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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1996 Commission File No. 0-11223
PROFESSIONAL BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 95-3701137
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(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)
Registrant's telephone number, including area code: (310) 458-1521
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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 1,300,650
----------------------------- ---------
Class Outstanding on March 31, 1996
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INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance sheets at March 31, 1996
and December 31, 1995 3
Consolidated Statements of Earnings for the
three months ended March 31, 1996 and 1995 4
Consolidated Statements of Cash flows for
the three months ended March 31, 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 6 Exhibits and Reports on Form 8K 12
Exhibit 11 13
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
Cash and due from banks:
Noninterest bearing $ 25,684,541 $ 41,791,145
Interest bearing 413,801 1,008,528
Federal funds sold 34,900,000 42,400,000
-------------- -----------------
Cash and cash equivalents 60,998,342 85,199,673
Securities available-for-sale
at fair value 78,716,088 81,520,398
Held-to-maturity securities
(Fair value of $47,101,000
and $48,159,000, respectively) 47,570,256 48,517,017
Loans, net of allowance for loan
losses of $1,264,000 and
$1,070,000 respectively 97,732,917 98,944,274
Premises and equipment, net 1,743,029 1,817,982
Accrued interest receivable
and other assets 6,280,204 6,165,562
-------------- --------------
$ 293,040,836 $ 322,164,906
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 83,785,648 $ 97,641,982
Demand, interest-bearing 13,855,606 14,474,546
Savings and money market 96,886,973 97,209,310
Time certificates of deposit 73,872,578 88,139,864
-------------- --------------
Total deposits 268,400,805 297,465,702
Convertible Notes 4,791,044 4,766,658
Accrued interest payable and
other liabilities 1,696,182 2,424,792
-------------- --------------
Total liabilities 274,888,031 304,657,152
-------------- --------------
Shareholders' Equity:
Common stock, $.008 par value;
12,500,000 shares authorized;
1,409,831 and 1,327,548 issued
and 1,300,650 and 1,218,367
outstanding 11,279 10,620
Additional paid-in capital 12,135,514 11,682,752
Retained earnings 7,259,011 6,983,628
Treasury stock (109,181) (655,085) (655,085)
Net unrealized loss on securities
available-for-sale (597,914) (514,161)
-------------- --------------
Total shareholders' equity 18,152,805 17,507,754
-------------- --------------
$ 293,040,836 $ 322,164,906
============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
THREE MONTH PERIODS ENDED MARCH 31,
1996 1995
----------- -----------
INTEREST INCOME:
Loans $ 2,320,817 $ 2,327,264
Securities 2,042,910 2,593,032
Federal funds sold and securities
purchased under agreements to resell 409,309 130,368
Interest-bearing deposits in other banks 4,800 -
----------- -----------
TOTAL INTEREST INCOME 4,777,836 5,050,664
INTEREST EXPENSE:
Deposits 1,374,798 1,142,260
Convertible notes 119,234 122,188
Federal funds purchased and securities
sold under agreements to repurchase 8,847 183,549
Total interest expense 1,502,879 1,447,997
----------- -----------
Net interest income 3,274,957 3,602,667
----------- -----------
Less: Provision for loan losses (180,000) (62,000)
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,094,957 3,540,667
OTHER OPERATING INCOME:
Securities transactions - net
Available-for-sale securities - 25,732
Merchant discount 53,408 48,988
Mortgage banking fees 24,073 3,400
Service charges on deposits 154,653 153,020
Other income 130,382 122,118
----------- ------------
TOTAL OTHER OPERATING INCOME 362,516 353,258
----------- ------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,463,008 1,525,703
Occupancy 342,598 343,083
Legal fees 185,033 161,991
Furniture and equipment 211,019 181,304
Professional services 125,999 146,250
Other assessment 83,730 70,519
Office supplies 80,104 59,231
Imprinted checks 62,757 29,148
Telephone 58,681 59,536
Donations 56,369 13,434
Audit, accounting and examinations 48,865 37,049
Postage 34,521 35,614
Messenger service 26,464 30,388
FDIC assessment 500 154,628
Other expense 222,143 227,736
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Total other operating expenses 3,001,791 3,075,614
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Income before taxes 455,682 818,311
Provision for income taxes 180,300 315,300
----------- ------------
Net earnings $ 275,382 $ 503,011
=========== ============
Earnings per share:
Primary $ 0.20 $ 0.33
Fully diluted $ 0.20 $ 0.30
SEE NOTES TO CONOLIDATED FINANCIAL STATEMENTS
4
