<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, 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 November 12, 1999, 2,025,321 shares of the Registrant's $0.008 par value
common stock were outstanding.
1
<PAGE>
PROFESSIONAL BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the nine months
ended September 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 23
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 25
Item 2. CHANGES IN SECURITIES 25
Item 3. DEFAULTS UPON SENIOR SECURITIES 25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
Item 5. OTHER INFORMATION 25
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks:
Noninterest-bearing $ 24,379,114 $ 20,992,183
Interest-bearing 503,881 572,519
Federal funds sold 26,000,000 10,400,000
------------ ------------
Cash and cash equivalents 50,882,995 31,964,702
Securities available-for-sale (cost of $49,213,510 and
$81,369,000 in 1999 and 1998, respectively) 47,311,283 80,891,072
Securities held-to-maturity (fair value of $19,390,124
and $24,135,000 in 1999 and 1998, respectively) 19,430,825 24,080,592
Loans (net of allowance for loan losses of $6,213,041
and $2,200,000 in 1999 and 1998, respectively) 142,741,302 115,518,693
Premises and equipment, net 1,263,071 1,390,128
Deferred tax asset 3,934,433 1,242,748
Accrued interest receivable and other assets 4,473,829 4,613,504
------------ ------------
$270,037,738 $259,701,439
============ ============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, noninterest-bearing $101,129,194 $109,421,629
Demand, interest-bearing 14,252,287 16,710,541
Savings and money market 92,788,733 75,500,642
Time deposits 36,304,428 28,947,934
------------ ------------
Total deposits 244,474,642 230,580,746
Convertible notes 748,000 1,116,000
Accrued interest payable and other liabilities 2,353,390 2,683,582
------------ ------------
Total liabilities 247,576,032 234,380,328
------------ ------------
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 2,025,321 and 1,996,344 outstanding in 1999 and 1998, 16,758 16,526
respectively
Additional paid-in-capital 21,207,979 20,873,603
Retained earnings 2,851,413 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 (1,077,193) (271,042)
------------ ------------
Total shareholders' equity 22,461,706 25,321,111
------------ ------------
$270,037,738 $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 Nine Months Ended
September 30, September 30,
-------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $ 3,433,006 $2,597,151 $ 9,511,179 $ 7,575,159
Securities 1,031,858 1,142,606 3,411,061 3,498,895
Federal funds sold and securities purchased
under agreements to resell 315,785 600,982 562,084 1,392,638
Interest-bearing deposits in other banks 20,039 1,909 56,100 5,044
-------------------------------------------------------
Total interest income 4,800,688 4,342,648 13,540,424 12,471,736
-------------------------------------------------------
Interest expense
Deposits 858,649 856,147 2,319,749 2,460,676
Convertible notes 4,986 (62,710) 34,775 127,038
Federal funds purchased and securities
sold under agreements to repurchase - - 108,737 3,055
-------------------------------------------------------
Total interest expense 863,635 793,437 2,463,261 2,590,769
-------------------------------------------------------
Net interest income 3,937,053 3,549,211 11,077,163 9,880,967
Provision for loan losses 4,426,000 - 5,598,000 -
-------------------------------------------------------
Net interest income after provision
for loan losses (488,947) 3,549,211 5,479,163 9,880,967
-------------------------------------------------------
Other operating income
Net gain (loss) on sale securities available-for-sale - - 39,610 (8,735)
Merchant discount 80,529 48,983 221,022 158,260
Mortgage brokering fees 12,225 49,943 75,319 133,466
Service charges on deposits 229,617 208,448 687,224 688,237
Other income 135,606 110,808 398,499 373,961
-------------------------------------------------------
Total other operating income 457,977 418,182 1,421,674 1,345,189
-------------------------------------------------------
Other operating expenses
Salaries and employee benefits 1,667,914 1,420,166 5,158,962 4,611,245
Occupancy 398,836 368,015 1,136,793 1,069,478
Furniture and equipment 196,442 208,547 619,648 598,812
Meetings and business development 45,973 53,464 166,728 147,414
Donations 26,286 19,475 116,432 82,227
Other promotion 54,290 105,372 196,836 257,634
Legal fees 392,213 105,575 710,325 357,472
Audit, accounting and examinations 49,045 41,140 221,650 125,175
Professional services 334,840 360,319 977,445 999,548
Strategic planning and other outside consulting 17,947 30,159 40,576 121,547
Office supplies 60,904 60,478 187,561 181,972
Telephone 91,557 76,649 215,288 217,161
Postage 39,237 41,570 107,969 122,964
Messenger service 22,165 8,446 36,293 25,944
FDIC assessment 21,301 6,303 33,994 19,065
Other assessments 43,025 53,930 134,658 141,759
Other expense 119,592 136,297 418,960 444,685
-------------------------------------------------------
Total other operating expenses 3,581,567 3,095,905 10,480,118 9,524,102
-------------------------------------------------------
Earnings before taxes (3,612,537) 871,488 (3,579,281) 1,702,054
Provision for income taxes (1,249,215) 359,000 (1,292,170) 661,000
-------------------------------------------------------
Net earnings $(2,363,322) $ 512,488 $(2,287,111) $ 1,041,054
=======================================================
Earnings per share
Basic $ (1.17) $ 0.26 $ (1.14) $ 0.62
Diluted $ (1.17) $ 0.22 $ (1.14) $ 0.52
</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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $(2,363,322) $512,488 $(2,287,111) $1,041,054
Other Comprehensive Income, net of tax
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period 222,031 30,325 (825,386) 148,256
Reclassification adjustment - - 19,235 (11,434)
---------------------------------------------------------------------
Other Comprehensive Income 222,031 30,325 (806,151) 136,822
---------------------------------------------------------------------
Comprehensive Income (Loss) $(2,141,291) $542,813 $(3,093,262) $1,177,876
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ (2,287,111) $ 1,041,054
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 442,923 441,839
Provision for loan losses 5,598,000 -
(Gain) loss on sales of securities available-for-sale (39,610) 8,735
Amortization of convertible note expense 12,702 63,796
Increase in deferred tax asset (1,034,265) (214,292)
Decrease in accrued interest receivable and other assets 93,582 93,871
Increase (increase) in accrued interest payable and other
liabilities (891,536) 115,578
Net amortization of premiums and discounts
on securities held-to-maturity 174,499 263,920
Net amortization of premiums and discounts
on securities available-for-sale 183,959 218,687
------------ ------------
Net cash provided by operating activities 2,253,143 2,033,188
------------ ------------
Cash flows from investing activities:
Proceeds from:
