<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
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 July 31, 1999, 2,015,873 shares of the Registrant's $0.008 par value
common stock were outstanding.
1
<PAGE>
PROFESSIONAL BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the three and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 24
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks:
Noninterest-bearing $ 28,975,000 $ 20,992,183
Interest-bearing 1,154,256 572,519
Federal funds sold 4,400,000 10,400,000
------------ ------------
Cash and cash equivalents 34,529,256 31,964,702
Securities available-for-sale (cost of $50,284,000 and
$81,369,000 in 1999 and 1998, respectively) 47,989,575 80,891,072
Securities held-to-maturity (fair value of $20,559,000
and $24,135,000 in 1999 and 1998, respectively) 20,755,274 24,080,592
Loans (net of allowance for loan losses of $1,813,000
and $2,200,000 in 1999 and 1998, respectively) 141,905,623 115,518,693
Premises and equipment, net 1,387,555 1,390,128
Deferred tax asset 2,591,539 1,242,748
Accrued interest receivable and other assets 4,624,352 4,613,504
------------ ------------
$253,783,224 $259,701,439
============ ============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, noninterest-bearing $102,328,229 $109,421,629
Demand, interest-bearing 12,763,382 16,710,541
Savings and money market 78,486,356 75,500,642
Time deposits 32,753,589 28,947,934
------------ ------------
Total deposits 226,331,556 230,580,746
Convertible notes 868,000 1,116,000
Accrued interest payable and other liabilities 2,090,637 2,683,582
------------ ------------
Total liabilities 229,290,193 234,380,328
------------ ------------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares
authorized; 2,064,710 and 2,064,710 issued
and 2,015,873 and 1,996,344 outstanding in 1999 and 1998, 16,683 16,526
respectively
Additional paid-in-capital 21,098,088 20,873,603
Retained earnings 5,214,735 5,239,275
Treasury stock, at cost (69,467 shares in both 1999 and 1998) (537,251) (537,251)
Unrealized loss on securities available-for-sale, net of taxes (1,299,224) (271,042)
------------ ------------
Total shareholders' equity 24,493,031 25,321,111
------------ ------------
$253,783,224 $259,701,439
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $3,193,826 $2,502,264 $6,078,172 $4,978,008
Securities 1,057,459 1,071,114 2,379,203 2,356,289
Federal funds sold and securities purchased
under agreements to resell 162,913 544,736 246,299 791,656
Interest-bearing deposits in other banks 4,595 1,589 36,062 3,135
-----------------------------------------------------
Total interest income 4,418,793 4,119,703 8,739,736 8,129,088
-----------------------------------------------------
Interest expense
Deposits 737,257 814,435 1,461,101 1,604,529
Convertible notes 13,242 81,559 29,789 189,748
Federal funds purchased and securities
sold under agreements to repurchase - - 108,737 3,055
-----------------------------------------------------
Total interest expense 750,499 895,994 1,599,627 1,797,332
-----------------------------------------------------
Net interest income 3,668,294 3,223,709 7,140,109 6,331,756
Provision for loan losses 1,047,000 - 1,172,000 -
-----------------------------------------------------
Net interest income after provision
for loan losses 2,621,294 3,223,709 5,968,109 6,331,756
-----------------------------------------------------
Other operating income
Net gain (loss) on sale securities available-for-sale 4,266 (8,735) 39,610 (8,735)
Merchant discount 78,980 50,593 140,492 109,277
Mortgage brokering fees 8,308 69,577 63,094 83,523
Service charges on deposits 228,541 222,842 457,608 479,789
Other income 127,459 125,795 262,894 263,153
-----------------------------------------------------
Total other operating income 447,554 460,072 963,698 927,007
-----------------------------------------------------
Other operating expenses
Salaries and employee benefits 1,785,603 1,653,224 3,491,048 3,191,079
Occupancy 350,966 352,892 737,957 701,463
Furniture and equipment 214,247 199,793 423,206 390,265
Meetings and business development 47,764 61,875 120,755 93,950
Donations 66,365 25,816 90,146 62,752
Other promotion 72,774 84,324 142,546 152,262
Legal fees 226,477 159,551 318,112 251,897
Audit, accounting and examinations 129,615 40,495 172,605 84,035
Professional services 334,163 282,215 642,605 639,229
Strategic planning and other outside consulting 16,399 37,473 22,629 91,388
Office supplies 63,458 55,481 126,657 121,494
Telephone 61,381 71,845 123,731 140,512
Postage 33,147 40,392 68,732 81,394
Messenger service 8,087 8,280 14,128 17,498
FDIC assessment 6,290 6,609 12,693 12,762
Other assessments 47,961 44,648 91,633 87,829
Other expense 139,742 170,637 299,368 308,388
-----------------------------------------------------
Total other operating expenses 3,604,439 3,295,550 6,898,551 6,428,197
-----------------------------------------------------
Earnings before taxes (535,591) 388,231 33,256 830,566
Provision for income taxes (276,259) 164,000 (42,955) 302,000
-----------------------------------------------------
Net earnings $ (259,332) $ 224,231 $ 76,211 $ 528,566