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PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Periods Ended
March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 275,382 $ 503,011
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 157,171 129,923
Provision for loan losses 180,000 62,000
Gain on securities available-for-sale - (25,733)
Amortization of convertible note expense 26,086 26,701
Decrease (Increase) in accrued interest
receivable and other assets 214,241 (20,088)
Increase (decrease) in accrued interest
payable and other liabilities (728,609) 205,300
Net amortization of premiums and
discounts on securities
held-to-maturity (71,076) 2,457
Net amortization of premiums and discounts
on securities available-for-sale (276,221) (148,507)
----------- -----------
Net cash (used) provided by operating
activities (223,026) 735,064
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
held-to-maturity 2,020,639 1,990,054
Proceeds from maturities of securities
available-for-sale 2,937,948 616,208
Proceeds from sales of securities
available-for-sale - 10,025,153
Purchases of securities held-to-maturity (1,002,802) -
Principal disbursed on loans, net 1,031,357 3,826,124
Purchase of bank premises and equipment,
net (82,218) (105,738)
----------- ------------
Net cash provided by investing activities 4,904,924 16,351,801
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in demand deposits
and savings accounts (14,797,611) (12,060,884)
Net proceeds from issuing
certificates of deposit (14,267,286) 11,645,244
Exercise of options 181,668 -
------------ ------------
Net cash used by financing activities (28,883,229) (415,640)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (24,201,331) 16,671,225
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 85,199,673 37,133,189
------------ ------------
CASH AND CASH EQUIVALENTS, MARCH 31, 60,998,342 53,804,414
============ ===========
Supplemental disclosure of cash flow
information - cash paid during the year for:
Interest $ 1,980,104 $ 1,860,422
Income Taxes $ 300 $ 139,000
Supplemental disclosure of noncash items:
Tax benefit from stock options
exercised/sold $ 270,054 $ -
Change in unrealized losses on
securities available-for-sale $ (142,583) $ 810,681
Conversion of notes $ 1,700 $ -
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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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 for the Company's financial position as of March 31, 1996 and
December 31, 1995 and the results of operations for the three months ended March
31, 1996 and 1995. All such adjustments are of a normal recurring nature.
NOTE 2 - EARNINGS PER SHARE
Earnings per share are based on the number of common shares outstanding
during each year and the assumed exercise of dilutive employee stock options
(less the number of treasury shares assumed to be purchased using the average
market price of the Company's common stock). Earnings per share for the three
month periods ending March 31, 1996 and 1995 are based on the modified treasury
stock method. The modified treasury stock method counts all outstanding
warrants and stock options as outstanding and then assumes the proceeds are used
to repurchase up to 20% of the outstanding shares at the average market price
for the period. The remaining proceeds are then assumed to be invested in U.S.
Treasury securities yielding 6.0% for the three months ended March 31, 1996 and
1995. Primary earnings per share are based upon 1,576,075 and 1,720,460 shares
for the three months ended March 31, 1996 and 1995, respectively. Fully diluted
earnings per share are based upon 1,997,351 and 2,151,710 shares for the three
months ended March 31, 1996 and 1995, respectively. Common shares exclude
109,181 of weighted average treasury shares for 1996 and 1995.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company posted earnings of 275,000 during the first three months of
1996 compared to earnings of $503,000 during the first three months of 1995.
The first quarter of 1995 included a gain from securities transactions of
$26,000.
Deposits have historically declined during the first quarter and decreased
$29.1 million or 9.8% to $268.4 million at March 31, 1996. This decline was
exaggerated by the outflow of approximately $25 million in Time certificates of
deposit (TCD's) which had been anticipated for several months. Savings and
money market accounts continued to represent the largest category of deposits
comprising 36.1% of total deposits at March 31, 1996 compared to 32.7% at
December 31, 1995 and 37.8% at March 31, 1995. TCD's comprised 27.5% of
deposits at March 31, 1996 compared to 29.6% at December 31, 1995 and 22.4% of
deposits at March 31, 1995. Noninterest bearing deposits continued to form a
solid deposit base comprising 31.2% of deposits at March 31, 1996 compared to
32.8% at December 31, 1995 and 34.5% at March 31, 1995.