Maturities of securities held-to-maturity 250,000 500,000
Maturities of securities available-for-sale - 6,550,000
Sales of securities available-for-sale 27,187,262 10,234,664
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity 4,225,268 7,850,368
Mortgage-backed securities available-for-sale 6,771,892 8,881,458
Purchases of securities available-for-sale (2,425,942) (29,588,004)
Net (increase) decrease in loans (32,820,609) (1,856,257)
Purchase of bank premises and equipment, net (315,867) (401,704)
------------ ------------
Net cash provided by investing activities 2,872,004 2,170,525
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits and
savings accounts 6,537,402 (10,794,888)
Net increase in time deposits 7,356,494 5,323,722
Cash dividends (100,750) (85,532)
Proceeds from exercise of stock options - 3,794,363
------------ ------------
Net cash used in financing activities 13,793,146 (1,762,335)
------------ ------------
Net decrease in cash and cash equivalents 18,918,293 2,441,378
------------ ------------
Cash and cash equivalents, beginning of period 31,964,702 54,339,670
------------ ------------
Cash and cash equivalents, end of period $ 50,882,995 $ 56,781,048
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 2,473,721 $ 2,743,927
Income taxes $ 1,120,000 $ 132,000
Supplemental disclosure of noncash items:
Pretax change in unrealized losses on securities
available for sale securities 1,902,227 $ 224,060
Conversion of notes 334,608 $ 3,788,439
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 September 30, 1999, and the results of
operations for the three and nine months ended September 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 - Earnings Per Share
The actual number of shares outstanding at September 30, 1999 was
2,025,321. 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income
(used in basic EPS computation) $(2,363,322) $ 512,488 $(2,287,111) $1,041,054
Adjustments to net income per
assumed effect of dilutive securities:
Interest on convertible notes, net of
tax effect (36,999) 74,952
----------- ---------- ----------- ----------
Adjusted earnings for diluted earnings per
share computation $(2,363,322) $ 475,489 $(2,287,111) $1,116,006
=========== ========== =========== ==========
Weighted average number of shares
outstanding for calculating basic earnings
per share 2,017,718 1,963,825 2,013,389 1,692,022
Effect of dilutive securities:
Options and warrants 64,265 150,547
Convertible notes 120,406 309,817
----------- ---------- ----------- ----------
Weighted average number of shares
outstanding for calculation of diluted
earnings per share 2,017,718 2,148,496 2,013,389 2,152,386
=========== ========== =========== ==========
Basic earnings per share $ (1.17) $ 0.26 $ (1.14) $ 0.62
=========== ========== =========== ==========
Diluted earnings per share $ (1.17) $ 0.22 $ (1.14) $ 0.52
=========== ========== =========== ==========
</TABLE>
/(1)/ Anti-dilutive
7
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
- -------------------------------------------------------------------------------
Of Operations
-------------
Professional Bancorp, Inc. (the "Company") is the holding company for First
Professional Bank, N.A. (the "Bank"). Since the Bank constitutes substantially
all the business of the Company, references to the Company in this Item 2
reflect the consolidated activities of the Company and the Bank. For a more
complete understanding of Professional Bancorp and its operations, reference
should be made to the financial statements in this report and in the Company's
1998 Annual Report on Form 10K. Certain statements in this report on Form 10Q
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995 which involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in such forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, economic conditions, competition in the geographic and business
areas in which the Company conducts operations, fluctuations in interest rates,
credit quality, year 2000 data systems compliance, and government regulations.
For additional information concerning these factors, see "Item 1. Business -
Factors That May Affect Results" contained in the Company's Annual Report on
Form 10K for the year ended December 31, 1998.
Results of Operations
The Company recorded a net loss of $(2,363,322) or $(1.17) per basic share
for the third quarter of 1999, compared with net earnings of $512,488 or $0.26
per basic share for the third quarter of 1998. For the nine months ended
September 30, 1999, the Company had a net loss of $(2,287,111) or $(1.14) per
basic share, compared to net earnings of $1,041,054 or $0.62 per share for the
first nine months of 1998. The Company had total assets of $270,037,738 at
September 30, 1999, compared to $259,701,439 at December 31, 1998.
The Company reported a consolidated net loss of $(2,363,322) for the third
quarter of 1999, compared with net earnings of $512,488 for the third quarter of
1998. Basic and diluted earnings (loss) per share for the third quarter of 1999
was $(1.17) compared to basic and diluted earnings per share of $0.26 and $0.22,
respectively, for the same period in 1998. Return on average shareholders'
equity for the third quarter of 1999 and 1998, were (37.04)% and 8.35%,
respectively. Additionally, return on average assets for the third quarter of
1999 and 1998, were (3.48)% and 0.81%, respectively.
For the first nine months of 1999, the Company reported a net loss of
$(2,287,111) compared to $1,041,054 for the same period in 1998. Basic and
diluted earnings (loss) per share for the nine months ended September 30, 1999
was $(1.14) compared to basic and diluted earnings per share of $0.62 and $0.52,
respectively, for the same period in 1998. Return on average shareholders'
equity for the nine months ended September 30, 1999 and 1998, were (11.92)% and
5.42%, respectively. Additionally, return on average assets for the nine months
ended September 30, 1999 and 1998, were (1.17)% and 0.57%, respectively.
The decrease of net earnings in 1999 is primarily due to increased
provisions for loan losses. The Company recorded provisions for loan losses of
$4,426,000 and $5,598,000, for the three and nine months periods ended September
30, 1999, respectively. This compares to zero provisions recorded in the same
periods in 1998. The additional provisions relate primarily to identified
weaknesses in a small number of loans, of substantial dollar amounts, which may
take an extended period of time to resolve. Secondarily, changes in the health
care industry and the increased complexity of the credits extended to the
industry made increases in the loan loss provisions prudent. Finally, growth in
the loan portfolio and increases in non-performing assets also contributed to
the increased provision. In addition, the other operating expense increased
$486,000, or 15.7%, to $3,582,000 for the third quarter of 1999 compared to
$3,096,000 for the same period in 1998. Other expenses for nine months ended
September 30, 1999 and 1998 were $10,480,000 and $9,524,000, an increase of
$956,000 or 10.0%.