=====================================================
Earnings per share
Basic $ (0.13) $ 0.13 $ 0.04 $ 0.34
Diluted $ (0.13) $ 0.13 $ 0.04 $ 0.30
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ (259,332) $224,231 $ 76,211 $528,566
Other Comprehensive Income, net of tax
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period (857,157) (80,767) (1,047,417) 117,931
Reclassification adjustment 8,213 (11,434) 19,235 (11,434)
---------------------------------------------------------------------
Other Comprehensive Income (848,944) (92,201) (1,028,182) 106,497
---------------------------------------------------------------------
Comprehensive Income (Loss) $(1,108,276) $132,030 $ (951,971) $635,063
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 76,211 $ 528,566
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 294,362 290,054
Provision for loan losses 1,172,000 -
(Gain) loss on sales of securities available-for-sale (39,610) 8,735
Amortization of convertible note expense 8,864 52,255
Increase in deferred tax asset (1,348,841) (214,291)
Increase in accrued interest receivable and other assets 744,423 6,959
Increase in accrued interest payable and other liabilities (592,943) (110,971)
Net amortization of premiums and discounts
on securities held-to-maturity 120,954 183,362
Net amortization of premiums and discounts
on securities available-for-sale 149,000 161,142
------------ ------------
Net cash provided by operating activities 584,420 905,811
------------ ------------
Cash flows from investing activities:
Proceeds from:
Maturities of securities held-to-maturity 250,000 3,056,168
Maturities of securities available-for-sale - 6,870,516
Sales of securities available-for-sale 27,187,261 10,234,664
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity 2,954,364 2,544,830
Mortgage-backed securities available-for-sale 5,736,476 6,348,014
Purchases of securities available-for-sale (1,947,308) (10,637,813)
Net (increase) decrease in loans (27,558,930) 5,618,520
Purchase of bank premises and equipment, net (291,789) (242,079)
------------ ------------
Net cash provided by investing activities 6,330,074 23,792,820
------------ ------------
Cash flows from financing activities:
Net decrease in demand deposits and savings accounts (8,054,845) (11,749,284)
Net increase (decrease) in time deposits 3,805,655 (1,081,895)
Cash dividends (100,750) (83,825)
Proceeds from exercise of stock options - 3,794,363
------------ ------------
Net cash used in financing activities (4,349,940) (9,120,641)
------------ ------------
Net decrease in cash and cash equivalents 2,564,554 15,577,990
------------ ------------
Cash and cash equivalents, beginning of period 31,964,702 54,339,670
------------ ------------
Cash and cash equivalents, end of period $ 34,529,256 $ 69,917,660
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 1,605,992 $ 1,925,902
Income taxes $ 1,120,000 $ 122,000
Supplemental disclosure of noncash items:
Decrease in unrealized losses on securities available for sale securities, net of tax $ 1,815,678 $ 170,509
Conversion of notes $ 214,988 $ 2,836,562
Tax benefit on stock options exercised - $ 560,384
</TABLE>
See accompanying notes to consolidated financial statements.
6
<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 June 30, 1999, and the results of operations
for the three and six months ended June 30, 1999 are not necessarily indicative
of the results of operations that may be expected for the year ending December
31, 1999. 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, 1998.
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 six months ended June 30, 1999, net earnings
(loss) totaled $(259,332) and $76,211, other comprehensive income (loss) totaled
$(848,944) and $(1,028,182) and total comprehensive income (loss) totaled
$(1,108,276) and $(951,971), respectively.
7
<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") originally filed its Form 10Q for the
quarter ended June 30, 1999 with the Securities Exchange Commission (SEC) on
August 16, 1999. Subsequent to that filing, the Company recorded a $1 million
provision for loan losses and a $1.5 million charge-off of a single loan for the
three months ended June 30, 1999. The result was a decrease in the second
quarter net earnings from $292,268 or $.14 per basic share to a net loss of
$(259,332) or $(0.13) per basic share. For the six months ended June 30, 1999,
net earnings decreased from $627,811 or $0.31 per basic share to $76,211 or $.04
per basic share. All of the financial tables, statements and discussion
throughout the 10Q have been modified to reflect these changes.
The Company recorded a net loss of $(259,332) or $(0.13) per basic
share for the second quarter of 1999, compared with net earnings of $224,231 or
$0.13 per share for the second quarter of 1998. For the six months ended June
30, 1999, the Company had net earnings of $76,211 or $0.04 per basic share. This
compares to net earnings of $528,566 or $0.34 per basic share for the first six
months of 1998. The Company had total assets of $253,783,224 at June 30, 1999,
compared to $259,701,439 at December 31, 1998.
