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 June 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 1,365,988
Class Outstanding on June 30, 1996
<PAGE>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance sheets at June 30, 1996 and
December 31, 1995 3
Consolidated Statements of Earnings for the three months
ended June 30, 1996 and 1995 and the six months ended
June 30, 1996 and 1995 4
Consolidated Statements of Cash flows for the six months
ended June 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 1 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8K 14
Exhibit 27. 16
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<S> <C> <C>
June 30, 1996 December 31, 1995
Cash and due from banks:
Noninterest bearing $ 31,088,071 $ 41,791,145
Interest bearing 751,280 1,008,528
Federal funds sold 5,800,000 42,400,000
Cash and cash equivalents 37,639,351 85,199,673
Securities available-for-sale at fair value 84,329,146 81,520,398
Held-to-maturity securities (Fair value of
$44,041,000 and $48,159,000, respectively) 45,258,350 48,517,017
Loans, net of allowance for loan losses
of $4,484,000 and $1,070,000 respectively 93,348,854 98,944,274
Premises and equipment, net 1,749,046 1,817,982
Accrued interest receivable and other assets 8,495,186 6,165,562
$ 270,819,933 $ 322,164,906
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 85,651,453 $ 97,641,982
Demand, interest-bearing 13,620,271 14,474,546
Savings and money market 96,814,317 97,209,310
Time certificates of deposit 35,098,105 88,139,864
Total deposits 231,184,146 297,465,702
Convertible Notes 4,817,126 4,766,658
Securities sold under agreements to repurchase 16,840,000 -
Accrued interest payable and other liabilities 3,984,557 2,424,792
Total liabilities 256,825,829 304,657,152
Shareholders Equity:
Common stock, $.008 par value;
12,500,000 shares authorized; 1,410,455
and 1,388,169 issued and 1,365,988
and 1,278,988 outstanding 11,284 10,620
Additional paid-in capital 12,487,849 11,682,752
Retained earnings 2,789,075 6,983,628
Treasury stock (44,467 and 109,181) shares (266,801) (655,085)
Net unrealized loss on securities
available-for-sale (1,027,303) (514,161)
Total shareholders equity 13,994,104 17,507,754
$ 270,819,933 $ 322,164,906
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<S> <C> <C> <C> <C>
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
1996 1995 1996 1995
Interest Income:
Loans $ 2,234,426 $ 2,468,790 $ 4,555,243 $ 4,796,054
Securities 2,005,287 2,466,740 4,048,197 5,059,772
Federal funds sold and securities purchased
under agreements to resell 229,234 390,158 638,543 520,526
Interest-bearing deposits in other banks 7,800 3,000 12,600 3,000
Total interest income 4,476,747 5,328,688 9,254,583 10,379,352
Interest expense:
Deposits 1,127,378 1,470,224 2,502,176 2,612,484
Convertible notes 119,149 122,187 238,383 244,375
Federal funds purchased and securities
sold under agreements to repurchase 55,080 9,804 63,927 193,353
Total interest expense 1,301,607 1,602,215 2,804,486 3,050,212
Net interest income 3,175,140 3,726,473 6,450,097 7,329,140
Less: Provision for loan losses (3,240,000) (125,000) (3,420,000) (187,000)
Net interest income after provisions for loan losses (64,860) 3,601,473 3,030,097 7,142,140
Other operating income:
Securities transactions - net
Available-for-sale securities - 96,902 - 122,634
Merchant discount 58,512 44,809 111,920 93,797
Mortgage banking fees 37,344 21,024 61,417 24,424
Service charges on deposits 151,042 167,399 305,695 320,419
Other income 146,015 136,310 276,397 258,428
Total other operating income 329,913 466,444 755,429 819,702
Other operating expenses:
Salaries and employee benefits 1,541,195 1,437,238 3,004,203 2,962,941
Occupancy 348,268 333,802 690,866 676,885
Legal fees 1,814,330 160,637 1,999,363 322,628