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, 1999, net interest income increased 10.9% to
$3,937,000 from $3,549,000 for the quarter ended September 30, 1998. For the
nine months ended September 30, 1999 and 1998 net interest income was
$11,077,000 and $9,881,000, respectively. The increase in net interest income
for the third quarter ended
8
<PAGE>
September 30, 1999 as compared to the same period in 1998, is primarily the
result of a 42% or $43,315,000 increase in average loans outstanding during the
quarter. For the nine months ended September 30, 1999 average loans outstanding
grew 35.2% to $137,675,000 as compared to $101,852,000 for the same period in
1998. For the three and nine months ended September 30, 1999, the net interest
margin was 6.52% and 6.40%, respectively, compared to 6.31% and 6.13% for the
same respective periods in 1998.
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,
1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended September 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 $ 67,673 6.05% $1,032 $ 76,761 5.91% $1,143
Loans/(1)/ 146,698 9.28 3,433 102,883 10.02 2,597
Federal funds sold 24,424 5.13 316 43,206 5.52 601
Interest-earning deposits - banks 642 12.39 20 374 2.12 2
-------- ------ -------- ------
Total interest-earning assets 239,437 7.95 4,801 223,224 7.72 4,343
-------- ------ -------- ------
Deferred loan fees (224) (81)
Allowance for loan losses (2,365) (1,871)
Noninterest-earning assets:
Cash and due from banks 24,371 23,162
Premises and equipment 1,349 1,523
Other assets 6,580 5,830
-------- --------
Total assets $269,148 $251,787
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 14,007 0.71% $ 25 $ 14,660 0.93% $ 35
Savings and money market deposits 86,590 2.07 452 86,036 2.16 469
Time deposits under $100,000 8,324 4.14 87 8,543 4.65 100
Time deposits of $100,000 and over 27,564 4.24 295 20,798 4.82 253
Convertible notes 828 2.39 5 1,479 -16.83 (63)
Repurchase agreements - - - - - -
-------- ------ -------- ------
Total interest-bearing liabilities 137,313 2.50 864 131,516 2.39 794
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 104,018 93,399
Other liabilities 2,506 2,516
Shareholders' equity 25,311 24,356
-------- --------
Total liabilities and shareholders' $269,148 $251,787
equity ======== ========
Interest income as a percentage of average
earning assets 7.96% 7.72%
Interest expense as a percentage of average
interest-bearing liabilities 2.50 2.39
Net interest margin and income 6.52% $3,937 6.31% $3,549
====== ======
/(1)/ Nonaccrual loans are included in average balances and rate calculations.
</TABLE>
9
<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 nine months ended September 30, 1999
and 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 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 $ 77,204 5.91% $ 3,411 $ 79,252 5.90% $ 3,499
Loans/(1)/ 137,843 9.23 9,511 101,852 9.94 7,575
Federal funds sold 15,111 4.97 562 34,066 5.47 1,393
Interest-earning deposits - banks 1,117 6.71 56 397 1.68 5
-------- ------- -------- -------
Total interest-earning assets 231,275 13,540 215,567 12,472
-------- ------- -------- -------
Deferred loan fees (216) (106)
Allowance for loan losses (2,182) (1,841)
Noninterest-earning assets:
Cash and due from banks 24,318 23,190
Premises and equipment 1,397 1,543
Other assets 6,133 6,100
-------- --------
Total assets $260,725 $244,453
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 13,801 0.73% $ 75 $ 13,735 0.93% $ 96
Savings and money market deposits 82,255 1.96 1,206 82,510 2.10 1,297
Time deposits under $100,000 8,603 4.21 271 7,982 4.65 278
Time deposits of $100,000 and over 24,151 4.24 767 22,574 4.68 790
Convertible notes 888 5.23 35 3,693 4.60 127
Repurchase agreements 2,896 5.02 109 73 5.49 3
-------- ------- -------- -------
Total interest-bearing liabilities 132,594 2,463 130,567 2,591
-------- ------- -------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 100,047 91,154
Other liabilities 2,410 1,651
Shareholders' equity 25,674 21,081
-------- --------
Total liabilities and shareholders'
equity $260,725 $244,453
======== ========
Interest income as a percentage of average
earning assets 7.83% 7.74%
Interest expense as a percentage of average
interest-bearing liabilities 2.48 2.65
Net interest margin and income 6.40 $11,077 6.13 $ 9,881
======= =======
/(1)/ Nonaccrual loans are included in average balances and rate calculations.
</TABLE>
10
<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 30,1999 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 Nine Months Ended
September 30, 1999 and 1998 September 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 $ (138) $ 27 $(111) $ (90) $ 3 $ (87)
Loans 1,037 (201) 836 2,516 (580) 1,936
Federal funds sold (245) (40) (285) (715) (116) (831)
Interest-bearing deposits - banks 2 16 18 19 32 51
------ ----- ----- ------ ----- ------
$ 656 $(198) $ 458 1,730 (661) 1,069
------ ----- ----- ------ ----- ------
Increase (decrease) in interest expense:
Interest-bearing demand deposits $ (1) $ (8) $ (9) $ - $ (22) $ (21)
Savings and money market deposits 3 (20) (17) (4) (86) (90)
Time deposits under $100,000 (3) (11) (14) 21 (27) (7)
Time deposits of $100,000 and over 75 (33) 42 53 (77) (24)
Convertible notes 19 49 68 (108) 16 (92)
Repurchase agreements - - - 106 - 106
------ ----- ----- ------ ----- ------
93 (23) 70 68 (196) (128)
------ ----- ----- ------ ----- ------
Increase (decrease) in net interest $ 563 $(175) $ 388 $1,662 $(465) $1,197
income ====== ===== ===== ====== ===== ======
</TABLE>
Interest income represents interest earned on loans, investment securities
and federal funds sold. Interest income increased $458,000 to $4,801,000 for the
three months ended September 30, 1999 from $4,343,000 for the same period in
1998. For the nine months ended September 30, 1999, interest income increased
8.6% to $13,540,000 from $12,472,000 for the same period in 1998. Interest
earned on loans increased 32% and 26% for the three and nine months ended
September 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 levels of federal funds sold during the three and nine months ended
September 30, 1999. Overall average interest earning assets increased
$15,708,000 or 7.3% for the nine months ended September 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 September 30,
1999 was $864,000 compared to $793,000 for the same period in 1998, an increase
of 9.0%. For the nine months ended September 30, 1999, interest expense
decreased to $2,463,000 from $2,591,000 for the same period in 1998. The
decrease in interest expense is primarily related to a $68,000 and a $92,000
decrease in interest expenses on convertible notes, for the three and nine
months periods ended September 30, 1999 as compared to the same periods in 1998.
