<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 SEPTEMBER 30, 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 October 1, 1998, 1,995,243 shares of the Registrant's $0.008 par value
common stock were outstanding.
1
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC.
INDEX
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 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 20
SIGNATURES 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks:
Noninterest-bearing $ 31,517,049 $ 28,627,771
Interest-bearing 263,999 111,899
Federal funds sold 25,000,000 25,600,000
------------ ------------
Cash and cash equivalents 56,781,048 54,339,670
Securities available-for-sale (cost of $56,839,000 and
$53,145,000 in 1998 and 1997, respectively) 56,614,700 52,696,180
Securities held-to-maturity (fair value of $26,783,000
and $35,147,000 in 1998 and 1997, respectively) 26,485,284 35,099,572
Loans (net of allowance for loan losses of $1,885,000
and $1,802,000 in 1998 and 1997, respectively) 105,756,339 103,900,082
Premises and equipment, net 1,507,636 1,547,771
Deferred tax asset 1,366,261 1,239,207
Accrued interest receivable and other assets 4,328,851 5,005,079
------------ ------------
$252,840,119 $253,827,561
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Demand, noninterest-bearing $ 94,663,546 $ 97,746,304
Demand, interest-bearing 15,988,873 14,961,400
Savings and money market 80,486,422 89,226,025
Time deposits 32,853,657 27,529,935
------------ ------------
Total deposits 223,992,498 229,463,664
Convertible notes 1,130,000 5,437,000
Accrued interest payable and other liabilities 2,618,939 3,063,744
------------ ------------
Total liabilities 227,741,436 237,964,408
------------ ------------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares
authorized; 2,064,710 and 1,426,689 issued
and 1,995,243 and 1,357,222 outstanding in 1998 and 1997, respectively 16,517 11,413
Additional paid-in-capital 20,797,856 12,659,774
Retained earnings 4,948,548 3,993,026
Treasury stock, at cost (69,467 and 69,467 shares in 1998 (537,251) (537,251)
and 1997, repectively)
Unrealized loss on securities available-for-sale, net of taxes (126,987) (263,809)
------------ ------------
Total shareholders' equity 25,098,683 15,863,153
------------ ------------
$252,840,119 $253,827,561
============ ============
</TABLE>
3
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(UNAUDITED) SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $2,597,151 $2,421,391 $ 7,575,159 $ 7,107,545
Securities 1,142,606 1,447,182 3,498,895 4,448,011
Federal funds sold and securities purchased
under agreements to resell 600,982 293,948 1,392,638 756,041
Interest-bearing deposits in other banks 1,909 5,597 5,044 23,300
---------- ---------- ----------- -----------
TOTAL INTEREST INCOME 4,342,648 4,168,118 12,471,736 12,334,897
---------- ---------- ----------- -----------
INTEREST EXPENSE
Deposits 856,147 846,205 2,460,676 2,408,698
Convertible notes (62,710) 119,360 127,038 358,082
Federal funds purchased and securities
sold under agreements to repurchase - - 3,055 15,807
---------- ---------- ----------- -----------
TOTAL INTEREST EXPENSE 793,437 965,565 2,590,769 2,782,587
---------- ---------- ----------- -----------
NET INTEREST INCOME 3,549,211 3,202,553 9,880,967 9,552,310
Provision for loan losses - 60,000 - 180,000
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,549,211 3,142,553 9,880,967 9,372,310
---------- ---------- ----------- -----------
OTHER OPERATING INCOME
Net gain (loss) on sale of securities
available-for-sale - - (8,735) -
Merchant discount 48,983 68,058 158,260 208,264
Mortgage banking fees 49,943 28,364 133,466 99,610
Service charges on deposits 208,448 220,192 688,237 620,286
Other income 110,808 138,828 373,961 496,268
---------- ---------- ----------- -----------
TOTAL OTHER OPERATING INCOME 418,182 455,442 1,345,189 1,424,428
---------- ---------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits 1,420,166 1,495,262 4,611,245 4,396,961
Occupancy 368,015 370,738 1,069,478 1,131,076
Furniture and equipment 208,547 207,372 598,812 644,494
Meetings and business development 53,464 48,015 147,414 143,693
Donations 19,475 36,500 82,227 79,089
Other promotion 105,372 78,389 257,634 250,833
Legal fees 105,575 85,269 357,472 344,130
Audit, accounting and examinations 41,140 32,873 125,175 91,398
Professional services 360,319 357,174 999,548 1,012,129
Strategic planning and other outside
consulting 30,159 173,155 121,547 277,671
Office supplies 60,478 53,662 181,972 167,212
Telephone 76,649 69,177 217,161 215,270
Postage 41,570 36,443 122,964 114,291
Messenger service 8,446 15,543 25,944 62,823
FDIC assessment 6,303 6,379 19,065 20,879
Other assessments 53,930 60,577 141,759 177,311
Imprinted checks 7,239 23,240 34,942 80,013
Other expense 129,058 175,634 409,743 462,262
---------- ---------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES 3,095,905 3,325,402 9,524,102 9,671,535
---------- ---------- ----------- -----------
Earnings before taxes 871,488 272,593 1,702,054 1,125,203
Provision for income taxes 359,000 73,000 661,000 424,300
---------- ---------- ----------- -----------
NET EARNINGS $ 512,488 $ 199,593 $ 1,041,054 $ 700,903
========== ========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.26 $ 0.15 $ 0.62 $ 0.52
Diluted $ 0.22 $ 0.15 $ 0.52 $ 0.51