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>
June 30, 1999 December 31, 1998
-----------------------------------------------------------------
(in thousands) Amount % of Total Amount % of Total
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial $111,534 77.5% $ 93,952 79.7%
Real estate secured commercial 23,289 16.2 11,698 9.9
-------- ----- -------- -----
134,823 93.7 105,650 89.6
Equity lines of credit 4,407 3.1 5,931 5.0
Other lines of credit 3,187 2.2 4,817 4.1
Installment 1,545 1.0 1,482 1.3
Lease financing - - 32 -
-------- ----- -------- -----
Gross loans 143,962 100.0% 117,912 100.0%
Less:
Allowance for loan losses 1,813 2,200
Deferred loan fees, net 243 193
-------- --------
Net loans $141,906 $115,519
======== ========
</TABLE>
The decrease in other lines of credit was due primarily to the $1.5
million charge-off of a single loan in the second quarter of 1999.
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.
8
<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>
June 30, December 31,
(in thousands) 1999 1998
---- ----
<S> <C> <C>
Nonperforming loans $2,301 $1,359
Other real estate owned (OREO) - -
Other repossessed assets 272 272
------ ------
Total nonperforming assets $2,573 $1,631
====== ======
Accruing loans 90 days or more past due $1,579 $ 100
====== ======
Nonperforming loans to total loans(1) 1.62% 1.15%
Nonperforming assets(1)
to total loans 1.81% 1.38%
to total loans, OREO and repossessed assets 1.81% 1.38%
to total assets 1.02% 0.63%
</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 $4,855 at June 30, 1999, and the Company had no
accrued interest due on loans 90 days past due at December 31, 1998. The
$1,579,000 in accruing loans over 90 days or more past due and still accruing as
of June 30, 1999 were all in the process of being renewed, paid off or the
credit quality was not impaired. 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.
9
<PAGE>
The following table provides a summary of the Company's allowance for
loan losses and charge-off and recovery activity during the six months ended
June 30, 1999, the year ended December 31, 1998, and the six months ended June
30, 1998:
<TABLE>
<CAPTION>
Period Ended
------------
June 30, December 31, June 30,
(in thousands) 1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 2,200 $ 1,802 $ 1,802
Provision for loan losses 1,172 406 -
-------- -------- --------
3,372 2,208 1,802
-------- -------- --------
Loan charge-offs 1,636 269 60
Recoveries on loans previously charged-off (77) (261) (109)
-------- -------- --------
Net charge-offs (recoveries) 1,559 8 (49)
-------- -------- --------
Balance at end of period $ 1,813 $ 2,200 $ 1,851
======== ======== ========
Loans outstanding at end of period $143,962 $117,912 $100,213
Average loans outstanding during period 133,369 103,548 101,342
Net charge-offs (recoveries) to average loans outstanding 1.17% 0.01% -0.10%
Allowance for loan losses:
to total loans 1.26 1.87 1.85
to nonperforming loans/(1)/ 78.79 161.88 351.23
to nonperforming assets/(1)/ 70.46 134.89 231.66
</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 $2,535,000 in impaired loans as of June 30,1999. The
carrying value of impaired loans for which there is a related allowance for loan
losses was $280,000, with the amount of specific allowance for loan losses
allocated to these loans of $56,000. There was $2,255,000 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 six months of 1999 was approximately $2,371,000 and
income recorded utilizing the cash basis and accrual basis method of accounting
was $11,000. Impaired loans at June 30, 1999, included $1,230,000 of nonaccrual
loans. Included in impaired loans as of June 30, 1999 were $1,213,000 of
troubled debt restructured loans, $808,000 of which were on nonaccrual and the
remaining $404,000 were in compliance with the modified terms.
10
<PAGE>
The Company had approximately $1,836,000 in impaired loans as of
December 31, 1998. The carrying value of impaired loans for which there is a
related allowance for loan losses was $153,000, with the amount of specific
allowance for loan losses allocated to these loans of $41,000. There were
$1,683,000 in impaired loans for which there was no related specific allowance
for loan losses. However, general allowance consistent with the level of
allowance for similar loans with similar risk characteristics were maintained
for impaired loans without specific allowance. The average recorded investment
in impaired loans during 1998 was $1,131,000. Impaired loans at December 31,
1998 included $1,359,000 of nonaccrual loans. Included in impaired loans as of
December 31, 1998 were $614,000 of troubled debt restructured loans, $341,000 of
which were on nonaccrual and the remaining $273,000 were in compliance with the
modified terms.
The Company had $839,000 in impaired loans as of June 30, 1998. The
carrying value of impaired loans for which there is a related allowance for loan
losses was $193,000, with the amount of specific allowance for loan losses
allocated to these loans of $59,000. There were $646,000 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 six months of 1998 was approximately $981,000 and income
recorded utilizing the cash basis and accrual basis method of accounting was
$33,000. Included in impaired loans as of June 30, 1998 were $374,000 of
troubled debt restructured loans, $62,000 of which were on nonaccrual and the
remaining $312,000 were in compliance with the modified terms.
