<PAGE>
================================================================================
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, 1998
COMMISSION FILE NUMBER: 0-11223
PROFESSIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 95-3701137
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
606 BROADWAY
SANTA MONICA, CALIFORNIA 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
--- ---
As of April 29, 1998, 1,676,495 shares of the Registrant's $0.008 par value
common stock were outstanding.
================================================================================
<PAGE>
PROFESSIONAL BANCORP, INC.
Index
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 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 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Assets
Cash and due from banks:
Noninterest-bearing $ 23,285,372 $ 28,627,771
Interest-bearing 334,261 111,899
Federal funds sold 38,200,000 25,600,000
------------- -------------
Cash and cash equivalents 61,819,633 54,339,670
Securities available-for-sale (cost of $48,307,000 and
$53,145,000 in 1998 and 1997, respectively) 48,195,956 52,696,180
Securities held-to-maturity (fair value of $32,649,000
and $35,147,000 in 1998 and 1997, respectively) 32,540,334 35,099,572
Loans (net of allowance for loan losses of $1,825,000
and $1,802,000 in 1998 and 1997, respectively) 98,910,061 103,900,082
Premises and equipment, net 1,520,862 1,547,771
Deferred tax asset 1,314,536 1,239,207
Accrued interest receivable and other assets 4,814,605 5,005,079
------------- -------------
$ 249,115,987 $ 253,827,561
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, noninterest-bearing $ 98,404,876 $ 97,746,304
Demand, interest-bearing 12,522,060 14,961,400
Savings and money market 76,885,648 89,226,025
Time deposits 32,943,576 27,529,935
------------- -------------
Total deposits 220,756,160 229,463,664
Convertible notes 5,251,000 5,437,000
Accrued interest payable and other liabilities 2,222,623 3,063,744
------------- -------------
Total liabilities 228,229,783 237,964,408
------------- -------------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares
authorized; 1,745,962 and 1,426,689 issued
and 1,676,495 and 1,357,222 outstanding in 1998 and 1997, respectively 13,967 11,413
Additional paid-in-capital 17,177,238 12,659,774
Retained earnings 4,297,361 3,993,026
Treasury stock, at cost (69,467 and 69,467 shares in 1998 and 1997,
respectively) (537,251) (537,251)
Unrealized loss on securities available-for-sale, net of taxes (65,111) (263,809)
------------- -------------
Total shareholders' equity 20,886,204 15,863,153
------------- -------------
$ 249,115,987 $ 253,827,561
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Interest income
Loans $2,475,744 $2,262,394
Securities 1,285,175 1,491,641
Federal funds sold and securities purchased
under agreements to resell 246,920 260,444
Interest-bearing deposits in other banks 1,546 4,565
---------- ----------
Total interest income 4,009,385 4,019,044
---------- ----------
Interest expense
Deposits 790,094 801,449
Convertible notes 108,189 119,361
Federal funds purchased and securities
sold under agreements to repurchase 3,055 --
---------- ----------
Total interest expense 901,338 920,810
---------- ----------
Net interest income 3,108,047 3,098,234
Provision for loan losses -- 60,000
---------- ----------
Net interest income after provision
for loan losses 3,108,047 3,038,234
---------- ----------
Other operating income
Merchant discount 58,684 67,953
Mortgage banking fees 13,946 33,170
Service charges on deposits 256,947 184,680
Other income 137,358 141,627
---------- ----------
Total other operating income 466,935 427,430
---------- ----------
Other operating expenses
Salaries and employee benefits 1,537,855 1,508,631
Occupancy 348,571 383,016
Furniture and equipment 190,472 173,935
Meetings and business development 32,075 33,234
Donations 36,936 15,280
Other promotion 67,938 72,253
Legal fees 92,346 116,169
Audit, accounting and examinations 43,540 27,735
Professional services 357,014 339,223
Strategic planning and other outside consulting 53,915 --
Office supplies 66,013 60,028
Telephone 68,667 75,837
Postage 41,002 34,967
Messenger service 9,218 30,165
FDIC assessment 6,153 6,211
Other assessments 43,181 52,357
Imprinted checks 12,743 28,655
Other expense 125,008 186,333
---------- ----------
Total other operating expenses 3,132,647 3,144,029
---------- ----------
Earnings before taxes 442,335 321,635
Provision for income taxes 138,000 132,000
---------- ----------
Net earnings $ 304,335 $ 189,635