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,041,054 $ 700,903
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 441,839 429,359
Provision for loan losses - 180,000
Loss on sales of securities available-for-sale 8,735 -
Amortization of convertible note expense 63,796 78,249
Decrease (increase) in deferred tax asset (214,292) 1,475,801
Decrease in accrued interest receivable and other assets 93,871 760,481
Decrease (increase) in accrued interest payable and other
liabilities 115,578 (459,790)
Net amortization of premiums and discounts
on securities held-to-maturity 263,920 198,694
Net amortization of premiums and discounts
on securities available-for-sale 218,687 181,367
------------ ------------
Net cash provided by operating activities 2,033,188 3,545,064
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of securities held-to-maturity 500,000 3,000,000
Maturities of securities available-for-sale 6,550,000 -
Sales of securities available-for-sale 10,234,664 -
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity 7,850,368 5,875,223
Mortgage-backed securities available-for-sale 8,881,458 5,036,077
Purchases of securities held-to-maturity - (2,991,950)
Purchases of securities available-for-sale (29,588,004) (6,037,422)
Net (increase) decrease in loans (1,856,257) (7,464,380)
Purchase of bank premises and equipment, net (401,704) (478,080)
------------ ------------
Net cash provided (used) by investing activities 2,170,525 (3,060,532)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts (10,794,888) (29,961,114)
Net increase (decrease) in time deposits 5,323,722 37,577
Cash dividends (85,532) -
Proceeds from exercise of stock options 3,794,363 13,354
------------ ------------
Net cash used in financing activities (1,762,335) (29,910,183)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 2,441,378 (29,425,651)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 54,339,670 66,339,978
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 56,781,048 $ 36,914,327
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 2,743,927 $ 3,068,234
Income taxes $ 132,000 $ 550,108
Supplemental disclosure of noncash items:
Decrease (increase) in unrealized losses on securities
available for sale $ 224,060 $ 236,552
Conversion of notes $ 3,788,439 $ -
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
management, 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. Management believes that the disclosures are adequate to make the
information presented not misleading.
The financial position at September 30, 1998, and the results of operations
for the three and nine months ended September 30, 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 with 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. For the three and nine months ended September 30, 1998, net
earnings totaled $512,000 and $1,041,000, other comprehensive income totaled
$30,000 and $137,000 and total comprehensive income totaled $542,000 and
$1,178,000, respectively. For the three and nine months ended September 30,
1997, net earnings totaled $200,000 and $701,000, other comprehensive income
totaled $181,000 and $128,000 and total comprehensive income totaled $381,000
and $829,000, 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 $512,000 or $0.26
per share for the third quarter of 1998, compared with net earnings of $200,000
or $0.15 per share for the third quarter of 1997. For the nine months ended
September 30, 1998, the Company had net earnings of $1,041,000 or $0.62 per
share . This compares to net earnings of $701,000 or $0.52 per share for the
first nine months of 1997. The Company had total assets of $252,840,000 at
September 30, 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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
(in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Commercial $ 87,898 81.6% $ 86,243 81.5%
Real estate secured commercial 10,177 9.4 10,512 9.9
-------- ----- -------- -----
98,075 91.0 96,755 91.4
Equity lines of credit 6,439 6.0 6,288 5.9
Other lines of credit 1,806 1.7 1,524 1.4
Installment 1,366 1.3 1,253 1.2
Lease financing 33 - 37 0.1
-------- ----- -------- -----
Gross loans 107,719 100.0% 105,857 100.0%
-------- --------
Less:
Allowance for loan losses 1,885 1,802
Deferred loan fees, net 78 155
-------- --------
Net loans $105,756 $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 use 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>
SEPTEMBER 30, DECEMBER 31,
(in thousands) 1998 1997
------------- -------------
<S> <C> <C>
Nonperforming loans $ 581 $ 877
Other real estate owned (OREO) - -
Other repossessed assets 272 272
--------- ---------
Total nonperforming assets $ 853 $ 1,149
========= =========
Accruing loans 90 days or more past due $ 619 $ 17
========= =========
Nonperforming loans to total loans(1) 0.54% 0.83%
Nonperforming assets(1)
to total loans 0.79% 1.09%
to total loans, OREO and repossessed assets 0.79% 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 $3,000 at September 30, 1998, and $1,000 at December
31, 1997. Of the $619,000 in accruing loans over 90 days or more past due and
still accruing as of September 30, 1998, $322,000 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 remainder of $297,000 represents loans which
are considered by management to be well secured and in the process of
collection.