Investment Securities
The following table sets forth the amortized cost and fair value of
securities available-for-sale as of June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------
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 39,358 - 1,675 37,683
Small Business Administration securities 767 - 24 743
Municipal securities 2,551 - 124 2,427
Federal Reserve Bank Stock 439 - 25 414
Collateralized mortgage obligations 7,169 - 446 6,723
------- ----------- -------- -------
Total $50,284 $ - $ 2,294 $47,990
======= =========== ======== =======
<CAPTION>
December 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 68,487 153 514 68,126
Small Business Administration securities 858 1 7 852
Municipal securities 2,551 3 8 2,546
Federal Reserve Bank Stock 439 - - 439
Collateralized mortgage obligations 9,034 - 106 8,928
------- ----------- --------- -------
Total $81,369 $ 157 $ 635 $80,891
======= ========== ======== =======
</TABLE>
11
<PAGE>
The amortized cost and fair value of securities held-to-maturity as of
June 30, 1999, and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
---- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,038 $ 22 $ 4 $ 3,056
U.S. Government agency securities 2,000 - 20 1,980
U.S. Government agency
mortgage-backed securities 15,717 5 199 15,523
------- ---- ---- -------
Total $20,755 $ 27 $223 $20,559
======= ==== ==== =======
<CAPTION>
December 31, 1998
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
---- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,043 $151 $ - $ 3,194
U.S. Government agency securities 2,250 21 - 2,271
U.S. Government agency - - - -
mortgage-backed securities 18,788 1 119 18,670
------- ---- ---- -------
Total $24,081 $173 $119 $24,135
======= ==== ==== =======
</TABLE>
During the six months ended June 30, 1999 and the twelve months ended
December 31, 1998, securities available-for-sale were sold for aggregate
proceeds of $27,148,000 and $15,337,000, respectively. These sales resulted in
gross realized gains and losses of $97,000 and ($57,000) for the six months
ended June 30, 1999 and $12,000 and ($18,000) for the twelve months period ended
December 31, 1998.
Deposits
Total deposits at June 30, 1999 were $226,332,000, a decrease of
$4,249,000 or 1.84% from $230,581,000 at December 31, 1998. 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 June 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(in thousands) Amount % of Total Amount % of Total
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $102,329 45.21% $109,422 47.46%
Demand, interest-bearing 12,764 5.64 16,710 7.25
Savings deposits 12,782 5.65 12,553 5.44
Money market deposits 65,704 29.03 62,948 27.30
Time deposits under $100,000 8,335 3.68 8,625 3.74
Time deposits of $100,000 and over 24,418 10.79 20,323 .81
-------- ------ -------- ------
$226,332 100.00% $230,581 100.00%
======== ====== ======== ======
</TABLE>
12
<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 products. 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."
13
<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 June 30, 1999.
<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)/ $25,792 10.08% $10,238 4.00% $12,797 5.00%
Tier 1 Risk-Based 25,792 15.06% 6,852 4.00% 10,278 6.00%
Total Risk-Based 28,474 16.62% 13,704 8.00% 17,130 10.00%
Bank
Leverage $22,791 8.95% $10,190 4.00% $12,737 5.00%
Tier 1 Risk-Based 22,791 13.47% 6,767 4.00% 10,151 6.00%
Total Risk-Based 24,604 14.54% 13,534 8.00% 16,918 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 June 30,1999, 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.
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 six months ended June 30, 1999, approximately $248,000 of notes
were converted to 19,529 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 Bank's primary sources of liquidity are federal funds sold to other
banks and the investment securities portfolio. For the six months ended June 30,
1999, federal funds sold averaged $10,413,000 and compared to $29,395,000 for
the same period in 1998. 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
June 30, 1999, were $47,990,000 and $20,559,000, respectively.
The Bank sells securities under agreements to repurchase. Securities sold
under repurchase agreements are recorded as short-term obligations. During the
first six months of 1999, the highest daily outstanding balance and the average
balance of securities sold under agreements to repurchase were $25,000,000 and
$4,368,000, respectively; the average rate paid was 4.95%. At June 30, 1999,
there were no securities sold under agreements to repurchase.
14
<PAGE>
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 Company's
Year 2000 risk mitigation program is a dynamic process of reassessment,
evaluation and testing. As a result, responses may change especially as vendors
and manufacturers find and report Year 2000 product and services issues. 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 reporting to the Audit Committee and Board of Directors of the
Company. The task force, which meets monthly, consists of members of senior
management representatives from key areas within the Company. The task force,
among other roles, monitors and report 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 substantially all systems was completed
by June 30, 1999. 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.
15
<PAGE>
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 implemented, 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.
Remediation: The remediation 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
renovation of mission critical systems where indicated is complete. The extent
of our identified renovation needs have been budgeted within our corporate
budgeting process.
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. These responses are monitored continually to determine 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 mission critical systems was
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 95% 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 for fiscal 1999 of which approximately 85% 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. 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 a consolidated net loss of $(259,332) for the
second quarter of 1999, compared with net earnings of $224,231 for the second
quarter of 1998. Basic and diluted earnings per share for the second quarter of
1999 was $(0.13), compared to $0.13 basic and diluted earnings per share for the
same period in 1998. Return on average shareholders' equity for the second
quarter of 1999 and 1998, were (4.03)% and 4.14%, respectively. Additionally,
return on average assets for the second quarter of 1999 and 1998, were (0.39)%
and 0.36%, respectively.
