30, 1995. TCD's comprised 18.0% of deposits at September 30,
1996 compared to 29.6% at December 31, 1995 and 29.6% of deposits at September
30, 1995. DDA deposits continued to form a solid deposit base comprising 37.1%
of deposits at September 30, 1996 compared to 32.8% at December 31, 1995 and
29.1% at September 30, 1995.
The Company continued to experience decreasing loan demand as gross
loans totaled $92.1 million at September 30, 1996 compared to $100.1 million at
December 31, 1995 for an annual rate of decline of 10.6%. The decrease was due
primarily to a decrease in commercial loans. Management expects some additional
loan demand during the fourth quarter of 1996 as the Company refocuses its
efforts in building the loan portfolio.
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<PAGE>
The following table sets forth the amount of loans outstanding by
category and the percentage of each category to the total loan portfolio:
<TABLE>
<S> <C> <C> <C> <C>
September 30, December 31,
1996 1995
Amount Percentage Amount Percentage
(Amounts in Thousands)
Commercial $72,081 78.2% $77,012 77.0%
Real estate secured commercial 10,605 11.5 13,241 13.2
Subtotal 82,686 89.7 90,253 90.2
Equity lines of credit 6,300 6.8 6,070 6.1
Other lines of credit 1,777 1.9 1,997 2.0
Installment 1,327 1.5 1,625 1.6
Lease financing 63 0.1 140 0.1
Total loans $92,153 100.0% $100,085 100.0%
Less:
Allowance for loan losses 2,034 1,070
Deferred loan fees, net 105 71
Loans - net $90,014 $98,944
</TABLE>
The Company 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, 1996 nonperforming loans (loans put on nonaccrual status) totaled
$1,783,000 or 1.93% of total loans. At December 31, 1995, nonperforming loans
totaled $4,173,000 or 4.18% of total loans. At September 30, 1996, nonperforming
assets (nonperforming loans plus Other Real Estate Owned) totaled $2,055,000 or
.84% of total assets and 2.23% of total loans. At December 31, 1995,
nonperforming assets totaled $4,263,000 or 1.32% of total assets and 4.26% of
total loans. The decrease in nonperforming assets was due primarily to loan
charge-offs of $3,312,000 taken during the third quarter. Additionally, accruing
loans 90 days or more past due decreased to $122,000 at September 30, 1996
compared to $632,000 at December 31, 1995.
For the Company, impaired loans generally include loans classified as
nonaccrual and troubled debt restructurings. At September 30, 1996, the Company
had troubled debt restructurings totaling $436,000, $182,000 of which was on
nonaccrual. At December 31, 1995 the Company had troubled debt restructurings
totaling $1,167,000 of which $104,000 was on nonaccrual.
The following table sets forth the impaired loans and specific related
allowance for loan losses at September 30, 1996 and December 31, 1995:
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<PAGE>
<TABLE>
<S> <C> <C>
September 30, 1996 December 31,
1996 1995
Carrying value of impaired loans with
a specific allowance $ 893,000 $2,633,000
Carrying value of impaired loans without
a specific allowance $1,143,000 2,607,000
Total impaired loans $2,036,000 $5,240,000
Specific allowance on impaired loans $ 275,000 $ 311,000
</TABLE>
The average recorded investment in impaired loans during the first nine months
of 1996 was $6.5 million with interest income of $15,000 recorded during the
period.
Capital
The Office of the Comptroller of the Currency (the "OCC"), the primary
regulator of the Company's wholly owned subsidiary, First Professional Bank,
N.A. (the "Bank"), 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, 1996 and December 31, 1995.
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Company
Minimum Well-
September 30, December 31, Capital Capitalized
1996 1995 Ratios Ratios
Capital Ratios:
Tier 1 risk-based 11.13% 12.47% 4.00% 6.00%
Teir risk-based 16.88% 16.91 8.00 10.00
Leverage 5.49 5.72 3.00 5.00
Bank
Minimum Well-
September 30, December 31, Capital Capitalized
1996 1995 Ratios Ratios
Capital Ratios:
Tier 1 risk-based 15.16% 15.84% 4.00% 6.00%
Teir risk-based 16.42% 16.40% 8.00 10.00
Leverage 7.45 7.24 3.00 5.00
<FN>
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.