Average convertible notes outstanding decreased to $828,000 and $888,000 for the
three and nine months period ended September 30, 1999, from $1,479,000 and
$3,693,000 for the same periods in 1998. In addition, interest expense was
further impacted by an increase in average repurchase agreements outstanding
during the nine month period ended September 30, 1999 as compared to the same
period in 1998. Interest expense on repurchase agreements increased to $109,000
for the nine months period ended September 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.
11
<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 $4,426,000 and
$5,598,000 for the three and nine months period ended September 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 in 1999 relate
primarily to identified weaknesses in a small number of loans, of substantial
dollar amounts, which may take an extended period of time to resolve.
Secondarily, changes in the health care industry and the increased complexity
of the credits extended to this industry made increases in the loan loss
provisions prudent. Finally, growth in the loan portfolio and increases in non-
performing assets also contributed to the increased provision. Net charge-offs
(recoveries) to average outstanding loans for the first nine months of 1999 and
1998 were 1.15% and (0.11)%, respectively.
Other Operating Income
For the nine months ended September 30, 1999, other operating income
totaled $1,422,000 compared with $1,345,000 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 $63,000 increase in merchant discount income during
the first nine 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 nine months of 1999, increased to
$10,480,000 from $9,524,000 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 $548,000 to
$5,159,000 for the first nine months of 1999 from $4,611,000 for the same period
in 1998. The increase primarily relates to an increase in staff and salaries and
increased group health insurance expenses. Legal fees and audit/accounting fees
increased $449,000 during the first nine months of 1999 as compared to the same
period in 1998, primarily due to an increase in audit fees of $96,000 related to
the completion of the 1998 annual report and an increase of $353,000 in legal
expenses related to the planned merger and lending activities. Legal expenses
related to the workout of problem loans may be recovered after the loan is fully
paid. There was also a decrease of $142,000 due to reduced promotional
activities and use of outside consultants.
Income Taxes
For the nine months ended September 30, 1999, the provision (benefit) for
income taxes was $(1,292,000) compared to $661,000 for the same period in 1998.
12
<PAGE>
BALANCE SHEET ANALYSIS
Investment Securities
The Company reported total investment securities of $66.7 million at
September 30, 1999. This represented a decrease of $38.2 million, or 36.4% from
$105.0 million at December 31, 1998.
Securities available-for-sale decreased $33.6 million, or 41.5%, to $47.3
million at September 30, 1999. The unrealized loss on securities held-for-sale
was $1.9 million at the end of the third quarter, with an adjustment to equity
capital of $1.1 million and deferred taxes of $0.8 million. The following table
sets forth the amortized cost and fair value of securities available-for-sale as
of September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 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 38,405 - 1,352 37,053
Small Business Administration securities 654 - 21 633
Municipal securities 2,551 - 133 2,418
Federal Reserve Bank Stock 439 - - 439
Collateralized mortgage obligations 7,163 - 395 6,768
------- --------- ------ -------
Total $49,212 $ - $1,901 $47,311
======= ========= ====== =======
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>
13
<PAGE>
Securities held-for-sale decreased $4.7 million, or 19.5%, to $19.4 million
at September 30,1999, from $24.1 million at December 31, 1998. The amortized
cost and fair value of securities held-to-maturity as of September 30, 1999, and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,035 $ 38 $ - $ 3,073
U.S. Government agency securities 2,000 - - 2,000
U.S. Government agency
mortgage-backed securities 14,396 29 107 14,318
------- ---- ---- -------
Total $19,431 $ 67 $107 $19,391
======= ==== ==== =======
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 nine months ended September 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 nine months
ended September 30, 1999 and $12,000 and ($18,000) for the twelve months period
ended December 31, 1998.
14
<PAGE>
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>
September 30, 1999 December 31, 1998
----------------------- -----------------------
(in thousands) Amount % of Total Amount % of Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Commercial $113,408 76.0% $ 93,952 79.7%
Real estate secured commercial 26,736 17.9 11,698 9.9
-------- ---------- -------- ----------
140,144 93.9 105,650 89.6
Equity lines of credit 4,320 2.9 5,931 5.0
Other lines of credit 3,205 2.2 4,817 4.1
Installment 1,501 1.0 1,482 1.3
Lease financing - - 32 -
-------- ---------- -------- ----------
Gross loans 149,170 100.0% 117,912 100.0%
Less:
Allowance for loan losses 6,213 2,200
Deferred loan fees, net 216 193
-------- --------
Net loans $142,741 $115,519
======== ========
</TABLE>
Gross loans outstanding increased by $31.3 million or 26.5% to $149.2
million at September 30, 1999 compared to $117.9 at December 31, 1998. This was
primarily due to increases in commercial and real estate secured commercial
loans of $19.5 million and $15.8 million, respectively. The table above
indicates that the loan portfolio mix at September 30, 1999 had a larger portion
of real estate secured commercial loans, representing 17.9% of gross loans as
compared to 9.9% at December 31, 1998, while commercial loans decreased from
79.7% to 76.0%.
The commercial and real estate secured commercial loans consist primarily
of short-to medium-term financing for small-to medium-sized health care-related
companies and professionals located in Southern California. These loans are
primarily concentrated in the same sectors of the medical community that the
Bank's deposit base is drawn from and consists of sole medical practitioners,
small group practices, large specialty groups, multi-specialty medical groups
and other outpatient health care service companies. Approximately 76% of total
loans at September 31, 1999 were commercial loans which were unsecured or
collateralized by various business and personal property assets, including
equipment, accounts receivable contracts, and proceeds thereof, including
capitation payments.