16
<PAGE>
For the first six months of 1999, the Company reported net earnings of
$76,211 compared to $528,566 for the same period in 1998. Basic and diluted
earnings per share for the six months ended June 30, 1999 were, $0.04 and $0.04,
respectively. Comparatively, basic and diluted earnings per share for the six
months ended June 30, 1998, were $0.34 and $0.30, respectively. Return on
average shareholders' equity for the six months ended June 30, 1999 and 1998,
were 0.60% and 5.48%, respectively. Additionally, return on average assets for
the six months ended June 30, 1999 and 1998, were 0.06% and 0.44%, respectively.
The comparative reduction in net earnings for the second quarter and first
six months of 1999, as compared to the same periods in 1998, resulted primarily
from the $1,047,000 increase in the provision for loan losses in the second
quarter of 1999. The increase in the provision for loan losses in the second
quarter of 1999 was primarily due to the $1.5 million charge-off of a single
loan in the loan portfolio. The Company continued to benefit from increased
interest income from loans and reduced interest expense for deposits and other
borrowings, during the second quarter and first six months of 1999 as compared
to the same periods in 1998. Further, net earnings for the second quarter and
first six months of 1999, were adversely impacted by higher than anticipated
levels of professional service expenses, expenses related to completing the 1998
audit and increased legal fees for corporate and lending activities.
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 June 30, 1999, net interest income increased 13.8% to $3,668,000
from $3,224,000 for the quarter ended June 30, 1998. For the six months ended
June 30, 1999 and 1998 net interest income was $7,140,000 and $6,332,000,
respectively. The increase in net interest income for the second quarter June
30, 1999 as compared to the same period in 1998, is primarily the result of a
39% or $39,027,000 increase in average loans outstanding during the quarter. For
the six months ended June 30, 1999 average loans outstanding grew 31.6% to
$133,369,000 as compared to $101,342,000 for the same period in 1998. For the
three and six months ended June 30, 1999, the net interest margin was 6.50% and
6.34%, respectively, compared to 5.96% and 6.03% for the same respective periods
in 1998.
17
<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 June 30, 1999 and
1998.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
Average Yield/ Average Yield/
(in thousands) Balance Rate Interest Balance Rate Interest
---------- ------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 72,389 5.86% $1,057 $ 76,045 5.65% $1,071
Loans/(1)/ 139,089 9.21 3,194 100,062 10.03 2,502
Federal funds sold 13,751 4.75 163 40,328 5.42 545
Interest-earning deposits - banks 1,317 1.40 5 614 1.31 2
-------- ------ -------- ------
Total interest-earning assets 226,546 7.82 4,419 217,049 7.61 4,120
-------- ------ -------- ------
Deferred loan fees (219) (92)
Allowance for loan losses (2,303) (1,843)
Noninterest-earning assets:
Cash and due from banks 24,700 23,619
Premises and equipment 1,404 1,557
Other assets 5,986 5,897
-------- --------
Total assets $256,114 $246,187
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 13,688 0.70% $ 24 $ 12,927 0.94% $ 30
Savings and money market deposits 79,559 1.81 359 81,094 2.06 417
Time deposits under $100,000 8,716 4.19 91 7,881 4.68 92
Time deposits of $100,000 and over 25,107 4.20 263 24,012 4.61 275
Convertible notes 879 6.04 13 4,224 7.76 82
Repurchase agreements - - - - - -
-------- ------ -------- ------
Total interest-bearing liabilities 127,949 2.35 750 130,137 2.76 896
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 99,951 92,091
Other liabilities 2,405 2,253
Shareholders' equity 25,809 21,706
-------- --------
Total liabilities and shareholders' $256,114 $246,187
equity ======== ========
Interest income as a percentage of average
earning assets 7.82% 7.61%
Interest expense as a percentage of average
interest-bearing liabilities 2.35% 2.76%
Net interest margin and income 6.50% $3,669 5.96% $3,224
====== ======
</TABLE>
/(1)/ Nonaccrual loans are included in average balances and rate calculations.