</FN>
</TABLE>
At September 30, 1996 the Company and the Bank exceeded all applicable
federal capital standards. Additionally, the Company and the Bank exceeded the
required minimum ratios for "well-capitalized" institutions. The Bank has
approximately $6,181,000 of capital in excess of the required minimum ratios for
"well-capitalized" institutions while the Company has approximately $1,248,000
of capital in excess of the required minimum ratios for "well-capitalized"
institutions. The Company does not currently intend to raise additional capital.
Dividends from the Bank to the Company in the amount of approximately $750,000
will be necessary in 1997 for the Company to meet its operating expenses and
interest obligations with respect to its convertible notes. Due to losses
sustained during 1996, the Bank will be required to obtain regulatory approval
in order to pay such dividends to the Company during 1997.
Liquidity
The Company continued to actively manage its liquidity and on September
30, 1996, the Bank sold $4.4 million in Federal funds. In addition, at September
30, 1996 the Company had securities available-for-sale totaling $68.0 million
available for either sale or for borrowing through repurchase agreements.
Results of Operations
The Company reported a loss of $4,058,000 or $2.96 per primary and
fully diluted share for the nine months ended September 30, 1996. This compares
with earnings of $1,658,000 or $1.01 per primary share and $.93 per fully
diluted share for the nine months ended September 30, 1995. The loss was
primarily due to costs associated with a proxy contest ($2,646,000 in legal
fees, printing, proxy solicitation and severance costs) and a higher provision
for loan losses ($4,256,000 for the first nine months of 1996 compared to
$392,000 in the year earlier period). The Company reported a loss of $607,000
for the three months ended September 30, 1996. This compares with earnings of
$551,000 or $.33 per primary share and $.30 per fully diluted share for the
three months ended September 30, 1995. The loss during the third quarter of 1996
was due primarily to a $836,000 provision for loan losses as well as $310,000 in
nonrecurring settlement related expenses. Also affecting earnings was a decline
in net interest income resulting from a declining asset base. Earning assets
averaged $244.8 million for the nine months ended September 30, 1996 compared to
$283.1 million for the year earlier period. Due to the decrease in earning
assets, net interest income for the nine
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<PAGE>
months ended September 30, 1996 was $9,605,000, a decrease of $1,243,000
(11.5%) below the amount recorded during the same period in 1995. Similarly,
earning assets averaged $222.7 million for the three months ended
September 30, 1996 compared to $291.5 million for the year earlier period
resulting in a decrease in net interest income of $364,000 (10.3%) during the
third quarter of 1996 compared to the third quarter of 1995.
The Company's net interest margin increased slightly to 5.24% for the
nine months ended September 30, 1996 from 5.15% for the nine months ended
September 30, 1995. Positively impacting the net interest margin in 1996 was the
termination of two interest rate swaps totaling $40 million notional (principal)
amount. Under the terms of the two swaps, the Company received a fixed rate of
7.215% for three years ended January 1996, while the Company paid the prime rate
over the same period of time. From January 1993 to January 30, 1996, the two
swaps decreased net interest income by $281,000 including $15,000 during the
first nine months of 1996 and $524,000 during the first nine months of 1995.
Also positively impacting the net interest margin has been the continued decline
of TCD's which tend to pay higher rates than other deposits. At September 30,
1996, TCD's totaled $40.0 million versus $88.1 million at December 31, 1995 and
$87.0 million at September 30, 1995.
In November 1993, the Bank entered into a swap with a notional amount
of $15,000,000. The effective start date of the swap was May 26, 1994 covering 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. Net interest income from May 1994 to September 30, 1996 was
reduced by the swap by $312,000 including $101,000 during the first nine months
of 1996 and $100,000 during the first nine months of 1995. At the date of this
report, the Company is paying 6.35% and receiving 5.49%.
As protection against lower interest rates, in December 1994 and
January 1995, the Company entered into three interest rate floor contracts with
a notional (principal) amount of $60,000,000. 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 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 at
approximately $20,000 per month. From December 1994 to September 30, 1996, net
interest income was increased by the floors by $343,000 including $176,000
during the first nine months of 1996 and $108,000 during the first nine months
of 1995.