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 nine months ended
September 30, 1998, the year ended December 31, 1997, and the nine months ended
September 30, 1997:
<TABLE>
<CAPTION>
PERIOD ENDED
------------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(in thousands) 1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 1,802 $ 2,253 $ 2,253
Provision for loan losses - 180 180
-------- -------- -------
1,802 2,433 2,433
-------- -------- -------
Loan charge-offs 122 882 823
Recoveries on loans previously charged-off (205) (251) (152)
-------- -------- -------
Net charge-offs (recoveries) (83) 631 671
-------- -------- -------
Balance at end of period $ 1,885 $ 1,802 $ 1,762
======== ======== =======
Loans outstanding at end of period $107,719 $105,857 $99,997
Average loans outstanding during period 101,852 97,197 95,398
Net charge-offs (recoveries) to average loans outstanding -0.11% 0.65% 0.94%
Allowance for loan losses:
to total loans 1.75 1.70 1.76
to nonperforming loans/(1)/ 324.44 205.47 165.14
to nonperforming assets/(1)/ 220.98 156.83 131.59
</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 $875,000 in impaired loans as of September 30, 1998.
The carrying value of impaired loans for which there is a related allowance for
loan losses was $171,000, with the amount of specific allowance for loan losses
allocated to these loans of $48,000. There was $704,000 in impaired loans for
which there were a general allowance allocated consistent with the Company's
allowance for loan loss methodology. The average recorded investment in
impaired loans during the first nine months of 1998 was approximately $955,000
and income recorded utilizing the cash basis and accrual basis method of
accounting was $34,000. Impaired loans at September 30, 1998, included $581,000
of nonaccrual loans.
The Company had $1,450,000 in impaired loans as of September 30, 1997.
The carrying value of impaired loans for which there is a related allowance for
loan losses was $228,000, with the amount of specific allowance for loan losses
allocated to these loans of $70,000. There was $1,222,000 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 nine months of 1997 was approximately $1,483,000
and income recorded utilizing the cash basis and accrual basis method of
accounting was $37,000. Nonaccrual loans at September 30, 1997, included
$1,067,000 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 September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, 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 52,911 165 388 52,688
Municipal securities 1,020 - - 1,020
Small Business Administration securities 912 9 - 921
Collateralized mortgage obligations 1,996 - 10 1,986
------- ---- ---- -------
Total $56,839 $174 $398 $56,615
======= ==== ==== =======
<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
September 30, 1998, and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
------------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,046 $156 $ - $ 3,202
U.S. Government agency securities 2,250 24 2,274
U.S. Government agency
mortgage-backed securities 20,750 128 10 20,868
Federal Reserve Bank stock 439 - - 439
------- ---- --- -------
Total $26,485 $308 $10 $26,783
======= ==== === =======
<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>
During the nine months ended September 30, 1998 securities available-for-
sale were sold for aggregate proceeds of $10,235,000. This sale resulted in a
gross realized loss of $9,000. There were no sales of securities available-for-
sale in the twelve months ended December 31, 1997.