18
<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 six months ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Average Yield/ Average Yield/
(in thousands) Balance Rate Interest Balance Rate Interest
---------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 82,045 5.85% $2,379 $ 80,541 5.90% $2,356
Loans/(1)/ 133,369 9.19 6,078 101,342 9.91 4,978
Federal funds sold 10,413 4.77 246 29,395 5.43 792
Interest-earning deposits - banks 1,359 5.35 36 411 1.54 3
-------- ------ -------- ------
Total interest-earning assets 227,186 7.76 8,740 211,689 7.74 8,129
-------- ------ -------- ------
Deferred loan fees (212) (118)
Allowance for loan losses (2,089) (1,826)
Noninterest-earning assets:
Cash and due from banks 24,293 24,754
Premises and equipment 1,424 1,553
Other assets 5,940 6,228
-------- --------
Total assets $256,542 $242,280
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 13,699 0.73% $ 50 $ 13,276 0.93% $ 61
Savings and money market deposits 80,078 1.90 755 80,723 2.07 828
Time deposits under $100,000 8,707 4.27 184 7,705 4.65 178
Time deposits of $100,000 and over 22,460 4.24 472 23,476 4.62 538
Convertible notes 919 6.54 30 4,800 7.97 190
Repurchase agreements 4,368 5.02 109 110 5.60 3
-------- ------ -------- ------
Total interest-bearing liabilities 130,231 2.48 1,600 130,090 2.79 1,797
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 97,795 90,008
Other liabilities 2,656 2,741
Shareholders' equity 25,860 19,441
-------- --------
Total liabilities and shareholders' $256,542 $242,280
equity ======== ========
Interest income as a percentage of average
earning assets 7.76% 7.74%
Interest expense as a percentage of average
interest-bearing liabilities 2.48% 2.79%
Net interest margin and income 6.34% $7,140 6.03% $6,332
====== ======
</TABLE>
/(1)/ Nonaccrual loans are included in average balances and rate calculations.
19
<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 six months
ended June 30,1999 and 1998. 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 Six Months Ended
June 30, 1999 and 1998 June 30, 1999 and 1998
(in thousands) Volume Rate Total Volume Rate Total
------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Securities $ (53) $ 39 $ (14) $ 44 $ (21) $ 23
Loans 911 (219) 692 1,480 (380) 1,100
Federal funds sold (322) (60) (382) (459) (86) (545)
Interest-bearing deposits - banks 2 1 3 16 17 33
----- ----- ----- ------ ----- ------
538 (239) 299 1,081 (470) 611
----- ----- ----- ------ ----- ------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 2 (7) (5) 2 (14) (12)
Savings and money market deposits (8) (50) (58) (7) (66) (73)
Time deposits under $100,000 9 (10) (1) 22 (15) 7
Time deposits of $100,000 and over 12 (25) (13) (23) (43) (66)
Convertible notes (53) (15) (68) (131) (28) (159)
Repurchase agreements - - - 106 - 106
----- ----- ----- ------ ----- ------
(38) (107) (145) (31) (166) (197)
----- ----- ----- ------ ----- ------
Increase (decrease) in net interest income $ 576 $(132) $ 444 $1,112 $ 304 $ 808
===== ===== ===== ====== ===== ======
</TABLE>
Interest income represents interest earned on loans, investment securities
and federal funds sold. Interest income increased $299,000 to $4,419,000 for the
three months ended June 30, 1999 from $4,120,000 for the same period in 1998.
For the six months ended June 30, 1999, interest income increase 7.5% to
$8,740,000 from $8,129,000 for the same period in 1998. Interest earned on loans
increased 28% and 22% for the three and six months ended June 30, 1999 and 1998,
respectively. The Company continues to benefit from strong loan demand, which
has been funded by the sale of investment securities and reduced level of
federal funds sold during the three and six months ended June 30, 1999. Overall
average interest earning assets increased $15,497,000 or 7.3% for the six months
ended June 30, 1999 as compared to the same period in 1998.
Interest expense represents interest paid on deposits, Company borrowings
and convertible notes. Interest expense for the three months ended June 30, 1999
was $750,000 compared to $896,000 for the same period in 1998, a decrease of
16.3%. For the six months ended June 30, 1999, interest expense decreased to
$1,600,000 from 1,797,000 for the same period in 1998. The decrease in interest
expense is primarily related to a $69,000 and a $160,000 decrease in interest
expenses on convertible notes, for the three and six months periods ended June
30, 1999 as compared to the same periods in 1998. Average convertible notes
outstanding decreased to $879,000 and $919,000 for the three and six months
period ended June 30, 1999, from $4,224,000 and $4,800,000 for the same periods
in 1998. In addition, interest expense was further impacted by an increase in
average repurchase agreements outstanding during the six month period ended June
30, 1999 as compared to the same period in 1998. Interest expense on repurchase
agreements increased to $109,000 for the six months period ended June 30, 1999
from $3,000 for the same period in 1998. The increase in average repurchase
agreements outstanding during the periods presented, was a result of the reduced
level of federal funds sold and the growth in the loan portfolio.
20
<PAGE>
Provision for Loan Losses
The provision for loan losses is determined by management based upon the
Company's loan loss experience, the performance of loans in the Company's
portfolio, the quality of loans in the Company's portfolio, evaluation of
collateral for such loans, the economic conditions affecting collectibility of
loans, the prospects and financial condition of the respective borrowers or
guarantors and such other factors which in management's judgment deserve
recognition in the estimation of probable loan losses. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance or to take charge-offs (reductions in the
allowance) in anticipation of losses.