Severance costs 1,006,000 - 1,006,000 -
Furniture and equipment 217,240 171,820 418,259 353,124
Professional services 311,082 193,227 437,081 339,477
Other assessment 78,640 68,114 162,370 138,633
Office supplies 81,053 81,004 161,157 140,235
Imprinted checks 25,899 28,480 88,656 57,628
Telephone 59,914 46,304 118,595 105,840
Donations 29,160 36,794 85,529 50,228
Audit, accounting and examinations 63,630 23,825 112,495 60,874
Postage 40,177 37,451 74,698 73,065
Messenger service 60,343 26,064 86,807 56,452
FDIC assessment 500 154,628 1,000 309,256
Other expense 357,348 256,069 579,491 483,805
Total other operating expenses 6,034,779 3,055,457 9,036,570 6,131,071
Income (loss) before taxes (5,706,726) 1,012,460 (5,251,044) 1,830,771
Provision for income taxes (1,981,000) 408,700 (1,808,700) 724,000
Net earnings (loss) $(3,725,726) $ 603,760 $(3,450,344) $ 1,106,771
Earnings (loss) per share
Primary $(2.73) $0.37 $(2.53) $0.68
Fully diluted $(2.73) $0.33 $(2.53) $0.62
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C>
Six Month Periods Ended
June 30,
1996 1995
Cash flows from operating activities:
Net earnings (loss) $(3,450,344) $ 1,106,771
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 321,538 260,114
Provision for loan losses 3,420,000 187,000
Gain on securities available-for-sale - (122,634)
Amortization of convertible note expense 52,169 53,401
Decrease (increase) in accrued interest
receivable and other assets (1,735,856) 755,893
Increase (decrease) in accrued interest payable
and other liabilities 1,559,765 1,201,735
Net amortization of premiums and discounts
on securities held-to-maturity 181,362 (76,526)
Net amortization of premiums and discounts
on securities available-for-sale (69,459) (194,568)
Net cash (used) provided by operating activities 279,175 3,171,186
Cash flows from investing activities:
Proceeds from maturities of securities held-to-maturity 4,091,309 4,810,236
Proceeds from maturities of securities available-for-sale 6,248,854 1,196,968
Proceeds from sales of securities available-for-sale - 17,429,218
Purchases of securities held-to-maturity (1,014,004) (14,596,152)
Purchases of securities available-for-sale (9,825,000) (8,494,606)
Principal disbursed on loans, net 2,175,420 (1,500,481)
Purchase of bank premises and equipment, net (252,601) (135,964)
Net cash provided by investing activities 1,423,978 (1,290,781)
Cash flows from financing activities:
Net (decrease) in demand deposits and savings accounts (13,239,797) (13,390,162)
Net proceeds from issuing certificates of deposit (53,041,759) 30,361,241
Net proceeds from securities sold under agreements
to repurchase 16,840,000 -
Fractional shares paid in lieu of stock dividend (3,664) -
Exercise of options 181,745 -
Net cash used by financing activities (49,263,475) 16,971,079
Net increase (decrease) in cash and cash equivalents (47,560,322) 18,851,484
Cash and cash equivalents, beginning of year 85,199,673 37,133,189
Cash and cash equivalents, June 30, 37,639,351 55,984,673
Supplemental disclosure of cash flow information - cash
paid during the year for:
Interest $ 3,037,445 $ 3,290,857
Income Taxes $ 300 $ 574,565
Supplemental disclosure of noncash items:
</TABLE>
See notes to consolidated financial statements.
- 5 -
<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 June 30, 1996 and
December 31, 1995 and the results of operations for the three months ended
June 30, 1996 and 1995 and the six months ended June 30, 1996 and 1995.
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
six month periods ending June 30, 1996, the earnings per share calculation,
using the modified treasury stock method is antidilutive; therefore, for the
three and six month periods ending June 30, 1996, earnings per share are based
on 1,365,988 shares which represents the actual average outstanding shares.