The Company continued to experience a low level of loan demand as gross
loans totaled $99,074,000 at March 31, 1996 compared to $100,085,000 at December
31, 1995 for an annual rate of decline of 4%. The decrease was due primarily to
a decrease in commercial loans. Management expects some additional loan demand
during the second quarter of 1996 as the Company is planning to begin
originating loans to Medical Service Organization's. The Company will also
begin to originate loans guaranteed by the Small Business Administration; most
of these loans, however, will be sold.
The following table sets forth the amount of loans outstanding by category
and the percentage of each category to the total loan portfolio:
MARCH 31, DECEMBER 31,
------------------- --------------------
1996 1995
------------------- --------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
(AMOUNTS IN THOUSANDS)
Commercial $ 75,906 76.6 $ 77,012 77.0%
Real estate secured commercial 13,581 13.7 13,241 13.2
-------- ---- -------- ----
Subtotal 89,487 90.3 90,253 90.2
Equity lines of credit 6,140 6.2 6,070 6.1
Other lines of credit 1,830 1.9 1,997 2.0
Installment 1,498 1.5 1,625 1.6
Lease financing 119 0.1 140 0.1
-------- ---- -------- ----
Total loans $ 99,074 100.0% $100,085 100.0%
========= ========
Less:
Allowance for loan losse 1,264 1,070
Deferred loan fees, net 77 71
Loans - net $ 97,733 $ 98,944
========= ========
The Bank does not originate mortgage loans or accept trust deeds on
property outside the State of California as primary collateral for a loan. At
March 31, 1996 nonperforming loans (loans put on nonaccrual status) totaled
$5,033,000 or 5.08% of total loans. At December 31, 1995, nonperforming loans
totaled
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$4,173,000 or 4.18% of total loans. At March 31, 1996, nonperforming assets
(nonperforming loans plus Other Real Estate Owned) totaled $5,123,000 or 1.75%
of total assets and 5.18% 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 increased to $687,000 at
March 31, 1996 compared to $632,000 at December 31, 1995.
The Bank 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 March 31, 1996, the Company had
troubled debt restructurings totaling $1,769,000, $599,000 of which was on
nonaccrual.
The Company had approximately $6,206,000 in impaired loans as of March 31,
1996. The carrying value of impaired loans for which there was a specific
related allowance for loan losses was $2,782,000, with the amount of allowance
for loan losses allocated to these loans of $539,000. There were $3,424,000 in
impaired loans for which there was no specific related allowance for credit
losses. The Company had approximately $5,240,000 in impaired loans as of
December 31, 1995. The carrying value of impaired loans for which there was a
specific related allowance for loan losses was $2,629,000, with the amount of
allowance for loan losses allocated to these loans of $311,000. There were
$2,607,000 in impaired loans for which there was no related allowance for credit
losses. The average recorded investment in impaired loans during the first
three months of 1996 was $6.2 million with interest income of $36,000 recorded
during the period.
The Bank continued to actively manage its liquidity and on March 31, 1996,
the Bank sold $34.9 million in Federal funds. In addition, at March 31, 1996
the Bank had approximately $78.7 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.
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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 March 31, 1996 and December 31, 1995.
COMPANY
----------------
MINIMUM WELL-
MARCH 31, DECEMBER 31, CAPITAL CAPITALIZED
1996 1995 RATIOS RATIOS
---- ----
CAPITAL RATIOS:
TIER 1 RISK-BASE 13.56% 12.47% 4.00% 6.00%
TOTAL RISK-BASED 18.54 16.91 8.00 10.00
LEVERAGE 6.36 5.72 3.00 5.00
BANK
-----------------
MINIMUM WELL-
MARCH 31, DECEMBER 31, CAPITAL CAPITALIZED
1996 1995 RATIOS RATIOS
---- ----
CAPITAL RATIOS:
TIER 1 RISK-BASED 16.55% 15.84% 4.00% 6.00%
TOTAL RISK-BASED 17.47 16.40 8.00 10.00
LEVERAGE 7.73 7.24 3.00 5.00
1 The minimum required by the FRB is 3%; for all but the most highly-rated bank
holding companies, the FRB expects a leverage ratio of 3% plus 100 to 200 basis
points.