========== ==========
Earnings per share
Basic $ 0.22 $ 0.14
Diluted $ 0.17 $ 0.14
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 304,335 $ 189,635
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 142,425 147,611
Provision for loan losses -- 60,000
Amortization of convertible note expense 24,959 26,083
Decrease (increase) in deferred tax asset (214,292) 20,691
Decrease in accrued interest receivable and other assets 144,786 1,123,608
Decrease in accrued interest payable and other liabilities (280,737) (79,231)
Net amortization of premiums and discounts
on securities held-to-maturity 77,409 54,841
Net amortization of premiums and discounts
on securities available-for-sale 71,647 42,657
------------ ------------
Net cash provided by operating activities 270,532 1,585,895
------------ ------------
Cash flows from investing activities:
Proceeds from:
Maturities of securities held-to-maturity 1,537,903 3,250,000
Maturities of securities available-for-sale 2,119,408 442,557
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity 943,926 1,265,680
Mortgage-backed securities available-for-sale 2,646,830 1,221,540
Purchases of securities held-to-maturity -- (2,991,950)
Net (increase) decrease in loans 4,990,021 (1,034,496)
Purchase of bank premises and equipment, net (115,516) (223,575)
------------ ------------
Net cash provided (used) by investing activities 12,122,572 1,929,756
------------ ------------
Cash flows from financing activities:
Net decrease in demand deposits and savings accounts (14,121,145) (18,301,130)
Net increase (decrease) in time deposits 5,413,641 (5,626,927)
Proceeds from exercise of stock options 3,794,363 13,354
------------ ------------
Net cash used in financing activities (4,913,141) (23,914,703)
------------ ------------
Net decrease in cash and cash equivalents 7,479,963 (20,399,052)
Cash and cash equivalents, beginning of period 54,339,670 66,339,978
------------ ------------
Cash and cash equivalents, end of period $ 61,819,633 $ 45,940,926
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 1,048,454 $ 1,125,741
Income taxes $ 2,000 $ --
Supplemental disclosure of noncash items:
Decrease (increase) in unrealized losses on securities
available-for-sale, net of tax $ 198,698 $ (44,899)
Conversion of notes $ 165,271 $ --
Tax benefit on stock options exercised $ 560,384 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Professional Bancorp, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for the periods covered
have been made. Certain information and note disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make the
information presented not misleading.
The financial position at March 31, 1998, and the results of operations for
the three months ended March 31, 1998 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31,
1998. These unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles on a basis
consistent with the Company's audited financial statements, and these interim
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1997.
NOTE 2 - ADOPTION OF NEW ACCOUNTING STANDARDS
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), and has
restated all prior period earnings per share data. SFAS No. 128 replaces primary
EPS with basic EPS and fully diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
from issuance of common stock that then shared in earnings.
The Company adopted, effective January 1, 1998, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
SFAS No. 130 requires companies to report comprehensive income and its
components in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital. Comprehensive income includes all changes in equity during a period
except those resulting from investments by stockholders and distributions to
stockholders. Comprehensive income, net of tax, was $503,033 and $144,736 for
the three months ended March 31, 1998 and 1997 respectively. The difference
between net income and comprehensive income was comprised of the change in the
unrealized gain or (loss) on securities available for sale, net of tax, of
$198,698 and $(44,899) for the three months ended March 31, 1998 and 1997,
respectively.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Professional Bancorp, Inc. (the "Company"), holding company for First
Professional Bank, N.A. (the "Bank"), recorded net earnings of $304,000 or $0.22
per share for the quarter ended March 31, 1998, compared with net earnings of
$190,000 or $0.14 per share for the same period in 1997. The Company had total
assets of $249,116,000 at March 31, 1998, compared to $253,828,000 at December
31, 1997.