For the three and six month periods ended June 30, 1995, primary earnings are
based upon 1,806,240 shares. For the three and six month periods ended
June 30, 1995, fully diluted earnings are based upon 2,259,052 shares.
- 6 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company posted a net loss of $3,450,000 during the first six months
of 1996 compared to net earnings of $1,107,000 during the first six months of
1995. The Company posted a net loss of $3,726,000 during the second quarter
of 1996 compared to net earnings of $604,000 during the second quarter in 1995.
The loss in 1996 was due to a provision for loan losses of $3,240,000, and
costs associated with a proxy contest and subsequent management changes
totaling $2,646,000. Of the $2,646,000, $1,640,000 related to legal fees and
other costs incurred during the proxy contest and related litigation matters;
$1,006,000 related to accrued severance costs stipulated in a settlement
agreement. The settlement agreement set the terms and conditions of benefits
and severance payments to certain outgoing officers of the Company and the
makeup of the Board of Directors (see Item 6. Exhibits and Reports on Form 8-K).
Of the provision for loan losses, $2,950,000 related to specific loans which
had deteriorated during the second quarter and that management determined
additional reserves were necessary to protect against potential losses; one
loan constituted $1,915,000 of the specific provision. During the second
quarter of 1996, the Company accrued a tax benefit of $1,981,000 reducing the
second quarter loss from $5,707,000 to $3,726,000.
Deposits decreased $66.3 million or 22.3% from December 31, 1995 to
June 30, 1996 and decreased $37.2 million or 13.9% from March 31, 1996 to
June 30, 1996. The decrease occurred in noninterest bearing demand ("DDA")
deposits and time certificates of deposit (TCD's). DDA deposits decreased
$12.0 million from December 31, 1995 to June 30, 1996. The decrease was
largely seasonal in nature. Typically, DDA balances rise at year-end due to
balance sheet structuring by clients and in anticipation of tax and bonus
payments. DDA deposits increased $1.9 million or 2.2% from March 31, 1996 to
June 30, 1996. TCD's decreased $53.0 million or 60.2% from December 31, 1995
to June 30, 1996. The decrease was primarily in large TCD's with certain
clients who moved the TCD's out of the Company shortly after merging into or
being purchased by larger companies. These TCD's were typically paying 5.0%
to 5.5% and were replaced by overnight repurchase agreements as necessary;
the Company's net interest margin was not impacted significantly. Savings and
money market accounts continued to represent the largest category of deposits
comprising 41.9% of total deposits at June 30, 1996 compared to 32.7% at
December 31, 1995 and 38.5% at June 30, 1995. TCD's comprised 15.2% of
deposits at June 30, 1996 compared to 29.6% at December 31, 1995 and 27.1% of
deposits at June 30, 1995. DDA deposits continued to form a solid deposit
base comprising 37.0% of deposits at June 30, 1996 compared to 32.8% at
December 31, 1995 and 29.5% at June 30, 1995.
The Company continued to experience decreasing loan demand as gross loans
totaled $97.8 million at June 30, 1996 compared to $100.1 million at
December 31, 1995 for an annual rate of decline of 4.6%. The decrease was due
primarily to a decrease in commercial loans. Management expects some
additional loan demand during the third quarter of 1996 as the Company
refocuses its efforts in building the loan portfolio. Additionally, the
Company has begun efforts to make loans to medical service organizations which
may also add to the Company's loan portfolio.