DEPOSITS
Total deposits at September 30, 1998 were $223,992,000, a decrease of
$5,472,000 or 2.4% 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 September 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------------- -------------------------
(in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $ 94,664 42.3% $ 97,746 42.6%
Demand, interest-bearing 15,989 7.1 14,961 6.5
Savings deposits 14,145 6.3 10,603 4.6
Money market deposits 66,341 29.6 78,624 34.3
Time deposits under $100,000 8,757 3.9 7,374 3.2
Time deposits of $100,000 and over 24,096 10.8 20,156 8.8
-------- ----- -------- -----
$223,992 100.0% $229,464 100.0%
======== ===== ======== =====
</TABLE>
11
<PAGE>
Historically, deposit levels increase substantially at year-end as
clients increase cash reserves required for 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 through its CNET Pro
product. The CNET product is a money market mutual fund. The goal of the fund is
to provide as high a level of current income as is consistent with preservation
of principal and liquidity. The fund is managed by The Cadre Network Health
Financial Services Liquid Asset Fund, and is not insured by the FDIC and is not
an obligation of, or guaranteed by the Company or its subsidiaries and is
subject to investment risk, including possible loss of principal invested.
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 September 30, 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)/ $25,226 10.02% $10,071 4.00% $12,589 5.00%
Tier 1 Risk-Based 25,226 17.86 5,651 4.00 8,476 6.00
Total Risk-Based 28,123 19.91 11,302 8.00 14,127 10.00
BANK
Leverage $21,966 8.74% $10,053 4.00% $12,567 5.00%
Tier 1 Risk-Based 21,966 15.59 5,636 4.00 8,454 6.00
Total Risk-Based 23,729 16.84 11,271 8.00 14,089 10.00
/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.
</TABLE>
The Company and the Bank, at September 30, 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. On May 29,
1998, the Company gave notice of its' intent to call for partial redemption of
$2,625,000 principal amount of the Professional Bancorp, Inc., 8.50% Convertible
Subordinated Reset Notes due March 1, 2004. As a result of this call,
approximately $2,552,000 of the notes converted to 200,955 shares of common
stock and $73,000 in notes were redeemed by the June 30, 1998 redemption date.
For the nine months ended September 30, 1998 approximately $4.31 million of
notes were converted to 333,393 shares of common stock.
LIQUIDITY
The Company's primary source of liquidity is dividends from the Bank.
Dividends from the Bank to the Company 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 Company's annual operating expenses and interest
obligations with respect to its convertible notes are approximately $662,000.
However, based upon the above redemption, Bancorp operating expenses will be
reduced by approximately $560,000 on an annual basis.
The Bank's primary sources of liquidity are federal funds sold to
other banks and the investment securities portfolio. For the nine months ended
September 30, 1998, federal funds sold averaged $34,066,000 and compared to
$18,825,000 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 September 30, 1998, were $56,615,000 and $26,783,000,
respectively.
13
<PAGE>
The Bank sells securities under agreements to repurchase. Securities
sold under repurchase agreements are recorded as short-term obligations. During
the first nine months of 1998, the highest daily outstanding balance and the
average balance of securities sold under agreements to repurchase was $5,000,000
and $73,000, respectively; the average rate paid was 5.5%. At September 30,
1998, there were no securities sold under agreements to repurchase.
YEAR 2000
The Year 2000 issue presents a very real and significant challenge to the
Company, along with the entire financial services industry. This problem has the
potential to affect a wide range of systems and equipment, including software
and hardware, utilities, communications platforms and devices, and facilities.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to represent the calendar year. Software so developed
and not corrected could produce inaccurate or unpredictable results when dates
change in the year 2000. Such occurrences may have a material adverse effect on
the Company's financial condition, results of operations, or business as the
Company, like most financial organizations, is significantly subject to the
potential Year 2000 issues due to the nature of financial information.
While no one can accurately predict what will happen with the date change to the
Year 2000, the Company's management and Board of Directors take the potential
risks seriously, and have been working since early in 1997, and will continue to
work hard, to be prepared for the Year 2000 transition.
There are a number of broad concerns that may affect the Company, our customers,
and business partners. In the event of a Year 2000 failure, the Company could be
adversely impacted in a number of ways. Internal operations problems and
problems resulting from primary vendors and suppliers inability to perform could
cause increased costs in determining correct results and lost customers
resulting in lost revenue. Large customers negatively effected by Year 2000
problems could lead to deposit outflows or increased risk of collecting loans.