In order to protect the fair value of a portion of the Company's GNMA
variable rate securities, in December 1995, the Company purchased two interest
rate caps with a notional (principal) amount of $10,000,000 each. The agreements
entitle the Company to receive from counterparties on a quarterly basis the
amounts, if any by which the one year Constant Maturity Treasury Index rises
above 6.50% for one of the agreements and 6.75% on the other. The cap agreements
are for a period of three years. The average premium paid for the cap agreements
was 63.5 basis points ($127,000) which is being amortized over the three year
period. From December 1995 to September 1996, net interest income was reduced by
the caps by $33,000 including $32,000 during the first nine months of 1996.
At September 30, 1996, the Company's available-for-sale portfolio
totaled $71,857,000 fair value compared to $81,520,000 at December 31, 1995 and
$35,958,000 at September 30, 1995. All of the Company's securities which reprice
with a frequency of annually or more frequently are classified as
available-for-sale. Additionally, all of the Company's Collateralized Mortgage
Obligations (CMO's) are also classified as available-for-sale. At September 30,
1996, the Company's CMO's had a total fair value of $33,619,000 which included
several securities. One CMO, with a fair value of $4,113,000 was a Planned
Amortization Class ("PAC") bond with a fixed 6.5% coupon and all principal
scheduled to be paid between 1996 and 2000. Another CMO, with a fair value of
$9,893,000 was a PAC bond that floats at 110 basis over the eleventh district
cost of funds index and has a cap of 10%. The remaining CMO's, with a fair value
of $19,613,000, were all variable rate using the one-month London Interbank
Offering Rate ("LIBOR") as the rate index.
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<PAGE>
Three of these CMO's had rates capped at between 9% and 10% of which with a
total fair value of $15,524,000 repricing monthly thereafter at 55 to 65
basis points over the one-month LIBOR. The fourth CMO had a fair value of
$4,089,000 which reprices monthly at a stated 200 basis points over the
one-month LIBOR with the rate capped at 10%. This security is known commonly
as a "kitchen sink" bond whose actual rate and cash flows are not predictable.
The scheduled principal payments on the CMO's are derived from the market's
median assumptions on mortgage prepayments. Actual principal payments on these
securities may vary significantly from those assumptions. In October 1996,
the Company sold $12,114,000 of its CMOs including the "kitchen sink" for
a net loss of $92,000.
The Company also holds approximately $36.4 million of GNMA adjustable
rate mortgage-backed securities. These securities which are available-for-sale
have current coupon rates between 6.50% and 7.125% and reprice annually with the
repricing dates of the securities held spread over the next twelve months. The
coupon rate is based on the one-year Constant Maturity Treasury index ("CMT")
plus 150 basis points. At September 30, 1996 the one-year CMT rate was 5.685%.
At September 30, 1996, the Company's held-to-maturity portfolio totaled
$43,446,000 compared to $48,517,000 at December 31, 1995 and $126,708,000 at
September 30, 1995. The most significant holdings in the Company
held-to-maturity portfolio include $13.6 million Federal National Mortgage
Association (FNMA) pass-through securities and $23.1 million fixed rate GNMA
pass-through securities. The FNMA securities have coupons of between 6.39% and
7.114%, are fixed until between September 1999 and January 2000, then float off
the one year CMT plus between 204.5 basis points and 219 basis points thereafter
with 2.0% annual limits to the change in the coupon rate. Many of the Company's
mortgaged-backed securities were purchased at a significant premium. This was
especially true with respect to the Company's GNMA pass-through securities which
have fixed coupon rates between 7% and 9%. These securities, which are also
held-to-maturity, mature between the years 2004 and 2008 with the majority
maturing in 2007, experience various prepayment speeds with higher prepayments
reducing the yield and slower prepayments raising the yield. Overall, as
interest rates declined, the yield on the Company's investment securities
decreased from 6.46% during the first nine months of 1995 to 6.24% for the first
nine months of 1996. Contributing to the decline in yield was the sale of
securities in December, 1995. While a gain of $870,000 was realized, the yield
going forward was negatively impacted. As the Company's focus becomes oriented
more to loan production, it is expected that the securities portfolio will
become a smaller portion of the balance sheet.