- 7 -
<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>
June 30, December 31,
1996 1995
Amount Percentage Amount Percentage
(Amounts in Thousands)
Commercial $ 77,318 79.0% $ 77,012 77.0%
Real estate secured commercial 11,281 11.5 13,241 13.2
Subtotal 88,599 90.5 90,253 90.2
Equity lines of credit 5,921 6.1 6,070 6.1
Other lines of credit 1,927 1.9 1,997 2.0
Installment 1,345 1.4 1,625 1.6
Lease financing 73 0.1 140 0.1
Total loans $ 97,905 100.0% $ 100,085 100.0%
Less:
Allowance for loan losses 4,484 1,070
Deferred loan fees, net 72 71
Loans - net $ 93,349 $ 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
June 30, 1996 nonperforming loans (loans put on nonaccrual status) totaled
$6,537,000 or 6.68% of total loans. At December 31, 1995, nonperforming loans
totaled $4,173,000 or 4.18% of total loans. At June 30, 1996, nonperforming
assets (nonperforming loans plus Other Real Estate Owned) totaled $6,616,000 or
2.44% of total assets and 6.76% 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. Additionally, accruing loans 90 days or more past due decreased
to $196,000 at June 30, 1996 compared to $632,000 at December 31, 1995. The
$78,000 of Other Real Estate Owned was disposed of in July at the stated
fair value.
The Company adopted Statement of Financial Accounting Standards No. 114
(SFAS 114) "Accounting by Creditors for Impairment of a Loan" and No. 118
(SFAS 118) "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" which amended certain provisions of SFAS 114 on
January 1, 1995. The Company considers a loan to be impaired when, based upon
current information and events, it believes it is probable that the Company
will be unable to collect all amounts due according to the contractual terms
of the loan agreement on a timely basis. Impairment of a loan is measured by
the present value of expected future cash flows discounted at the loan's
effective interest rate, 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, the
Company recognizes an impairment by creating a valuation allowance with a
corresponding charge to provision for loan losses.
For the Company, impaired loans generally include loans classified as
nonaccrual and troubled debt restructurings. At June 30, 1996, the Company
had troubled debt restructurings totaling $1,753,000, $1,470,000 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.
- 8 -
<PAGE>
The following table sets forth the impaired loans and specific related
allowance for loan losses at June 30, 1996 and December 31, 1995:
<TABLE>
<S> <C> <C>
June 30, December 31,
1996 1995
Carrying value of impaired loans with a specific allowance $ 5,065,000 $ 2,633,000
Carrying value of impaired loans without a specific allowance $ 1,755,000 $ 2,607,000
Total impaired loans $ 6,820,000 $ 5,240,000
Specific allowance on impaired loans $ 3,511,000 $ 311,000
</TABLE>
The average recorded investment in impaired loans during the first six months
of 1996 was $6.5 million with interest income of $38,000 recorded during the
period.
Capital
On May 14, 1996 the Company declared a 5% stock dividend. The record date
for the stock dividend was May 31, 1996 and was paid on June 21, 1996. As a
result of the stock dividend, the outstanding shares of common stock increased
from 1,300,650 to 1,365,364. The conversion price on the Company's 8.5%
convertible notes decreased from $13.3333 to $12.6984 or 78.75 shares per
$1,000 face value of notes.
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.
- 9 -
<PAGE>
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, 1996 and December 31, 1995.
<TABLE>
<S> <C> <C> <C> <C>
Company
Minimum Well-
June 30, December 31, Capital Capitalized
1996 1995 Ratios Ratios
Capital Ratios:
Tier 1 risk-based 11.3 % 12.47% 4.00% 6.00%
Total risk-based 16.45 16.91 8.00 10.00
Leverage 5.33 5.72 3.00 5.00
Bank
Minimum Well-
June 30, December 31, Capital Capitalized
1996 1995 Ratios Ratios
Capital Ratios:
Tier 1 risk-based 16.10% 15.84% 4.00% 6.00%
Total risk-based 17.03 16.40 8.00 10.00
Leverage 7.57 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 June 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 $7,214,000 of capital in excess of the required minimum ratios
for "well-capitalized" institutions while the Company has approximately
$935,000 of capital in excess of the required minimum ratios for "well-
capitalized institutions. The Company does not currently intend to raise
additional capital. During July 1996, the Bank paid dividends to the Company
totaling $1,350,000 to enable the Company to pay the costs incurred during the
proxy contest. These dividends were paid from the Bank's retained earnings
and so decreased the capital of the Bank. After payment of the dividends, the
Bank has approximately $5,864,000 of capital in excess of the required minimum
ratios for "well-capitalized" institutions.