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.
15
<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) 1999 1998
------------- ------------
<S> <C> <C>
Nonperforming loans $ 4,325 $ 1,359
Other real estate owned (OREO) - -
Other repossessed assets 272 272
------------- ------------
Total nonperforming assets $ 4,597 $ 1,631
============= ============
Accruing loans 90 days or more past due $ 2,990 $ 100
============= ============
Allowance for loan losses as a percent of
nonperforming loans 143.7% 617.7%
Nonperforming loans to total loans(1) 2.90% 1.15%
Nonperforming assets(1)
to total loans 3.08% 1.38%
to total loans, OREO and repossessed assets 3.08% 1.38%
to total assets 1.70% 0.63%
</TABLE>
(1) Nonperforming loans and nonperforming assets do not include accruing
loans 90 days or more past due.
Nonperforming loans increased to $4.3 million at September 30,1999 from
$1.4 million at December 31, 1998. This increase was primarily due to a single
borrower being placed on nonaccrual status during the third quarter of 1999.
The $2,990,000 in accruing loans over 90 days or more past due and still
accruing as of September 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 total
accrued interest on loans 90 days or more past due and still accruing was
approximately $7,934 at September 30, 1999, and the Company had no accrued
interest due on loans 90 days past due at December 31, 1998.
Allowance for loan losses
Management's determination of the allowance for loan losses requires the
use of estimates and assumptions related to the actual and inherent risks in the
loan portfolio. Actual results may, however, differ significantly from such
estimates. In connection with the determination of the allowance for loan losses
where real estate secures the loan, management generally obtains independent
appraisals for all properties. Management believes its current appraisal policy
conforms to regulatory guidelines.
An evaluation of the overall quality of the portfolio is performed at least
quarterly to determine the level of the allowance for loan losses. This
evaluation takes into consideration the classification of loans and the
application of loss estimates attributable to these classifications. The Company
classifies loans as pass, watch, special mention, substandard, doubtful, or loss
based on classification criteria believed by management to be consistent with
the criteria applied by regulatory agencies and consistent with sound banking
practices. These classifications and loss estimates take into consideration all
sources of repayment, underlying collateral, the value of the collateral,
current and anticipated economic conditions, trends and uncertainties and the
historical accuracy of specific reserves attached to loans with serious
perceived weakness. Additionally, the Company utilizes "migration analysis' as
another means to assist management in estimating the level of the allowance for
loan losses. Migration analysis is a statistical method that examines historic
charge-off and classification trends prior to charge-off to estimate potential
losses inherent in the loan portfolio. In addition, the Company utilizes a
comprehensive program that considers numerous variables, of which migrations is
one, to determine the adequacy of the allowance for loan losses for reserves
nonspecific to certain credits. This program is consistent with the
methodologies in Banking Circular 201. Amongst others, consideration is given
to historical and current trends in past due loans, charged-off loans,
nonaccruals, and
16
<PAGE>
the nature and mix of the loan portfolio; local, regional, industry, and
national economic trends in determining loan loss adequacy. Finally, credit
administration, corresponding loan policies and procedures, and timely problem
loan identification are integral to the sound determination of the allowance for
loan losses. Based on information available at September 30, 1999, management
believes that a $6.2 million allowance for loan losses, which constitutes 4.17%
of gross loans, was adequate as an allowance against probable and estimable
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.
As this risk continually changes in response to factors beyond the control of
the Company, such as the state of the economy, management's judgment as to the
adequacy of the allowance for loan losses in future periods, while approximate,
is in part based on a reasonable methodology. In addition, various regulatory
agencies, as an integral part of their examination process, review the Company's
allowance for loan losses. Such agencies may require the Bank to record
additions or deletions to the allowance based on their judgments of information
available to them at the time of their examination.
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, 1999, the year ended December 31, 1998, and the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
Period Ended
------------
September 30, December 31, September 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 5,598 406 -
------------- ------------ -------------
7,798 2,208 1,802
------------- ------------ -------------
Loan charge-offs 1,690 269 122
Recoveries on loans previously charged-off (105) (261) (205)
------------- ------------ -------------
Net charge-offs (recoveries) 1,585 8 (83)
------------- ------------ -------------
Balance at end of period $ 6,213 $ 2,200 $ 1,885
============= ============ =============
Loans outstanding at end of period $ 149,170 $ 117,912 $ 107,719
Average loans outstanding during period 137,675 103,548 101,852
Net charge-offs (recoveries) to average loans outstanding 1.15% 0.01% -0.11%
Allowance for loan losses:
to total loans 4.17 1.87 1.75
to nonperforming loans/(1)/ 1.44 161.88 324.44
to nonperforming assets/(1)/ 1.35 134.89 220.98
</TABLE>
/(1)/ Nonperforming loans and nonperforming assets do not include accruing
loans 90 days or more past due.
The allowance for losses on loans was $6.2 million at September 30, 1999,
an increase of $4.0 million and $4.3 million from at December 31, 1998 and
September 30, 1998, respectively. The additional provisions relate primarily to
identified weaknesses in a small number of loans, of substantial dollar amounts,
which may take an extended period of time to resolve. Secondarily, changes in
the health care industry and the increased complexity of the credits extended to
this industry made increases in the loan loss provisions prudent. Finally,
growth in the loan portfolio and increases in non-performing assets also
contributed to the increased provision. The Company also added $1.0 million of
allowance for losses on loans during the second quarter of 1999.
Net loan charge-offs for the nine months ended September 30, 1999 amounted
to $1.6 million as compared to a total net recovery of $0.1 million for the same
period in 1998. Of the $1.7 million in charge-offs in 1999, $1.5 was
attributable to a single credit in the second quarter.
17
<PAGE>
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 $4,545,000 in impaired loans as of September 30,1999. The
carrying value of impaired loans for which there is a related allowance for loan
losses was $264,000, with the amount of specific allowance for loan losses
allocated to these loans of $61,000. There was $4,281,000 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 1999 was approximately $2,915,000
and income recorded utilizing the cash basis and accrual basis method of
accounting was $60,038. Impaired loans at September 30, 1999, included
$4,325,000 of nonaccrual loans. Included in impaired loans as of September 30,
1999 were $999,000 of troubled debt restructured loans, $778,000 of which were
on nonaccrual and the remaining $221,000 were in compliance with the modified
terms.