As part of our efforts to ensure compliance with government regulatory standards
and establish prudent business practices for Year 2000 issues, the Board of
Directors and senior management have previously developed and approved a Year
2000 preparedness plan, which is currently being implemented. The following
outlines major areas within the plan and provides the status of our efforts:
AWARENESS: Our plan provides for a Year 2000 task force which reports at least
quarterly to the Audit Committee and Board of Directors of the Company. The task
force, which meets at least monthly, consists of members of senior management
representatives from key areas within the Company. The task force, among other
roles, monitors and reports progress, and provides direction toward preparation
for the Year 2000 date change.
ASSESSMENT: The task force has developed an overall strategy which identifies
and categorizes internal information and operating systems, and external
vendors, customers, auditors and business partners, according to risk of
business disruption. Each operating system, process, vendor, or other business
partner is risk assessed based upon the impact on the Company's business. High
risk processes and systems have been categorized as "mission critical" and have
been prioritized in our Year 2000 risk mitigation process. Testing plans have
been developed, and we have completed testing all mission critical and many
other identified systems. The testing of all systems is scheduled to be
completed by the end of 1998. We have identified contingency plans and
alternatives, including replacement or elimination, for mission critical systems
and other systems in the event that such actions become necessary. Also,
we have integrated the Year 2000 business risks into our overall bankwide
business resumption plans. We will test mission critical and other systems on an
ongoing basis to reasonably determine that they will continue to operate after
the Year 2000.
In addition, as a lending institution, the Company is exposed to potential risk
if it's customers suffer Year 2000 related difficulties. Therefore, we have
developed, and are implementing, a process to assess the potential risks to the
Company of both our lending and deposit customer's preparedness for the Year
2000 date change. Also, potential borrower's readiness for Year 2000 is assessed
and included within the credit underwriting and approval process.
RENOVATION: The renovation phase includes upgrading or replacing information or
operating systems, vendor certifications, and other associated changes. We have
begun renovation of systems, including non-information technology systems, that
have been identified as non-compliant to Year 2000, including replacing some
personal computers, or upgrading software and other operating systems. The
extent of our identified renovation needs have been budgeted within our
corporate budgeting process.
14
<PAGE>
Additionally, we have received vendor responses or certification for all of our
mission critical systems, along with most of our other information and operating
systems, and are monitoring the vendors' progress toward preparedness.
VALIDATION/IMPLEMENTATION: As operating systems are validated, upgraded, and
successfully tested the systems are integrated into ongoing operations. As with
any new system, or system change, internal/external users are provided training,
connectivity with other systems is determined and integration into current
processes occurs. Validation and implementation of several mission critical
systems is expected to be completed by December 31, 1998. In addition, we have
instituted an independent third party review of our Year 2000 efforts for all
mission critical systems.
Significant progress has been accomplished in our efforts to prepare for the
Year 2000-century date change. All of our mission critical systems have been
tested and none have failed. Additionally, we are 75% complete assessing,
renovating, testing and implementing Year 2000 preparedness for all other
identified systems. Management currently estimates the overall cost of Year 2000
risk mitigation not to exceed $100,000 in operating expenses and $300,000 in
fixed asset purchases of which approximately 50% has been incurred. These costs
are included within our ongoing budget and planning process.
We continue with the execution of our Year 2000 Preparedness Plan and remain on
schedule to meet our internal timeline and regulatory expectations and continue
to project that we will complete renovation and implementation prior to June 30,
1999. Also, we have developed and presented internal and external awareness
programs, which reinforce the awareness and the need for preparedness to the
Year 2000 problem for the Company's Board of Directors, employees, and our
customers. Based upon the information we have developed through our Year 2000
Preparedness Plan, we have not identified risks associated with the date change
to Year 2000 that will have a material financial impact on the Company.
RESULTS OF OPERATIONS
The Company reported consolidated net earnings of $512,000 for the third
quarter of 1998, compared with net earnings of $200,000 for the third quarter of
1997. Basic and diluted earnings per share for the third quarter of 1998 were
$0.26 and $0.22, respectively, compared to $0.15 basic and diluted earnings per
share for the same period in 1997. Return on average equity for the third
quarter of 1998 and 1997, were 8.35% and 5.42%, respectively. Additionally,
return on average assets for the second quarter of 1998 and 1997, were 0.81% and
0.33%, respectively.
For the first nine months of 1998, the Company reported net earnings of
$1,041,000 compared to $701,000 for the same period in 1997. Basic and diluted
earnings per share for the nine months ended September 30, 1998, were $0.62 and
$0.52, respectively. Comparatively, basic and diluted earnings per share for
the nine months ended September 30, 1997, were $0.52 and $0.51, respectively.