LOANS
The following table sets forth the amount of loans outstanding by category
and the percentage of each category to the total loan portfolio.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------- --------------------
(in thousands) Amount % of Total Amount % of Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Commercial $ 81,772 81.1% $ 86,243 81.5%
Real estate secured commercial 10,320 10.2 10,512 9.9
-------- -------- -------- --------
92,092 91.3 96,755 91.4
Equity lines of credit 5,784 5.8 6,288 5.9
Other lines of credit 1,649 1.6 1,524 1.4
Installment 1,297 1.3 1,253 1.2
Lease financing 35 - 37 0.1
-------- -------- -------- --------
Gross loans 100,857 100.0% 105,857 100.0%
======== ========
Less:
Allowance for loan losses 1,825 1,802
Deferred loan fees, net 122 155
-------- --------
Net loans $ 98,910 $103,900
======== ========
</TABLE>
In accordance with management's credit administration and regulatory
policy, loans are placed on nonaccrual status when the collection of principal
or interest is questionable. Generally, this means that loans are placed on
nonaccrual status when interest is 90 days or more past due, unless the loan is
well secured and in the process of collection or in the process of renewal.
Nonperforming loans and nonperforming assets do not include accruing loans 90
days or more past due where loan quality is not impaired, but rather the renewal
in process is pending receipt of the borrower's updated financial information.
Credit administrative policies discourage the usage of "short-term"
extensions while awaiting receipt of updated financial packages from borrowers.
The policy is aimed at facilitating timely credit renewals. However, as a result
of this policy, aggregate "past due" volumes will not necessarily be correlative
to absolute asset quality measurement.
7
<PAGE>
The following table sets forth information about nonperforming assets
(which include nonaccrual loans, other real estate owned and other repossessed
assets), accruing loans 90 days or more past due, and certain ratios.
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1998 1997
--------- ------------
<S> <C> <C>
Nonperforming loans $ 577 $ 877
Other real estate owned (OREO) - -
Other repossessed assets 272 272
--------- ------------
Total nonperforming assets $ 849 $ 1,149
========= ============
Accruing loans 90 days or more past due $ 484 $ 17
========= ============
Nonperforming loans to total loans(1) 0.57% 0.83%
Nonperforming assets(1)
to total loans 0.84% 1.09%
to total loans, OREO and repossessed assets 0.84% 1.08%
to total assets 0.34% 0.45%
</TABLE>
(1) Nonperforming loans and nonperforming assets do not include accruing loans
90 days or more past due.
The total accrued interest on loans 90 days or more past due and still
accruing was approximately $1,400 at March 31, 1998, and $1,000 at December 31,
1997. Of the $484,000 in accruing loans over 90 days or more past due and still
accruing, $137,000 represents loans where the renewal was in process, credit
quality was not impaired or risk rated below pass. As a result of the Company's
practice to discourage "short-term" extensions, these loans are carried as "past
due" to ensure proper underwriting and administrative controls.
The Company maintains the allowance for loan losses at a level considered
adequate by management to provide for potential loan losses. While the Company's
policy is to charge-off in the current period those loans for which a loss is
considered probable, there also exists the risk of future losses which cannot be
precisely quantified or attributed to particular loans. Reasonable estimates of
these future amounts are included in the allowance for loan losses.
8
<PAGE>
The following table provides a summary of the Company's allowance for loan
losses and charge-off and recovery activity during the three months ended March
31, 1998, December 31, 1997, and March 31, 1997:
<TABLE>
<CAPTION>
Period Ending
March 31, December 31, March 31,
1998 1997 1997
-------- -------- -------
<S> <C> <C> <C>
Balance at beginning of period $ 1,802 $ 2,253 $ 2,253
Provision for loan losses - 180 60
-------- -------- -------
1,802 2,433 2,313
-------- -------- -------
Loan charge-offs 50 882 147
Recoveries on loans previously charged-off (73) (251) (76)
-------- -------- -------
Net charge-offs (recoveries) (23) 631 71
-------- -------- -------
Balance at end of period $ 1,825 $ 1,802 $ 2,242
======== ======== =======
Loans outstanding at end of period $100,857 $105,857 $94,106
Average loans outstanding during period 102,640 97,197 92,263
Net charge-offs (recoveries) to average loans outstanding -0.09% 0.65% 0.31%
Allowance for loan losses:
to total loans 1.81 1.70 2.38
to nonperforming loans(1) 316.29 205.47 183.77
to nonperforming assets(1) 214.96 156.83 150.27
</TABLE>
(1) Nonperforming loans and nonperforming assets do not include accruing loans
90 days or more past due.