Liquidity
The Company continued to actively manage its liquidity and on June 30,
1996, the Bank sold $5.8 million in Federal funds. At June 30, 1996, the
Company also had $16,840,000 outstanding in repurchase agreements which the
Company has increasingly been relying on for liquidity as TCD's balances have
declined. In addition, at June 30, 1996 the Company had securities available-
for-sale totaling $67.2 million available for either sale or for borrowing
through repurchase agreements.
Results of Operations
The Company reported a loss of $3,450,000 or $2.53 per primary and fully
diluted share for the six months ended June 30, 1996. This compares with
earnings of $1,107,000 or $.68 per primary share and $.62 per fully diluted
share for the six months ended June 30, 1995. The loss was primarily due to
costs associated
- 10 -
<PAGE>
with a proxy contest ($2,646,000 in legal fees, printing, proxy
solicitation and severance costs) and a higher provision for loan
losses ($3,420,000 for the first six months of 1996 compared to $187,000 in
the year earlier period). Also affecting earnings was a decline in earning
assets. Earning assets averaged $254,686,000 for the six months ended
June 30, 1996 compared to $277,889,000 for the year earlier period. Due to
the decrease in earning assets, net interest income before provision for
loan losses for the six months ended June 30, 1996 was $6,450,000, a decrease
of $879,000 (12%) below the amount recorded during the same period in 1995.
The Company's net interest margin increased slightly to 5.25% for the six
months ended June 30, 1996 from 5.22% for the six months ended June 30, 1995.
Positively impacting net interest income 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 June 30, 1996, the two swaps decreased net
interest income by $281,000 including $15,000 during the first six months of
1996 and $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 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 June 30,
1996 was reduced by the swap by $279,000 including $68,000 during the first
six months of 1996 and $69,000 during the first six 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
June 30, 1996, net interest income was increased by the floors by $256,000
including $117,000 during the first six months of 1996 and $22,000 during the
first six 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 June 1996, net interest income
was reduced by the caps by $22,000 including $21,000 during the first six
months of 1996.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company classifies its investment in debt and equity securities as held-to-
maturity, available-for-sale or trading securities as applicable. Securities
held-to-maturity are those securities for which the Company has the ability
and intent to hold the security until maturity. Trading securities consisting
of U.S. Government and agency obligations are acquired and sold to benefit
from short-term movements in market prices. All other securities are
classified as available-for-sale.
Securities held-to-maturity are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Trading securities
are carried at fair value and are recorded as of their trade dates. Gains or
losses on trading securities, both realized and unrealized, are recognized
currently in income. Securities designated as available-for-sale are recorded
at fair value. Change in the fair value of debt
- 11 -
<PAGE>
securities available-for-sale are included in stockholders' equity as
unrealized gains (losses) on securities available-for-sale, net of taxes.
Unrealized losses, on securities reflecting a decline in value judged to be
other than temporary, are charged to income in the consolidated statements of
earnings. Unrealized gains and losses and realized gains and losses on
securities are computed on a specific identification basis.
At June 30, 1996, the Company's available-for-sale portfolio totaled
$84,329,000 fair value compared to $81,520,000 at December 31, 1995 and
$37,150,000 at June 30, 1995. All of the Company's securities which reprice
with a frequency of annually or more frequently were classified as available-
for-sale. Additionally, all of the Company's Collateralized Mortgage
Obligations (CMO's) were also classified as available-for-sale. The Company's
CMO's had a total fair value of $35,357,000 which included several securities.
One CMO, with a fair value of $4,539,000 was a Premium 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 $10,222,000 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 were all variable rate using
the one-month London Interbank Offering Rate ("LIBOR") as the rate index.
These CMO's had rates capped at between 9% and 10% and included PACs with a
total fair value of $16,331,000 repricing monthly thereafter at 55 to 65 basis
points over the one-month LIBOR. The remaining CMO had a fair value of
$3,996,000 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.