At March 31, 1996 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
$8,699,000 of capital in excess of the required minimum ratios for "well-
capitalized" institutions while the Company has approximately $4,119,000 of
capital in excess of the required minimum ratios for "well-capitalized
institutions. The Company does not currently intend to raise additional
capital.
RESULTS OF OPERATIONS
Earnings for the three months ended March 31, 1996 decreased by $228,000 to
$275,000 compared earnings of $503,000 for the same period in 1995, Earnings
per share, as calculated using the modified treasury stock method, decreased to
$0.20 per fully diluted share compared to $0.30 per share for the first quarter
of 1995. Earnings decreased due to a slight narrowing of the interest margin to
5.03% for the first quarter of 1996 from 5.23% recorded in the year earlier
period, a higher provision for loan losses ($180,000 versus $62,000) and a
slight decline in average earning assets ($262,253,000 versus $275,541,000).
Net interest income before provision for credit losses for the three months
ended March 31, 1996 was $3,275,000, an decrease of $328,000 (9%) below the
amount recorded during the same period in 1995. The Company's net interest
margin decreased to 5.03% for the quarter ended March 31, 1996 from 5.23% for
the quarter ended March 31, 1995. The net interest margin narrowed primarily
due a slight shift in the Bank's deposit mix. Noninterest bearing deposits
comprised 31.2% of deposits at March 31, 1996 compared to 32.8% at December 31,
1995 and 34.5% at March 31, 1995. Positively impacting net interest income was
the
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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 March 31, 1996, the two
swaps decreased net interest income by $281,000 including $15,000 during the
first three months of 1996 and $161,000 during the first three 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 March 31, 1996 was
reduced by the swap by $242,000 including $30,000 during the first three months
of 1996 and $34,000 during the first quarter of 1995. At the date of this
report, the Company is paying 6.35% and receiving 5.27%.
As protection against lower interest rates, in December 1994 and January
1995, the Compnay entered into three interes 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 appproximately $20,000 per month. From December 1994 to
March 31, 1996, net interest income was increased by the floors by $198,000
including $59,000 during the first three months of 1996. Net interest income
was reduced by the floors by $4,000 during the first three 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 March 1996, net interest income was reduced by the caps by
$12,000 including $11,000 during the first three 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 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 operations. Unrealized gains and losses and realized
gains and losses on securities are computed on a specific identification basis.
At March 31, 1996, the Company's available-for-sale portfolio totaled
$78,716,000 fair value compared to $81,520,000 at December 31, 1995 and
$37,346,000 at March 31, 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
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Company's CMO's had a total fair value of $36,694,000 which included several
securities. One CMO, with a fair value of $4,968,000 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
$10,298,000 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 $17,428,000 repricing monthly thereafter at 55 to 65
basis points over the one-month LIBOR. The remaining CMO had a fair value of
$4,000,000 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 $40.1 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 March 31, 1996 the one-year CMT rate was 5.41%.
At March 31, 1996, the Company's held-to-maturity portfolio totaled $47,570,000
compared to $48,517,000 at December 31, 1995 and $118,742,000 at March 31, 1995.
The most significant holdings in the Company held-to-maturity portfolio include
$14.7 million Federal National Mortgage Association (FNMA) pass-through
securities and $25.8 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
remained similar, the yield on the Company's investment securities increased
from 6.27% during the first three months of 1995 to 6.33% for the first three
months of 1996.
Other operating income, excluding securities transactions totaled $363,000
for the first three months of 1996 compared to $328,000 for the same period in
1995. The increase was due primarily to higher mortgage banking fees which
reflects the 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.
For the first three months of 1996, other operating expenses decreased
$74,000 or 2.4% compared to the same period in 1995. There were decreases in
several expense areas primarily salaries and employment benefits which decreased
$63,000 due to temporary changes in staffing levels. Otherwise, increases in
legal fees ($23,000) due to increased loan collection efforts, imprinted checks
($34,000) due to client check orders, furniture and equipment $30,000 due to
computure upgrades and donations ($43,000) offset the reduction in the FDIC
assessment of $154,000. While many of the expense variances are nonrecurring,
the Company is currently developing an expanded product line which will result
in a similar overall level of noninterest expense in the remaining quarters of
1996. Such products include asset managment, cash management, mutual funds,
trust, estate planning and custody services and Small Business Administration
("SBA") lending. These products should also increase noninterest income
beginning in the third quarter of 1996.