Management considers a loan to be impaired when, based upon available
information and current events, it believes that it is probable the Company will
be unable to collect all amounts due on a timely basis in accordance with the
contractual terms of the loan agreement. Impairment of a loan is measured by the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Impairment is recognized by the
establishment of a valuation allowance equal to the excess of the Company's
recorded investment in the loan over its measured value.
The Company had $907,000 in impaired loans as of March 31, 1998. The
carrying value of impaired loans for which there is a related allowance for loan
losses was $213,000, with the amount of specific allowance for loan losses
allocated to these loans of $80,000. There were $694,000 in impaired loans for
which there was a general allowance allocated consistent with the Company's
allowance for loan loss methodology. The average recorded investment in impaired
loans during the first three months of 1998 was approximately $1,053,000 and
income recorded utilizing the cash basis and accrual basis method of accounting
was $22,000. Impaired loans at March 31, 1998, included $577,000 of nonaccrual
loans.
The Company had $1,355,000 in impaired loans as of March 31, 1997. The
carrying value of impaired loans for which there is a related allowance for loan
losses was $558,000, with the amount of specific allowance for loan losses
allocated to these loans of $314,000. There were $797,000 in impaired loans for
which there was a general allowance allocated consistent with the Company's
allowance for loan loss methodology. The average recorded investment in impaired
loans during the first quarter of 1997 was approximately $1,625,000 and income
recorded utilizing the cash basis and accrual basis method of accounting was
$12,000. Nonaccrual loans at March 31, 1997, included $907,000 of the impaired
loans.
9
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the amortized cost and fair value of
securities available-for-sale as of March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government securities $ - $ - $ - $ -
U.S. Government agency and
mortgage-backed securities 33,204 93 192 33,105
Small Business Administration securities 1,147 15 - 1,162
Collateralized mortgage obligations 13,956 - 27 13,929
--------- ---------- ---------- -------
Total $ 48,307 $ 108 $ 219 $48,196
========= ========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government securities $ 2,003 $ 1 $ - $ 2,004
U.S. Government agency and
mortgage-backed securities 34,963 99 322 34,740
Small Business Administration securities 1,281 11 - 1,292
Collateralized mortgage obligations 14,898 - 238 14,660
--------- ---------- ---------- -------
Total $ 53,145 $ 111 $ 560 $52,696
========= ========== ========== =======
</TABLE>
10
<PAGE>
The amortized cost and fair value of securities held-to-maturity as of
March 31, 1998, and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,052 $ 67 $ - $ 3,119
U.S. Government agency securities 2,500 1 2,501
U.S. Government agency
mortgage-backed securities 26,549 73 32 26,590
Federal Reserve Bank stock 439 - - 439
--------- ---------- ---------- -------
Total $ 32,540 $ 141 $ 32 $32,649
========= ========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,054 $ 55 $ - $ 3,109
U.S. Government agency securities 2,750 - 10 2,740
U.S. Government agency
mortgage-backed securities 28,857 72 70 28,859
Federal Reserve Bank stock 439 - - 439
--------- ---------- ---------- -------
Total $ 35,100 $ 127 $ 80 $35,147
========= ========== ========== =======
</TABLE>
There were no sales of available-for-sale securities during the three
months ended March 31, 1998 and in the twelve months ended December 31, 1997.
DEPOSITS
Total deposits at March 31, 1998 were $220,756,000, a decrease of
$8,708,000 or 3.8% from $229,464,000 at December 31, 1997. The Company attracts
deposits primarily from individuals and businesses related to the health care
services industry, as well as other professionals and professional services
firms. The Company has no brokered deposits and the Company's practice is to not
purchase brokered deposits.