The improvement in net earnings for the third quarter of 1998 as compared
to 1997, are primarily the result of growth in the loan portfolio, lower
interest expenses associated with the convertible notes and continued
implementation of a cost containment program which reduced non-interest
expenses, during the quarter and for the nine months ended September 30, 1998.
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 September 30, 1998, net interest income increased 10.8% to
$3,549,000 from $3,203,000 for the quarter ended September 30, 1997. For the
nine months ended September 30, 1998 and 1997, net interest income was
$9,881,000 and $9,552,000, respectively. The increase in net interest income is
primarily due to increased loan volume combined with reduced interest expenses
as a result of conversion of convertible notes during the quarter ending
September 30, 1998 as compared to the same period in 1997. For the three months
ended September 30, 1998 and 1997, the net interest margin was 6.31% and 5.96%,
respectively.
15
<PAGE>
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 September 30,
1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
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 $ 76,761 5.91% $1,143 $ 93,489 6.14% $1,447
Loans/(1)/ 102,883 10.02 2,597 97,847 9.82 2,421
Federal funds sold 43,206 5.52 601 21,373 5.46 294
Interest-earning deposits - banks 374 2.12 2 561 4.24 6
-------- ------ -------- ------
Total interest-earning assets 223,224 7.72 4,343 213,270 7.75 4,168
-------- ------ -------- ------
Deferred loan fees (81) (202)
Allowance for loan losses (1,871) (2,252)
Nonearning assets:
Cash and due from banks 23,162 21,053
Premises and equipment 1,523 1,662
Other assets 5,830 6,946
-------- --------
Total assets $251,787 $240,477
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 14,660 0.93% $ 35 $ 12,119 0.92% $ 28
Savings and money market deposits 86,036 2.16% 469 93,996 2.01% 477
Time deposits 29,341 4.77% 353 28,431 4.77% 342
Convertible notes 1,479 -16.83% (63) 5,617 8.41% 119
-------- ------ ------ -------- ---- ------
Total interest-bearing liabilities 131,516 2.39% 794 140,163 2.73% 966
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 93,399 82,533
Other liabilities 2,516 3,167
Shareholders' equity 24,356 14,614
-------- --------
Total liabilities and shareholders' equity $251,787 $240,477
======== ========
Interest income as a percentage of average
earning assets 7.72% 7.75%
Interest expense as a percentage of average
interest-bearing liabilities 2.39 2.73
Net interest margin and income 6.31% $3,549 5.96% $3,202
====== ======
/(1)/ Nonaccrual loans are included in average balances and rate calculations.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
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 $ 79,252 5.90% $ 3,499 $ 95,297 6.24% $ 4,448
Loans/(1)/ 101,852 9.94 7,575 95,398 9.96 7,108
Federal funds sold 34,066 5.47 1,393 18,825 5.37 756
Interest-earning deposits - banks 397 1.70 5 472 6.52 23
-------- ------- -------- -------
Total interest-earning assets 215,567 7.74 12,472 209,992 7.85 12,335
-------- ------- -------- -------
Deferred loan fees (106) (161)
Allowance for loan losses (1,841) (2,283)
Nonearning assets:
Cash and due from banks 23,190 21,843
Premises and equipment 1,543 1,669
Other assets 6,100 7,801
-------- --------
Total assets $244,453 $238,861
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 13,735 0.93% $ 96 $ 12,784 0.82% $ 78
Savings and money market deposits 82,510 2.10 1,297 94,334 1.89 1,337
Time deposits 30,556 4.67 1,068 28,086 4.73 994
Convertible notes 3,693 4.60 127 5,617 8.50 358
Repurchase agreements 73 5.49 3 366 5.84 16
-------- ------- -------- -------
Total interest-bearing liabilities 130,567 2.65 2,591 141,187 2.64 2,783
-------- ------- -------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 91,154 80,081
Other liabilities 1,651 3,240
Shareholders' equity 21,081 14,353
-------- --------
Total liabilities and shareholders' equity $244,453 $238,861
======== ========
Interest income as a percentage of average
earning assets 7.74% 7.85%
Interest expense as a percentage of average
interest-bearing liabilities 2.65 2.64
Net interest margin and income 6.13 $ 9,881 6.08 $ 9,552
======= =======
/(1)/ Nonaccrual loans are included in average balances and rate calculations.