The Company also holds approximately $38.0 million of GNMA adjustable rate
mortgage-backed securities. These securities which are available-for-sale have
current coupon rates between 6.50% and 7.375% 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 June 30, 1996 the one-year CMT rate
was 5.68%.
At June 30, 1996, the Company's held-to-maturity portfolio totaled $45,258,000
compared to $48,517,000 at December 31, 1995 and $130,597,000 at June 30, 1995.
The most significant holdings in the Company held-to-maturity portfolio
include $13.9 million Federal National Mortgage Association (FNMA) pass-through
securities and $22.8 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 6.35% during the first six months of 1995 to 6.26%
for the first six months of 1996. The Company may sell certain securities at
a loss in order to increase the overall yield on the available-sale-portfolio
from current levels.
Other operating income, excluding securities transactions, totaled
$755,000 for the first six months of 1996 compared to $697,000 for the same
period in 1995. The increase 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.
- 12 -
<PAGE>
For the first six months of 1996, other operating expenses increased
$2,905,000 or 47.4% compared to the same period in 1995. $2,646,000 of the
increase related to costs incurred as a result of a proxy contest and related
litigation. Excluding such costs, other operating expenses increased $259,000
or 4.2%. There were increases in several areas, the largest being legal fees
which increased $151,000 or 46.9%. Most of this increase was due to increased
costs of loan collections. Furniture and equipment increased $75,135 or 21.3%
as the Company began installing a wide area network. This cost should moderate
in the second half of 1996. Other increases included audit, accounting and
examinations ($52,000) due to an increase in audits performed in all areas of
the Bank's operations, meetings and business development ($37,000) due to the
cost in researching new products, donations ($35,000), imprinted checks
($31,000) due to several large client orders, messenger service ($30,000) due
to increased use of outside couriers and salaries and benefits ($41,000) due
to severance benefits. These increases were largely offset by a reduction in
the FDIC assessment of $308,000. Noninterest expense is expected to be
reduced in the third and fourth quarters.
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 1. Legal Proceedings
On May 28, 1996, Martin S. Goldfarb, M.D., a shareholder of the Company
and a member of the Professional Bancorp Shareholders Protective Committee
(the "Shareholders Protective Committee" or the "Committee"), filed a
complaint in United States District Court for the Central District of
California against the Directors of the Company. The complaint was amended
on June 11, 1996, naming the Company as a Defendant. The complaint alleged
disenfranchisement of the shareholders, financial self-dealing and breach of
fiduciary duty, and sexual harassment. The complaint sought declaratory and
injunctive relief, damages estimated to exceed $1,000,000, and punitive and
exemplary damages. The complaint was voluntarily dismissed on June 20, 1996.
On June 3, the Company filed a complaint in the United States District
Court for the Central District of California against the Shareholders
Protective Committee and certain members of the Shareholders Protective
Committee. The complaint alleged that the defendants' activities related
to the proxy solicitation for the 1996 Annual Meeting of Shareholders (the
"Annual Meeting") constituted a breach of a stock subscription agreement
entered into by the shareholder defendants when they purchased shares of the
Company through a private placement. The Company sought an unspecified amount
of damages, indemnification of all costs incurred and injunctive relief. The
complaint was dismissed on July 26, 1996 as a result of a settlement reached
on July 8, 1996 between the Company, First Professional Bank, N.A., certain
officers and directors of the Company, and the Committee (the "Settlement
Agreement").
On June 24, 1996, the Company also filed a complaint in Philadelphia
County Court of Common Pleas in Pennsylvania against certain shareholders of
the Company alleging that the defendants constituted a "control group" under
Pennsylvania Law and therefore had improperly sought to vote their shares at
the Annual Meeting, and that the proxies granted by the defendants were
invalid because the proxies granted discretionary authority to the proxy
holders. The complaint sought damages in excess of $50,000 and the
disqualification of the defendants' proxies. The complaint was dismissed on
July 12, 1996 as a result of the Settlement Agreement.