The following table sets forth the amount of deposits by category and the
percentage of each category to total deposits as of March 31, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------- --------------------
(in thousands) Amount % of Total Amount % of Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $ 98,405 44.6% $ 97,746 42.6%
Demand, interest-bearing 12,522 5.7 14,961 6.5
Savings deposits 12,582 5.7 10,603 4.6
Money market deposits 64,304 29.1 78,624 34.3
Time deposits under $100,000 7,819 3.5 7,374 3.2
Time deposits of $100,000 and over 25,124 11.4 20,156 8.8
-------- ---------- -------- ----------
$220,756 100.0% $229,464 100.0%
======== ========== ======== ==========
</TABLE>
11
<PAGE>
Historically, deposit levels decrease substantially in the first and second
quarter when clients tend to make first and second quarter tax payments and
bonuses. In addition, increasing competition for operating cash deposits comes
from broker dealer products and accounts. In order to minimize the effects of
such "disintermediation" from the Company to such accounts, the Company is
currently offering to clientele such accounts.
CAPITAL
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 average total assets) of 3.0% 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% 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 Bank, as Bancorp'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% 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% plus an
additional cushion of 100 to 200 basis points. The Federal Reserve Bank has not
advised the Bancorp of any specific minimum Tier 1 capital leverage ratio
applicable to it.
Risk-based capital standards were implemented on December 31, 1992. Since
December 31, 1992, banking organizations have been expected to meet a minimum
ratio for qualifying total capital to risk-weighted assets of 8.0%, 4.0% of
which must be Tier 1 capital. A banking organization's risk-based capital ratios
are obtained by dividing its qualifying capital by its total risk-adjusted
assets and risk-weighted off-balance sheet items.
The Federal Deposit Insurance Act of 1991 contains "prompt correction
action" provisions pursuant to which insured depository institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well-capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
12
<PAGE>
The following table presents the capital ratios for the Company and the
Bank, compared with the standards for "well-capitalized" depository institutions
(which standards do not apply to bank holding companies) and the minimum
required capital ratios to be deemed "adequately capitalized" under applicable
federal regulations, as of March 31, 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Company
Leverage (1) $20,951 8.87% $ 9,453 4.00% $11,816 5.00%
Tier 1 Risk-Based 20,951 15.34 5,463 4.00 8,194 6.00
Total Risk-Based 27,911 20.44 10,925 8.00 13,656 10.00
Bank
Leverage $20,967 8.94% $ 9,380 4.00% $11,725 5.00%
Tier 1 Risk-Based 20,967 15.42 5,437 4.00 8,156 6.00
Total Risk-Based 22,668 16.68 10,875 8.00 13,594 10.00
</TABLE>
/1/ The minimum required by the FRB is 3%; for all but the most highly rated
bank holding companies, the FRB expects a leverage ratio of 3% plus 100 to 200
basis points.
The Company and the Bank, at March 31, 1998, were considered "well-
capitalized" and exceeded all applicable minimum capital requirements. Capital
requirements of the federal banking regulators, however, could limit the
Company's future growth if the Company were to rely solely on the retention of
earnings to generate additional capital or rapid growth.
During March 1998, the Company received approximately $3,490,000 in
additional capital due to the exercise of 276,515 in stock options.
LIQUIDITY
The Bancorp's primary source of liquidity is dividends from the Bank.
Dividends from the Bank to the Bancorp are subject to certain regulatory
restrictions. Under federal banking law, dividends declared by the Bank in any
calendar year may not, without the approval of the OCC, exceed its net earnings,
as defined, for that year combined with its retained net earnings for the
proceeding two years. The Bancorp's annual operating expenses and interest
obligations with respect to its convertible notes are approximately $750,000.