Other operating income, excluding securities transactions, totaled
$1,187,000 for the first nine months of 1996 and $432,000 during the third
quarter, compared to $1,064,000 for the first nine months of 1995 and $367,000
during the third quarter of 1995. The increase in 1996 was due primarily to
higher mortgage banking fees which reflects the continuing pickup in Southern
California for both mortgage refinancing as well as purchases. 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. Other income also increased from certain fee increases
which took effect on July 1, 1996.
For the first nine months of 1996, other operating expenses increased
$3,630,000 or 48.9% compared to the same period in 1995. $2,646,000 of the
increase related to costs incurred in the second quarter as a result of a proxy
contest and related litigation; such costs were mainly incurred as legal fees
and severance costs. Approximately $115,000 was due to printing and proxy
solicitation. Excluding such costs, other operating expenses increased $984,000
or 11.1%. There were increases in several areas, the largest being legal fees
which increased $400,000 or 79.1%. This increase was primarily due to increased
costs of loan collections most of which was substantially concluded by the end
of the third quarter. The increase of $313,000 in salary and employee benefits
was due primarily to nonrecurring expenses related to management changes during
the third quarter. Furniture and equipment increased $107,000 or 20.4% as the
Company installed a wide area network; this cost is moderating and should
continue to do so in the fourth quarter of 1996. Other increases included audit,
accounting and examinations ($54,000) due to an increase in
- 12 -
<PAGE>
audits performed in all areas of the Bank's operations, donations ($50,000) and
messenger service ($47,000) due to increased use of outside couriers. These
increases were largely offset by a reduction in the FDIC assessment of $291,000.
Noninterest expense is expected to be reduced in the fourth quarter.
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 5. Other Information.
In August 1996, the Company entered into a consulting agreement with
Network Health Financial Services (NHFS), a financial management and service
firm, pursuant to which NHFS provides consulting services to the Company and the
Bank with respect to policies, staffing and operation. During the third quarter,
the Company also entered into negotiations with NHFS to form a strategic
alliance. Melinda McIntyre-Kolpin is the founder, president and chief executive
officer of NHFS and former president of First Professional Bank. On September
24, 1996, Ms. McIntyre-Kolpin was appointed interim president and chief
executive officer of First Professional Bank in a first step in the joint
creation of a comprehensive set of financial products and services. The
framework of the strategic alliance between NHFS and First Professional Bank is
expected to be confirmed by the end of the year.
Item 6. Exhibits and Reports on Form 8-K
1. An 8-K was filed July 12, 1996 which had attached as Exhibit 1, a press
release dated July 11, 1996 announcing a new Board of Directors, the end of
litigation and the appointment of an interim Chief Executive Officer.
2. An 8-K was filed July 22, 1996 which had attached as Exhibit 1, a
settlement agreement between Professional Bancorp, Inc., First Professional
Bank, N.A., certain officers and directors of the Company, and the
Shareholders Protective Committee (the "Settlement Agreement") which set
the terms and conditions of the change in management of Professional
Bancorp, Inc. including the makeup of the Board of Directors, the interim
Chief Executive Officer, payments to certain outgoing executive officers,
termination of litigation and indemnification of the parties involved.
3. An 8-K was filed July 24, 1996 which had attached as Exhibit 1, a press
release, dated July 18, 1996 detailing the Company's second quarter, 1996
reported loss.
Exhibit 27. Financial Data Schedule.
- 13 -
<PAGE>
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 14, 1996 PROFESSIONAL BANCORP, INC.
(Registrant)
Daniel S. Rader
Chief Financial Officer and Treasurer
- 14 -
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,451,111
<INT-BEARING-DEPOSITS> 1,076,018
<FED-FUNDS-SOLD> 4,400,000
<TRADING-ASSETS> 0
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0
0
<COMMON> 11,285
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<INTEREST-DEPOSIT> 3,327,656
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<LOAN-LOSSES> 4,256,000
<SECURITIES-GAINS> 20,921
<EXPENSE-OTHER> 12,509,270
<INCOME-PRETAX> (5,952,528)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,057,828)
<EPS-PRIMARY> (2.96)
<EPS-DILUTED> (2.96)
<YIELD-ACTUAL> 7.34
<LOANS-NON> 1,783,000
<LOANS-PAST> 122,000
<LOANS-TROUBLED> 1,167,000
<LOANS-PROBLEM> 500,000
<ALLOWANCE-OPEN> 1,070,426
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<ALLOWANCE-DOMESTIC> 275,000
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