- 13 -
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
1. The Annual Meeting of Shareholders was held June 27, 1996. The
following persons were nominated and elected to the board of
directors to serve until the 1997 Annual Meeting of Shareholders:
Richard A. Berger Ray T. Oyakawa, M.D.
Alan S. Borstein Lynn O. Poulson, J.D.
Ronald L. Katz, M.D. Julie P. Thompson
Joel S. Moskowitz
The tabulation with respect to each nominee for the office of
director, using cumulative voting, was as follows:
<TABLE>
<S> <C> <C>
Candidate's Name Authority Given Authority Withheld
Richard A. Berger 1,019,551 1,797
Alan S. Borstein 1,018,750 0
John S. Buchanan 200 0
John E. Cobain 593 0
James B. Jacobson 262 1,797
Ronald L. Katz, M.D. 1,019,944 1,797
Anthony R. Kovner 262 1,797
Joel W. Kovner, Dr. PH. 262 1,797
Larry E. Kushing 593 0
Joel S. Moskowitz 1,239,279 0
Ray T. Oyakawa, M.D. 1,248,460 0
Lynn O. Poulson, J.D. 1,018,414 1,797
David G. Rodeffer, MPH 262 1,797
Julie P. Thompson 1,246,648 0
</TABLE>
2. Rejected the proposal for the 1996 Non-Employee Director Stock
Option Plan by the following vote:
For: 445,740; Against: 663,066; Abstain: 18,518
3. Ratified the appointment of KPMG Peat Marwick LLP as independent
public accountants for 1996 by the following vote:
For: 1,030,325; Against: 93,578; Abstain: 4,021
Item 5. Other Information.
Pursuant to the settlement agreement dated July 8, 1996, John S. Buchanan was
approved by the board of directors of the Bank to be a director of the Bank
during his period of employment.
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, 1996.
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.
- 14 -
<PAGE>
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 10. The Settlement Agreement, which was filed as an Exhibit to the
8-K filed July 22, 1996, is hereby incorporated by reference.
Exhibit 27. Financial Data Schedule.
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 13, 1996 PROFESSIONAL BANCORP, INC.
(Registrant)
/s/ Daniel S. Rader
Daniel S. Rader
Chief Financial Officer and Treasurer
- 15 -
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 31,088,071
<INT-BEARING-DEPOSITS> 751,280
<FED-FUNDS-SOLD> 5,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 84,329,146
<INVESTMENTS-CARRYING> 45,258,350
<INVESTMENTS-MARKET> 44,041,000
<LOANS> 97,805,249
<ALLOWANCE> 4,483,793
<TOTAL-ASSETS> 270,819,933
<DEPOSITS> 231,184,146
<SHORT-TERM> 16,840,000
<LIABILITIES-OTHER> 3,984,557
<LONG-TERM> 4,817,126
0
0
<COMMON> 11,284
<OTHER-SE> 13,982,820
<TOTAL-LIABILITIES-AND-EQUITY> 270,819,933
<INTEREST-LOAN> 4,555,243
<INTEREST-INVEST> 4,048,197
<INTEREST-OTHER> 651,142
<INTEREST-TOTAL> 9,254,583
<INTEREST-DEPOSIT> 2,502,176
<INTEREST-EXPENSE> 2,804,486
<INTEREST-INCOME-NET> 6,450,097
<LOAN-LOSSES> 3,420,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,036,570
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,450,344)
<EPS-PRIMARY> (2.53)
<EPS-DILUTED> (2.53)
<YIELD-ACTUAL> 8.43
<LOANS-NON> 6,537,000
<LOANS-PAST> 196,000
<LOANS-TROUBLED> 1,753,000
<LOANS-PROBLEM> 500,000
<ALLOWANCE-OPEN> 1,070,426
<CHARGE-OFFS> 40,852
<RECOVERIES> 34,219
<ALLOWANCE-CLOSE> 4,483,793
<ALLOWANCE-DOMESTIC> 3,511,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 972,793
</TABLE>