The Bank's primary sources of liquidity are federal funds sold to other
banks and the investment securities portfolio. For the three months ended March
31, 1998, federal funds sold averaged $18,368,000 and compared to $20,182,000
for the same period in 1997. In addition, securities in the available-for-sale
portfolio can be sold in response to liquidity needs or used as collateral under
reverse repurchase agreements. Securities held-to-maturity are available for
liquidity needs primarily as collateral for reverse repurchase agreements. The
fair value of securities available-for-sale and securities held-to-maturity at
March 31, 1998, were $48,196,000 and $32,649,000, respectively.
The Bank sells securities under agreements to repurchase. Securities sold
under repurchase agreements are recorded as short-term obligations. During the
first three months of 1998, the highest daily outstanding balance and the
average balance of securities sold under agreements to repurchase was $5,000,000
and $222,000, respectively; the average rate paid was 5.5%. At March 31, 1998,
there were no securities sold under agreements to repurchase.
13
<PAGE>
RESULTS OF OPERATIONS
The Company reported consolidated net earnings of $304,000 for the first
quarter of 1998, compared with net earnings of $190,000 for the first quarter of
1997. Basic and diluted earnings per share for the first quarter of 1998 were
$0.22 and $0.17, respectively, compared to $0.14 basic and diluted earnings per
share for the same period in 1997. Return on average equity for the first
quarter of 1998 and 1997, were 7.29% and 5.44%, respectively. Additionally,
return on average assets for the first quarter of 1998 and 1997, were 0.52% and
0.32%, respectively.
The improvement in earnings during the first three months of 1998 is
largely the result of reduced provision for loan losses and improved noninterest
income relating to account analysis fees.
NET INTEREST INCOME
The Company's earnings depend primarily on net interest income, which is
the difference between the interest and fees earned on loans and investments
less the interest paid on deposits, borrowings and convertible notes. For the
quarter ended March 31, 1998, net interest income increased $10,000 from
$3,098,000 for the quarter ended March 31, 1997, to $3,108,000, for the quarter
ended March 31, 1998. For the three months ended March 31, 1998 and 1997, the
net interest margin was 6.11% and 6.02%, respectively.
The following tables present the distribution of average assets,
liabilities and shareholders' equity as well as the total dollar amount of
interest income from average interest-earning assets and resultant yields, and
the dollar amounts of interest expense and average interest-bearing liabilities,
expressed both in dollars and rates for the three months ended March 31, 1998
and 1997.
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------
1998 1997
---- ----
Average Yield/ Average Yield/
(in thousands) Balance Rate Interest Balance Rate Interest
----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 85,079 6.13% $ 1,285 $ 95,748 6.32% $ 1,492
Loans(1) 102,640 9.78 2,475 92,263 9.94 2,262
Federal funds sold 18,368 5.45 247 20,182 5.23 260
Interest-earning deposits - banks 198 3.17 2 354 5.22 5
-------- ------- -------- -------
Total interest-earning assets 206,285 7.88 4,009 208,547 7.81 4,019
-------- ------- -------- -------
Deferred loan fees (145) (137)
Allowance for loan losses (1,808) (2,214)
Nonearning assets:
Cash and due from banks 22,716 22,131
Premises and equipment 1,549 1,721
Other assets 6,566 8,335
-------- --------
Total assets $235,163 $238,383
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 13,630 0.93% $ 31 $ 13,225 0.74% $ 24
Savings and money market deposits 80,367 2.07 410 94,478 1.83 427
Time deposits 30,445 4.64 348 30,173 4.72 351
Convertible notes 5,375 8.16 108 5,678 8.50 119
Repurchase agreements 222 5.58 3 - - -
-------- ------- -------- -------
Total interest-bearing liabilities 130,039 2.81 901 143,554 2.60 921
-------- ------- -------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 84,719 77,610
Other liabilities 3,234 3,283
Shareholders' equity 17,171 13,936
-------- --------
Total liabilities and shareholders' equity $235,163 $238,383
======== ========
Interest income as a percentage of average
earning assets 7.88% 7.81%
Interest expense as a percentage of average
interest-bearing liabilities 2.81 2.60
Net interest margin and income 6.11 $ 3,108 6.02 $ 3,098
======= =======
</TABLE>
(1) Nonaccrual loans are included in average balances and rate calculations.