</TABLE>
17
<PAGE>
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 and nine months
ended September 30, 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997 SEPTEMBER 30, 1998 AND 1997
------------------------------ -----------------------------
(in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Securities $(250) $ (54) $(304) $(718) $(231) $(949)
Loans 126 50 176 480 (13) 467
Federal funds sold 304 3 307 623 14 637
Interest-bearing deposits - banks (2) (2) (4) (3) (15) (18)
----- ----- ----- ----- ----- -----
178 (3) 175 382 (245) 137
----- ----- ----- ----- ----- -----
Increase (decrease) in interest expense:
Interest-bearing demand deposits 6 1 7 6 12 18
Savings and money market deposits (42) 34 (8) (177) 137 (40)
Time deposits 11 - 11 86 (12) 74
Convertible notes (36) (146) (182) (99) (132) (231)
Repurchase agreements - - - (12) (1) (13)
----- ----- ----- ----- ----- -----
(61) (111) (172) (196) 4 (192)
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest income $ 239 $ 108 $ 347 $ 578 $(249) $ 329
===== ===== ===== ===== ===== =====
</TABLE>
Interest income represents interest earned on loans, investment
securities and federal funds sold. Interest income increased 4.2% or $175,000
to $4,343,000 for the three months ended September 30, 1998 from $4,168,000 for
the same period in 1997. For the nine months ended September 30, 1998, interest
income increased to $12,472,000 from $12,335,000 for the same period in 1997.
The increase in interest income for the three and nine months ended September
30, 1998 was primarily the result of increased volume and yield on Loans and
Federal funds sold. Interest income on loans increased 7.27% and 6.57% or
$176,000 and $467,000, respectively for the period ending September 30, 1998 as
compared to September 30, 1997. In addition, interest income on Federal funds
sold for the three and the nine months ended September 30, 1998 increased 104.4%
and 84.25% or $307,000 and $637,000, respectively as compared to the same period
ending September 30, 1997. The increases for the three and nine months ended
September 30, 1998 as compared to 1997 primarily reflect the result of increased
volume in the Loan and Federal funds sold portfolio, offset by lower volume and
yields on the Securities.
18
<PAGE>
Interest expense represents interest paid on deposits, Company borrowings
and convertible notes. Interest expense for the three months ended September 30,
1998 was $794,000 compared to $966,000 for the same period in 1997, a decrease
of 17.8%. For the first nine months of 1998, interest expense decreased
$192,000 or 6.9% to $2,591,000, as compared with $2,783,000 for the first nine
months of 1997. A 73.7% decrease in average convertible notes outstanding during
the quarter to $1,479,000 for the three months ended September 30, 1998 compared
to $5,617,000 for the same period in 1997, was the primary reason for the
reduction in interest expenses. Interest expense on convertible notes declined
during the third quarter of 1998 as compared to the third quarter of 1997, as a
result of $1.0 million of convertible notes that converted and a reversal of
$76,000 of interest expense during the quarter that had been previously accrued.
For the nine months ended September 30, 1998 interest expense on convertible
notes were $127,000, a 64.5% decline from $358,000 for the same period in 1997.
The decrease is the result of $4.3 million of convertible notes were converted
and redeemed during the first nine months of 1998 compared with the same period
in 1997.
OTHER OPERATING INCOME
For the nine months ended September 30, 1998, other operating income
totaled $1,345,000 compared with $1,424,000 for the same period in 1997. The
primary reason for the decrease from 1997 to 1998 was in other income which
decreased $122,000 to $374,000 for the nine months ended September 30, 1998.
The decrease is primarily the result of a $69,000 cancellation fee received by
the Bank in the second quarter of 1997 for warrants extinguished in connection
with a credit assumption. The Company continues to generate fees for services
provided to customers which increased approximately $68,000 from $620,000 for
nine months ended September 30, 1997 to $688,000 for the same period in 1998.
OTHER OPERATING EXPENSE
Other operating expense for the third quarter of 1998, declined
$229,000 to $3,096,000 from $3,325,000 for the third quarter of 1997. For the
nine months ended September 30, 1998, other operating expenses was $9,524,000 or
$147,000 lower than the same period in 1997.
Salaries and other employee benefits decreased approximately $75,000
to $1,420,000 for the third quarter of 1998, compared with $1,495,000 for the
third quarter of 1997. For the nine months ended September 30, 1998, salaries
and employee benefits increased $214,000 to $4,611,000 as compared to $4,397,000
for the same period in 1997. This increase was largely due to returning the
Company to full staff level, annual staff performance percentage increases and a
$64,000 reversal in the second quarter of 1997 for severance payments to a
former employee that had initially been expensed, but was reversed because it
had been accrued in the prior year.