The Company recorded provisions for loan losses of $1,047,000 and
$1,172,000 for the three and six months period ended June 30, 1999,
respectively. The Company had made no provision for loan losses for the same
periods in 1998. The increase in the provision for loan losses was due primarily
to a $1.5 million charge-off of a single loan in the second quarter of 1999. Net
charge-offs (recoveries) to average outstanding loans for the first six months
of 1999 and 1998 were (1.17%) and (0.10%), respectively.
Other Operating Income
For the six months ended June 30, 1999, other operating income totaled
$964,000 compared with $927,000 for the same period in 1998. The increase was
primarily related to a $40,000 net gain recognized on the sale of investment
securities and a $31,000 increase in merchant discount income during the first
six months of 1999 as compared to 1998. In addition, other operating income was
adversely impacted by declines in mortgage brokering fees on a comparative
basis, for the periods presented.
Other Operating Expense
Other operating expenses for the first six months of 1999, increased to
$6,899,000 from $6,428,000 for the same period in 1998. The increase primarily
occurred in salaries and other employee benefits, legal fees and audit
accounting fees.
Salaries and other employee benefits increased approximately $300,000 to
$3,491,000 for the first six months of 1999 from $3,191,000 for the same period
in 1998. The increase primarily relates to an increase number of employees as
the Company became more fully staffed and increased group health insurance
expenses. Legal fees and audit/accounting fees increased $155,000 during the
first six months of 1999 as compared to the same period in 1998, primarily as a
result of accounting fee overages related to completing the 1998 audit and
additional legal fees expended for corporate and lending activities.
Income Taxes
For the six months ended June 30, 1999, the provision (benefit) for income
taxes was (42,955) compared to $302,000 for the same period in 1998.
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.
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Interest Rate Sensitivity
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps. Investment securities
and loans are presented based upon contractual maturity and related weighted
average interest rates by expected maturity dates. The information is presented
in US dollar equivalents, which is the Company's reporting currency.
<TABLE>
<CAPTION>
There Fair
1999 2000 2001 2002 2003 After Total Value
------- ------- ------ ------- ------- ------- -------- --------
(U.S. $ equivalent in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS (1)
- ----------
Securities
U.S. government securities
Fixed $ - $ - $1,015 $ - $ 2,023 $ - $ 3,038 $ 3,056
Weighted average interest rate 6.81% 5.89% 6.20%
U.S. government agency and
mortgage-backed securities
Fixed - - - - 2,000 38,056 40,056 38,556
Weighted average interest rate 5.65% 6.26% 5.96%
Variable - - - - - 16,996 16,996 16,605
Weighted average interest rate 5.66% 5.66%
Municipal securities
Fixed - - - - - 2,551 2,551 2,427
Weighted average interest rate 6.47% 6.47%
Small Business Administration securities
Variable - - - - - 694 694 670
Weighted average interest rate 5.40% 5.40%
Collateralized mortgage securities
Fixed - - - - - 7,169 7,169 6,723
Weighted average interest rate 6.32% 6.32%
Variable - - - - - - - -
Weighted average interest rate
Federal Reserve Bank Stock
Fixed - - - - - 439 439 414
Weighted average interest rate - - - - - 6.08% 6.08%
Loans
Fixed $ 9,270 $ 4,716 $2,316 $ 4,641 $ 3,674 $ 9,506 $ 34,123 $ 33,857
Weighted average interest rate 8.97% 9.37% 9.47% 9.69% 9.85% 7.87% 9.20%
Variable 36,044 20,753 7,807 10,354 15,485 17,977 108,420 108,420
Weighted average interest rate 9.35% 9.45% 9.52% 9.48% 9.44% 9.18% 9.41%
</TABLE>
22
<PAGE>
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including rate interest swaps. Certificates of
deposit and convertible notes are presented based upon contractual maturity and
related weighted average interest rates by expected maturity dates. For
interest rate swaps and caps, the table present notional amounts and weighted
average interest rates by contractual maturity dates. The information is
presented in US dollar equivalents, which is the Company's reporting currency.
<TABLE>
<CAPTION>
There Fair
1999 2000 2001 2002 2003 After Total Value
----- ---- ----- ---- ---- ----- ------ -----
(U.S. $ equivalent in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES (1)
- ---------------
Deposits
Noninterest-bearing transaction accounts $102,328 $ - $ - $ - $ - $ - $102,328 $102,328
Weighted average interest rate 0.00% - - - - - 0.00%
Interest-bearing transaction accounts 12,763 - - - - - 12,763 12,763
Weighted average interest rate 0.73% - - - - - 0.73%
Savings and money market accounts 78,486 - - - - - 78,486 78,486
Weighted average interest rate 1.90% - - - - - 1.90%
Certificates of deposit and other time deposits
Fixed 30,114 2,639 - - - - 32,753 32,636
Weighted average interest rate 4.50% 4.03% - - - - 4.33%
Convertible notes - - - - - 868 868 864
Weighted average interest rate - - - - - 6.54% 6.54%
OFF-BALANCE SHEET ASSETS - - - - - - - -
- ------------------------
</TABLE>
(1) The Company used certain assumptions to estimate fair values and expected
maturities. For loans, expected maturities are contractual maturities adjusted
for estimated prepayments of principal based on market indicators. Investment
securities are at quoted market rates and stated maturities. For loan fair
value computations, the company used a discounted cashflow model with discount
rates based upon prevailing market rates for similar types of loans,
incorporating adjustments for credit risk. For deposit liabilities, fair values
were calculated using discounted cashflow models based on market interest rates
for different product types and maturity dates for which the deposits are held.