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
"volume change." It is also affected by changes in yields earned on interest-
earning assets and interest rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities, and the amount of
change attributable to volume and rate changes for the three months ended March
31, 1998 and 1997. The changes due to both rate and volume have been allocated
to rate and volume in proportion to the relationship between their absolute
dollar amounts.
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 and 1997
-----------------------
(in thousands) Volume Rate Total
------ ------ -------
<S> <C> <C> <C>
Increase (decrease) in interest income:
Securities $(162) $ (44) $(206)
Loans 251 (38) 213
Federal funds sold (24) 10 (14)
Interest-bearing deposits - banks (2) (1) (3)
------ ------ ------
63 (73) (10)
------ ------ ------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 1 7 8
Savings and money market deposits (68) 51 (17)
Time deposits 3 (6) (3)
Convertible notes (6) (5) (11)
Repurchase agreements 3 - 3
------ ------ ------
(67) 47 (20)
------ ------ ------
Increase (decrease) in net interest income $ 130 $(120) $10
====== ====== ======
</TABLE>
Interest income represents interest earned on loans, investment securities
and federal funds sold. Interest income decreased a total of $10,000 from
$4,019,000 for the three months ended March 31, 1997 to $4,009,000 for the three
months ended March 31, 1998. The decrease in interest income was a result of a
decline of $73,000 due to a slight decrease in yield on securities and loans
offset by an increase of $63,000 due to a change in the mix of interest earning
assets. Overall average interest earning assets decreased $2,262,000 from
$208,547,000 for the three months ended March 31, 1997 to $206,285,000 for the
three months ended March 31, 1998; however, average loans which yield 9.78%
increased $10,377,000 to $102,640,000 for the quarter ended March 31, 1998 which
is offset by a decline in average securities which yield 6.13% of $10,669,000 to
$85,079,000 for the same period in 1998.
Interest expense represents interest paid on deposits, Company borrowings
and convertible notes. For the first quarter of 1998, interest expense decreased
$20,000 to $901,000, as compared with $921,000 for the first quarter of 1997. A
decrease of $13,514,000 in average interest-bearing liabilities reduced interest
expense by approximately $66,000. Repurchase agreements averaged $222,222 during
the first quarter of 1998, while there were no repurchase agreements during the
first quarter of 1997. The decrease in deposits was centered primarily in
average savings and money market deposits which declined $14,111,000 from
$94,478,000 for the three months ended March 31, 1997 to $80,367,000 for the
three months ended March 31, 1998.
NONINTEREST INCOME
For the three months ended March 31, 1998, noninterest income totaled
$467,000 compared with $427,000 for the same period of 1997. The primary
increase was in service charges on deposits which increased $72,000 to $257,000
for the third quarter of 1998 as the Company continues to generate fees for
services provided to customers.
NONINTEREST EXPENSE
Noninterest expense for the first quarter of 1998, decreased $11,000 to
$3,133,000 from $3,144,000 for the first quarter of 1997.
16
<PAGE>
Salaries and other employee benefits increased approximately $29,000 to
$1,538,000 for the first quarter of 1998, compared with $1,509,000 for the first
quarter of 1997. This increase was largely due to returning the Company to full
staff level.
Legal fees decreased $24,000 to $92,000 for the first quarter of 1998, from
$116,000 for the first quarter of 1997. The decrease in legal fees is due
primarily to nonrecurring legal expenses associated with loan collection efforts
as the quality of the loan portfolio has improved over the past year.
Other professional services increased $18,000 to $357,000 for the first
quarter of 1998, compared with $339,000 for the comparable period in 1997. The
Company continues to utilize the services of outside professionals to augment
staffing and support service training.
INCOME TAXES
For the three months ended March 31, 1998, the provision for income taxes
was $138,000 compared to $132,000 for the same period in 1997.