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 $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. 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 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. Included in impaired loans as of
September 30, 1998 were $319,000 of troubled debt restructured loans, $25,000 of
which were on nonaccrual and the remaining $294,000 were in compliance with the
modified terms.
Deposits
Total deposits at September 30, 1999 were $244,475,000, an increase of
$13,894,000 or 6.03% 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 September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Amount % of Total Amount % of Total
-------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $101,129 41.37% $109,422 47.46%
Demand, interest-bearing 14,253 5.83 16,711 7.25
Savings deposits 13,604 5.56 12,553 5.44
Money market deposits 79,184 32.39 62,947 27.30
Time deposits under $100,000 8,252 3.38 8,625 3.74
Time deposits of $100,000 and over 28,053 11.47 20,323 .81
-------- ---------- -------- ----------
$244,475 100.00% $230,581 100.00%
======== ========== ======== ==========
</TABLE>
18
<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.
Federal banking agencies 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."
19
<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, 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)/ $23,539 8.76% $10,747 4.00% $13,434 5.00%
Tier 1 Risk-Based 23,539 13.24% 7,114 4.00% 10,671 6.00%
Total Risk-Based 26,559 14.93% 14,228 8.00% 17,785 10.00%
Bank
Leverage 20,101 7.53% 10,675 4.00% 13,344 5.00%
Tier 1 Risk-Based 20,101 11.45% 7,021 4.00% 10,531 6.00%
Total Risk-Based 22,345 12.73% 14,041 8.00% 17,552 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 September 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' 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, 1999, approximately $368,000 of
notes were converted to 28,977 shares of common stock. The principal balance of
notes outstanding at September 30, 1999 were $748,000.
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 nine months ended
September 30, 1999, federal funds sold averaged $15,111,000 and compared to
$34,066,000 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 September 30, 1999, were $47,311,000 and $19,390,000,
respectively.
20
<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 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 September 30,
1999, 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 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 continues to
report 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 developed an overall strategy which identified
and categorized 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 was risk assessed based upon the impact on the Company's business. High
risk processes and systems were categorized as "mission critical" and were
prioritized in our Year 2000 risk mitigation process. Testing plans were
developed, and we completed testing all mission critical and other identified
systems. The testing of all systems was completed by September 30, 1999. We
identified contingency plans and alternatives, including replacement or
elimination, for mission critical systems and other systems. Also, we
integrated the Year 2000 business risks into our overall bankwide business
resumption plans.
In addition, as a lending institution, the Bank is exposed to potential
risk if its customers suffer Year 2000 related difficulties. Therefore, we have
developed, and implemented, a process to assess the potential risks to the Bank
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.
21
<PAGE>
Remediation: The remediation phase included upgrading or replacing
information or operating systems, vendor certifications, and other associated
changes. We have completed renovation of systems, including non-information
technology systems that were identified as non-compliant to Year 2000, including
replacement of some personal computers and upgrade of software and other
operating systems.
The renovation of mission critical systems is complete. The extent of our
identified renovation needs were budgeted within our corporate budgeting process
or expensed in accordance with generally accepted accounting procedures.
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 were validated, upgraded,
and successfully tested the systems were 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 instituted an
independent third party review of our Year 2000 efforts for all mission critical
systems. This independent audit of the Bank's Year 2000 readiness plan recently
confirmed that 100 percent of our mission-critical systems are Y2K Compliant.
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 100% 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 100% has been incurred.
While we expect we are fully prepared for the Year 2000 transition, it is
not possible to guaranty that the Bank has eliminated every conceivable risk or
the potential that one or more of our systems may be affected by the actions or
events controlled by third parties. We have, therefore, developed and tested a
comprehensive contingency plan outlining emergency procedures should key
services be disrupted.
We continue with the execution of our Year 2000 Preparedness Plan and have
met or 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.
22
<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 $ - $ - $1,013 $ - $ 2,022 $ - $ 3,035 $ 3,073
Weighted average interest rate 6.81% 5.89% 6.20%
U.S. government agency and
mortgage-backed securities
Fixed - - - - 2,000 36,907 38,907 37,751
Weighted average interest rate 5.65% 6.26% 6.32%
Variable - - - - - 15,896 15,896 15,621
Weighted average interest rate 5.76% 5.76%
Municipal securities
Fixed - - - - - 2,551 2,551 2,418
Weighted average interest rate 5.82% 5.82%
Small Business Administration securities
Variable - - - - - 694 694 633
Weighted average interest rate 5.40% 5.40%
Collateralized mortgage securities
Fixed - - - - - 7,163 7,163 6,767
Weighted average interest rate 6.32% 6.32%
Variable - - - - - - - -
Weighted average interest rate
Federal Reserve Bank Stock
Fixed - - - - - 439 439 439
Weighted average interest rate - - - - - 6.08% 6.08%
Loans
Fixed 6,762 4,434 2,310 4,434 3,851 11,223 33,014 37,148
Weighted average interest rate 9.59% 8.95% 9.37% 9.65% 9.78% 7.94% 9.21%
Variable 24,853 34,589 6,371 9,607 13,816 26,920 116,156 116,156
Weighted average interest rate 9.81% 9.78% 10.00% 9.99% 10.00% 9.73% 9.89%
</TABLE>
23
<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 $101,129 $ - $ - $ - $ - $ - $101,129 $101,129
Weighted average interest rate 0.00% - - - - - 0.00%
Interest-bearing transaction accounts 14,252 - - - - - 14,252 14,252
Weighted average interest rate 0.73% - - - - - 0.73%
Savings and money market accounts 92,789 - - - - - 92,789 92,789
Weighted average interest rate 1.96% - - - - - 1.96%
Certificates of deposit and other time deposits
Fixed 29,662 6,642 - - - - 36,304 36,435
Weighted average interest rate 4.46% 4.22% - - - - 4.34%
Convertible notes - - - - - 748 748 752
Weighted average interest rate - - - - - 5.23% 5.23%
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.
24
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
- -----------
3.1 Articles of Incorporation (filed as Exhibit 3.3 to Bancorp's 1989 Form
10-K Report and incorporated herein by this reference).