Strategic planning and other outside consulting decreased 82.6% and
56.2% during the three and nine months ended September 30, 1998, respectively as
compared to the same periods in 1997. For the three months ended September 30,
1998, strategic planning and other outside consulting decreased $143,000 to
$30,000 from $173,000 for the same period in 1997. For the nine months ended
September 30, 1998, strategic planning and other outside consulting decreased
$156,000 to $122,000 from $278,000 for the same period in 1997. As the Company
returns to full staffing the utilization of services of outside professionals to
augment staffing and support service training continues to decline.
INCOME TAXES
For the three months ended September 30, 1998, the provision for
income taxes was $359,000 compared to $73,000 for the same period in 1997. For
the nine months ended September 30, 1998 the provision for income taxes was
$661,000 compared to $424,000 for the same period in 1997.
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.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement regarding computation of per share earnings
(b) Reports on Form 8-K: No reports on Form 8-K were filed for
the quarter ended September 30, 1998.
20
<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: November 12, 1998 /s/ Julie P. Thompson
--------------------------------
Julie P. Thompson
Chairman of the Board
Date: November 12, 1998 /s/ Eric J. Woodstrom
--------------------------------
Acting - Chief Financial Officer
21
<PAGE>
EXHIBIT 11 - COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net income
(used in basic EPS computation) $ 512,488 $ 199,593 $1,041,054 $ 700,903
Adjustments to net income per
assumed effect of dilutive securities:
Interest on convertible notes, net of tax effect (36,999) 70,423 74,952 211,269
---------- ---------- ---------- ----------
Adjusted earnings for diluted earnings per
share computation $ 475,489 $ 270,016 $1,116,006 $ 912,172
========== ========== ========== ==========
Weighted average number of shares
outstanding for calculating basic earnings
per share 1,963,825 1,343,048 1,692,022 1,342,648
Effect of dilutive securities:
Options and warrants 64,265 33,676 150,547 /(1)/
Convertible notes 120,406 442,339 309,817 442,339
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding for calculation of diluted
earnings per share 2,148,496 1,819,063 2,152,386 1,784,987
========== ========== ========== ==========
Basic earnings per share $ 0.26 $ 0.15 $ 0.62 $ 0.52
========== ========== ========== ==========
Diluted earnings per share $ 0.22 $ 0.15 $ 0.52 $ 0.51
========== ========== ========== ==========
/(1)/ Anti-dilutive
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q -
3RD QUARTER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 0 31,517
<INT-BEARING-DEPOSITS> 0 264
<FED-FUNDS-SOLD> 0 25,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 56,615
<INVESTMENTS-CARRYING> 0 26,485
<INVESTMENTS-MARKET> 0 83,398
<LOANS> 0 105,756
<ALLOWANCE> 0 1,885
<TOTAL-ASSETS> 0 252,840
<DEPOSITS> 0 223,992
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 2,619
<LONG-TERM> 0 1,130
0 0
0 0
<COMMON> 0 17
<OTHER-SE> 0 25,081
<TOTAL-LIABILITIES-AND-EQUITY> 0 252,840
<INTEREST-LOAN> 2,597 7,575
<INTEREST-INVEST> 1,143 3,499
<INTEREST-OTHER> 603 1,398
<INTEREST-TOTAL> 4,343 12,472
<INTEREST-DEPOSIT> 856 2,461
<INTEREST-EXPENSE> (63) 130
<INTEREST-INCOME-NET> 3,549 9,881
<LOAN-LOSSES> 0 0
<SECURITIES-GAINS> 0 (9)
<EXPENSE-OTHER> 3,096 9,524
<INCOME-PRETAX> 871 1,702
<INCOME-PRE-EXTRAORDINARY> 871 1,702
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 512 1,041
<EPS-PRIMARY> 0.26 0.62
<EPS-DILUTED> 0.22 0.52
<YIELD-ACTUAL> 6.31 6.13
<LOANS-NON> 0 581
<LOANS-PAST> 0 619
<LOANS-TROUBLED> 0 875
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 0 1,802
<CHARGE-OFFS> 0 123
<RECOVERIES> 0 206
<ALLOWANCE-CLOSE> 0 1,885
<ALLOWANCE-DOMESTIC> 0 1,885
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