Exchange Rate Sensitivity
All of the Company's derivative financial instruments and other financial
instruments are denominated in US dollars. The Company does not have, or
anticipate having, any foreign currency exchange rate exposure.
Commodity Price Sensitivity
The Company does not have, or anticipate having, any derivative commodity
instruments.
23
<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
Form Type: 8-K
SEC File Number: 001-10937
File Number: 99596263
Date Filed: April 16, 1999
Description: Press release, dated April 16, 1999,
announcing delay in filing Form 10-K for the fiscal
year-end December 31, 1998 and temporary halt in
trading.
Form Type: 8-K
SEC File Number: 001-10937
File Number: 99655219
Date Filed: June 28, 1999
Description: On June 28, 1999, Professional Bancorp,
Inc. (the "Company") announced through a press
release that the Company has agreed in principle to
terms of a transaction under which it and its wholly
owned subsidiary First Professional Bank, N.A. are to
be acquired by FirstFed Financial Corp.
24
<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 15, 1999 /s/ Julie P. Thompson
--------------------------
Julie P. Thompson
Chairman of the Board
Date: November 15, 1999 /s/ Larry Patapoff
--------------------------------
Chief Financial Officer
25
<PAGE>
EXHIBIT 11 - Computation of Basic and Diluted Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
---- ----- ---- ----
<S> <C> <C> <C> <C>
Net income
(used in basic EPS computation) $ (259,332) $ 224,231 $ 76,211 $ 528,566
Adjustments to net income per
assumed effect of dilutive securities:
Interest on convertible notes, net of tax 7,872 48,120 17,576 111,951
effect ---------- ---------- ---------- ----------
Adjusted earnings for diluted earnings per
share computation $ (251,460) $ 272,351 $ 93,787 $ 640,517
========== ========== ========== ==========
Weighted average number of shares
outstanding for calculating basic earnings
per share 2,015,227 1,690,479 2,011,189 1,553,870
Effect of dilutive securities:
Options and warrants 71,277 82,118 68,228 194,228
Convertible notes 68,375 393,757 73,039 406,097
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding for calculation of diluted
earnings per share 2,154,879 2,166,354 2,152,456 2,154,195
========== ========== ========== ==========
Basic earnings per share $ (0.13) $ 0.13 $ 0.04 $ 0.34
========== ========== ========== ==========
Diluted earnings per share $ (0.13) $ 0.13 $ 0.04 $ 0.30
========== ========== ========== ==========
</TABLE>
/(1)/ Anti-dilutive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 0 34,529,256
<INT-BEARING-DEPOSITS> 0 1,154,256
<FED-FUNDS-SOLD> 0 4,400,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 47,989,575
<INVESTMENTS-CARRYING> 0 20,755,274
<INVESTMENTS-MARKET> 0 20,559,000
<LOANS> 0 143,719,082
<ALLOWANCE> 0 1,813,460
<TOTAL-ASSETS> 0 253,783,224
<DEPOSITS> 0 226,331,556
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 2,090,636
<LONG-TERM> 0 868,000
0 0
0 0
<COMMON> 0 16,683
<OTHER-SE> 0 24,476,348
<TOTAL-LIABILITIES-AND-EQUITY> 0 253,783,224
<INTEREST-LOAN> 3,193,827 6,078,173
<INTEREST-INVEST> 1,057,459 2,379,203
<INTEREST-OTHER> 167,508 282,361
<INTEREST-TOTAL> 4,418,793 8,739,736
<INTEREST-DEPOSIT> 737,257 1,461,101
<INTEREST-EXPENSE> 13,242 138,526
<INTEREST-INCOME-NET> 3,668,294 7,140,109
<LOAN-LOSSES> 1,047,000 1,172,000
<SECURITIES-GAINS> 4,266 39,610
<EXPENSE-OTHER> 3,604,439 6,898,551
<INCOME-PRETAX> (535,591) 33,256
<INCOME-PRE-EXTRAORDINARY> (535,591) 33,256
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (259,332) 76,211
<EPS-BASIC> (0.13) 0.04
<EPS-DILUTED> (0.12) 0.04
<YIELD-ACTUAL> 6.50 6.34
<LOANS-NON> 0 2,301,000
<LOANS-PAST> 0 1,579,000
<LOANS-TROUBLED> 0 1,213,000
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 0 2,200,000
<CHARGE-OFFS> 0 1,636,000
<RECOVERIES> 0 77,000
<ALLOWANCE-CLOSE> 0 1,813,000
<ALLOWANCE-DOMESTIC> 0 1,172,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>