3.2 Amendment to Articles of Incorporation, dated September 8, 1992 (filed
as Exhibit 3.3 to Bancorp's 1995 Form 10-K/A Report filed on June 3,
1996 and incorporated herein by this reference).
3.3 Bylaws adopted April 25, 1990, as amended July 25, 1990 (filed as
Exhibit 3.2 to Bancorp's 1995 Form 10-K/A Report filed on June 3, 1996
and incorporated herein by this reference).
4.1 Warrant to purchase 100,000 shares of Common Stock dated 12-31-92,
issued to Robert H. Leshner (filed as Exhibit 4.1 in Bancorp's 1992
Form 10-K Report and incorporated herein by this reference).
4.2 Warrant to purchase 12,500 shares of Common Stock dated 12-31-92
issued to Andrew E. Haas. (filed as Exhibit 4.2 in Bancorp's 1998 Form
10-K Report and incorporated herein by this reference).
4.3 Warrant to purchase 12,500 shares of Common Stock dated 12-31-92,
issued to Curtis Swindall. (filed as Exhibit 4.3 in Bancorp's 1998
Form 10-K Report and incorporated herein by this reference).
10.1* Indemnity Agreement entered into with directors and certain officers
dated October 25, 1989 (filed as Exhibit 10.11 to Bancorp's 1995 Form
10-K/A Report filed on June 3, 1996 and incorporated herein by this
reference).
10.2* 1990 Stock Option Plan (filed as Exhibit 28.A in Bancorp's 1990 Form
10-K Report on Form 8, Amendment No. 1 dated April 29, 1991 and
incorporated herein by this reference).
10.3* 1992 Stock Option Plan (filed as Exhibit A in Bancorp's 1992 Proxy
Statement and incorporated herein by this reference).
10.4* 1998 Stock Option Plan. (filed as Exhibit 10.4 to Bancorp's 1998 Form
10-K Report and incorporated herein by this reference).
10.5* Stock repurchase agreement (filed as Exhibit 10.1 in Form 8-K, dated
December 18, 1990 and incorporated herein by this reference).
10.6* Consulting Agreement dated as of August 12, 1996 between Bancorp,
First Professional Bank, N.A. and Network Health Financial Services,
Inc. (filed as Exhibit 10.6 to Bancorp's 1996 Form 10-K Report and
incorporated herein by this reference).
10.7* Amendment No. 1 to Consulting Agreement dated as of August 12, 1996
between Professional Bancorp, Inc., First Professional Bank, N.A. and
Network Health Financial Services, Inc. (Filed as Exhibit 10.7 to
Bancorp's 1998 Form 10-K Report and incorporated herein by reference).
10.8* Salary Continuation Agreement entered into between the Bank and Joel
W. Kovner dated May 1, 1992 (filed as Exhibit 10.25 to Bancorp's 1992
10-K Report and incorporated herein by this reference).
10.9 Settlement Agreement dated as of July 8, 1996 among Bancorp, the Bank,
the Shareholders Protective Committee and certain officers and
directors (filed as Exhibit 1 to Bancorp's Form 8-K filed July 22,
1996 and incorporated herein by this reference).
26
<PAGE>
10.10 Lease for premises at 606 Broadway, Santa Monica, California (filed as
Exhibit 10(a) to Bancorp's Registration Statement on Form S-1, File
No. 2-76371 filed March 8, 1982 and incorporated herein by this
reference).
10.11 Lease for premises at 520 Broadway, Santa Monica, California (filed as
Exhibit 10.5 in Bancorp's 1983 10-K Report and incorporated herein by
this reference).
10.12 Lease for premises at 8600 West 3rd Street, Suite #1, Los Angeles,
California (filed as Exhibit 10.6 in Bancorp's 1983 10-K Report and
incorporated herein by this reference.
10.13 Lease for second floor premises and extension of lease of entire
premises at 606 Broadway, Santa Monica, California (filed as Exhibit
10.8 in Bancorp's 1984 10-K Report and incorporated herein by this
reference).
10.14 Lease for premises at 9629 Brighton Way, Beverly Hills, California
(filed as Exhibit 10.9 in Bancorp's 1984 10-K Report and incorporated
herein by this reference).
10.15 Lease for premises at 5525 Etiwanda Street, Tarzana, California (filed
as Exhibit 10.8 in Bancorp's 1986 10-K Report and incorporated herein
by this reference).
10.16 Lease for premises at 55 E. California, Pasadena, California (filed as
Exhibit 10.65 in Bancorp's 1991 10-K Report and incorporated herein by
this reference).
10.17 Lease for premises at 10 North 5th Street, Redlands, California,
(filed as Exhibit 10.7 in Bancorp's 1991 10-K Report and incorporated
herein by this reference).
10.18 Lease for premises at 9900 Norwalk Boulevard, Santa Fe Springs,
California, (filed as Exhibit 10.75 in Bancorp's 1992 10-K Report and
incorporated herein by this reference).
10.19* Employment agreement effective November 1, 1999, among First
Professional Bank, N.A., Professional Bancorp, Inc. and Larry
Patapoff.
10.20* Employment agreement effective October 21, 1999, among First
Professional Bank, N.A., Professional Bancorp, Inc. and Gene Gaines.
21 Subsidiaries of the Registrant (filed as Exhibit in Bancorp's 1986 10-
K Report and incorporated herein by this reference).
27 Financial Data Schedule
*Identified as a management contract or compensatory agreement pursuant to Item
14(a)# of Form 10-K.
27
<PAGE>
(b) Reports on Form 8-K: None
28
<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, 1999 /s/ Julie P. Thompson
---------------------
Julie P. Thompson
Chairman of the Board
Date: November 12, 1999 /s/ Larry Patapoff
-----------------------
Chief Financial Officer
29
<PAGE>
Exhibit 10.19
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made this 1st day of November, 1999,
among FIRST PROFESSIONAL BANK, N.A. (the "Bank") and PROFESSIONAL BANCORP, INC.
("PBI") (PBI and the Bank are collectively referred to herein as "Employer") and
LARRY PATAPOFF ("Executive").