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 a material effect on the liquidity, capital
resources or operations of the Company.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Statement regarding computation of per share earnings
27 - Financial Data Schedule
(b) Reports on Form 8-K: Reports on Form 8-K were filed on January
and March 1998 reporting on the following items:
Item 5. Other Events -
In January 1998, a Report on Form 8-K was filed pertaining to
Professional Bancorp, Inc. ("Bancorp") and its wholly-owned
subsidiary, First Professional Bank, N.A. (the "Bank"), have
entered into a Settlement Agreement and Release with St. Paul
Mercury Insurance Company ("St. Paul"), their Directors and
Officers Liability insurance carrier.
In March 1998, a Report on Form 8-K was filed pertaining to Joel
W. Kovner, an option holder of Professional Bancorp, Inc.
("Bancorp") stock options. Mr. Kovner exercised all of his
options to purchase 276,515 shares of common stock of Bancorp
pursuant to Bancorp's 1990 and 1992 Stock Option Plans.
18
<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.
PROFESSIONAL BANCORP, INC.
--------------------------
(Registrant)
Date: May 11, 1998 /s/ Julie P. Thompson
--------------------------
Julie P. Thompson
Chairman of the Board
Date: May 11, 1998 /s/ Melissa Lanfre
--------------------------
Melissa Lanfre
Chief Financial Officer and
Senior Vice President
19
<PAGE>
EXHIBIT 11 - EARNINGS PER SHARE
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
---------------------------
Basic Earnings Per Share 1998 1997
---------- ----------
<S> <C> <C>
Computation for Statement of Operations:
Net earnings per statement of
operations used in basic earnings
per share computation:
Basic earnings $ 304,335 $ 189,635
========== ==========
Weighted average number of shares
outstanding 1,415,741 1,365,671
========== ==========
Basic earnings per share $ 0.22 $ 0.14
========== ==========
</TABLE>
20
<PAGE>
Statement Regarding Computation of Per Share Earnings - (Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
---------------------------
Diluted Earnings Per Share 1998 1997
---------- ----------
<S> <C> <C>
Computation for Statement of Operations:
Net earnings per statement of
operations used in diluted
earnings per share computation:
Basic earnings $ 304,335 $ 189,635
Interest on convertible
notes, net of tax effect 63,832 70,423
---------- ----------
Basic earnings as adjusted $ 368,167 $ 260,058
========== ==========
Weighted average number of shares
outstanding, as per diluted
computation above 1,676,495 1,366,903
Net shares issuable from assumed exercise
of warrants and options, as determined by
the application of the Treasury
Stock Method 55,300 (1)
Weighted average shares issuable from
assumed conversion of convertible notes 413,517 428,164
---------- ----------
Weighted average number of shares
outstanding 2,145,312 1,795,067
========== ==========
Diluted earnings per share $ 0.17 $ 0.14
========== ==========
</TABLE>
(1) Anti-dilutive
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 23,285,372
<INT-BEARING-DEPOSITS> 334,261
<FED-FUNDS-SOLD> 38,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,195,956
<INVESTMENTS-CARRYING> 32,540,334
<INVESTMENTS-MARKET> 32,649,000
<LOANS> 100,734,931
<ALLOWANCE> 1,824,870
<TOTAL-ASSETS> 249,115,987
<DEPOSITS> 220,756,160
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,222,623
<LONG-TERM> 5,251,000
0
0
<COMMON> 13,967
<OTHER-SE> 20,872,237
<TOTAL-LIABILITIES-AND-EQUITY> 249,115,987
<INTEREST-LOAN> 2,475,744
<INTEREST-INVEST> 1,285,175
<INTEREST-OTHER> 248,466
<INTEREST-TOTAL> 4,009,385
<INTEREST-DEPOSIT> 790,094
<INTEREST-EXPENSE> 901,338
<INTEREST-INCOME-NET> 3,108,047
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,132,647
<INCOME-PRETAX> 442,335
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 304,335
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.17
<YIELD-ACTUAL> 6.11
<LOANS-NON> 577,000
<LOANS-PAST> 484,000
<LOANS-TROUBLED> 907,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,802,000
<CHARGE-OFFS> 50,000
<RECOVERIES> 73,000
<ALLOWANCE-CLOSE> 1,825,000
<ALLOWANCE-DOMESTIC> 1,825,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