11
<PAGE>
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 March
31, 1996.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 14, 1996 PROFESSIONAL BANCORP, INC.
(Registrant)
-------------------------------------
Daniel S. Rader
Chief Financial Officer and Treasurer
12
<PAGE>
EXHIBIT 11 - EARNINGS PER SHARE
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED MARCH 31,
----------------------------------
PRIMARY EARNINGS PER SHARE 1996 1995
---- ----
Computation for Statement of Earnings:
Net earnings per statement of
earnings used in primary earnings
per share computation:
Net earnings $ 275,382 $ 503,011
Interest on borrowings, net of tax
effect, on application of assumed
from exercise of warrants and options
in excess of 20% limitation 33,732 60,858
---------- ----------
Net earnings as adjusted $ 309,114 $ 563,869
========== ==========
Weighted average number of shares
outstanding, as per primary computation
above 1,300,650 1,188,133
Net shares issuable from assumed
exercise of warrants and options,
as determined by the application
of the Modified Treasury Stock Method 275,425 532,327
---------- ----------
Weighted average number of shares
outstanding 1,576,075 1,720,460
========== ==========
Primary earnings per share $ 0.20 $ 0.33
========== ==========
13
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - (CONTINUED)
THREE MONTHS ENDED MARCH 31,
--------------------------------------
FULLY DILUTED EARNINGS PER SHARE 1996 1995
Computation for Statement of Earnings:
Net earnings per statement of
earningss used in fully diluted
earnings per share computation:
Net earnings $ 275,382 $ 503,011
Interest and amortized costs on
convertible notes, net of tax effect 85,814 87,456
Interest on borrowings, net of tax
effect, on application of assumed
from exercise of warrants and options
in excess of 20% limitation 33,732 61,127
----------- -----------
Net earnings as adjusted $ 394,928 $ 651,594
=========== ===========
Weighted average number of shares
outstanding, as per fully diluted
computation above 1,300,650 1,188,133
Net shares issuable from assumed
exercise of warrants and options,
as determined by the application
of the Modified Treasury
Stock Method 275,425 532,327
Weighted average shares issuable from
assumed conversion of convertible notes 421,276 431,250
----------- -----------
Weighted average number of
shares outstanding 1,997,351 2,151,710
=========== ===========
Fully diluted earnings per share $ 0.20 $ 0.30
=========== ===========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 25,684,541
<INT-BEARING-DEPOSITS> 413,801
<FED-FUNDS-SOLD> 34,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,716,088
<INVESTMENTS-CARRYING> 47,570,256
<INVESTMENTS-MARKET> 47,101,000
<LOANS> 99,074,206
<ALLOWANCE> 1,264,078
<TOTAL-ASSETS> 293,040,836
<DEPOSITS> 268,400,805
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,696,182
<LONG-TERM> 4,791,044
0
0
<COMMON> 11,279
<OTHER-SE> 18,141,526
<TOTAL-LIABILITIES-AND-EQUITY> 293,040,836
<INTEREST-LOAN> 2,320,817
<INTEREST-INVEST> 2,042,910
<INTEREST-OTHER> 414,109
<INTEREST-TOTAL> 4,777,836
<INTEREST-DEPOSIT> 1,374,798
<INTEREST-EXPENSE> 1,502,879
<INTEREST-INCOME-NET> 3,274,957
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,001,791
<INCOME-PRETAX> 455,682
<INCOME-PRE-EXTRAORDINARY> 275,382
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 275,382
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 7.376
<LOANS-NON> 5,033,000
<LOANS-PAST> 687,000
<LOANS-TROUBLED> 1,769,000
<LOANS-PROBLEM> 300,000
<ALLOWANCE-OPEN> 1,070,426
<CHARGE-OFFS> 3,981
<RECOVERIES> 17,633
<ALLOWANCE-CLOSE> 1,264,078
<ALLOWANCE-DOMESTIC> 1,067,379
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 196,699
</TABLE>