RECITALS
--------
WHEREAS, PBI and the Bank both desire to employ Executive as their Senior
Vice President and Chief Financial Officer, and Executive desires to be employed
by PBI and the Bank, on the terms and subject to the conditions set forth in
this Agreement;
NOW, THEREFORE, in consideration of the foregoing promises and the terms,
covenants and conditions set forth herein, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, the definitions set
-----------
forth on Exhibit B hereto shall apply unless the context clearly indicates
otherwise.
2. Employment and Term. Employer hereby employs Executive and Executive
-------------------
hereby accepts employment, upon the terms and conditions set forth herein. The
term of this Agreement (the "Term") shall be for a period of one year,
commencing November 1, 1999 and ending on October 31, 2000, unless earlier
terminated in accordance with the provisions hereof. This Agreement shall
automatically renew for successive one-year periods thereafter, unless
terminated by either party giving written notice of termination to the other
party at least ninety (90) days prior to the expiration of the then-current one-
year term.
3. Duties. Executive shall serve as the Senior Vice President and Chief
------
Financial Officer of PBI and the Bank and shall perform the duties and have the
responsibilities set forth on Exhibit A attached hereto and incorporated herein
by reference, and shall have the authority and perform such other duties,
services and responsibilities incident to such position as are customary of the
Senior Vice President and Chief Financial Officer of a bank and bank holding
company, and such other reasonable duties and responsibilities as are determined
from time to time by the Board. Executive shall report to the Chief Executive
Officer of the Bank and the Board of PBI. Executive shall devote one hundred
percent (100%) of his business time, attention and skill to the performance of
his duties hereunder, and shall perform his duties to the best of his ability
and subject to the policies and instructions of the Board. Executive will not,
without the prior written approval of Employer, engage in any other business
activity which would interfere with the performance of his duties, services and
responsibilities hereunder or which is in violation of policies established from
time to time by the Board.
4. Compensation.
------------
(a) Salary. Executive will receive an annual base salary of One
Hundred Thirty Thousand Dollars ($130,000) during the Term (the "Annual Base
Salary"), payable in equal bi-weekly installments. Salary payments shall be
subject to withholding and all other applicable taxes. Executive's Annual Base
Salary shall be reviewed at least annually by the Compensation Committee of the
Board and may be increased in the discretion of the Board based upon Executive's
performance, Employer's performance and profitability and other factors
generally used by Employer and in the industry in adjusting salaries of
executive employees.
(b) Annual Bonus. Executive may be eligible to receive an annual
bonus in an amount of up to 50% of his Annual Base Salary, based upon the
attainment of either (i) specific
<PAGE>
corporate budgetary and strategic objectives or (ii) specific individual
performance objectives, any of which shall be set by the Board. Bonuses, if any,
may be payable in a combination of a lump sum cash payment and the issuance of
options to purchase shares of common stock of PBI, to be allocated as determined
by Employer.
(c) Stock Options. On the execution date hereof, in consideration of
Executive agreeing to enter into this Agreement, PBI shall grant to Executive
fully vested and immediately exercisable stock options to purchase 10,000 shares
of PBI's common stock at an exercise price determined pursuant to the applicable
stock option plan. Executive shall be eligible to receive additional
performance-based options, consistent with PBI's applicable stock option plans,
as determined by the Compensation Committee of the Board. All options are
subject to the terms of the applicable stock option plan(s).
(d) Severance. If during the two-year period beginning on the date of
this Agreement, (i) PBI or the Bank sells all or substantially all of its assets
to, or merges with, a third party, and (ii) Executive's employment is terminated
thereafter (within such two-year period) by Employer for other than Cause or the
death or Incapacity of Executive or by Executive for Good Reason, then Employer
will continue to pay Executive the monthly base salary that he is earning at the
time of such termination for a period of nine months following the Date of
Termination.
5. Fringe Benefits.
---------------
(a) Incentive Plans/Benefits. Subject to the eligibility requirements
of each plan, Executive shall be entitled to participate in all medical or
health plans, dental and vision plans, life insurance plans, disability plans,
401(K)/savings and retirement plans, welfare plans, incentive plans, equity-
based plans and all other benefits generally available to full-time officers or
senior management employees of Employer in effect from time to time. All
insurance is subject to the terms of the policies in effect and to Executive's
insurability under such policies.
(b) Auto Allowance. Executive shall be entitled to an auto allowance
of Five Hundred Dollars ($500) per month.
(c) Vacation. Executive shall receive twenty (20) paid vacation days
per year.
(d) Business Expenses. In accordance with the policies relating to
Employer's senior executive employees, Employer will reimburse Executive for
reasonable out-of-pocket expenses incurred by Executive in the performance of
his duties hereunder. All such reimbursements will be made upon submission to
Employer of written expense reports or other documentation which describe and
substantiate such business expenses and which are in such form as Employer may
from time to time prescribe for its executive employees.
6. Confidential Information. Executive acknowledges that in his positions
------------------------
with Employer, he will be exposed to and receive information relating to the
confidential affairs of Employer and Employer's subsidiaries, including but not
limited to, Employer's and Employer's subsidiaries' customer lists, financial
information, strategic plans, business and marketing plans and strategies,
information concerning Employer's and Employer's subsidiaries' products,
promotions, customers, development, financing, expansion plans, business
policies and practices, and other information considered by Employer and
Employer's subsidiaries to be confidential, proprietary and in the nature of
trade secrets (the "Confidential
-2-
<PAGE>
Information"). Executive acknowledges that the Confidential Information is a
valuable, special and unique asset of Employer's and Employer's subsidiaries'
businesses. Executive agrees to keep all Confidential Information confidential
and shall not, during the Term or thereafter, directly or indirectly disclose
all or any part of the Confidential Information in any manner whatsoever to any
person, firm, corporation, association or other entity other than outside
professionals employed by Employer or use such Confidential Information for his
own personal benefit, without the prior written consent of Employer, unless such
disclosure is made in the ordinary course of Employer's business and is
necessary and advances the best interests of Employer.
7. Employer Documents. Executive expressly agrees that all plans,
------------------
customer lists, reports, manuals, documents, files, studies, instruments and
other materials used and/or developed by Executive relating to Employer and
Employer's subsidiaries and their respective customers are solely the property
of Employer and Employer's respective subsidiary and that Executive has no
right, title or interest therein. During Executive's employment with Employer
and after termination thereof, regardless of the reason therefor, Executive
shall hold in a fiduciary capacity for the benefit of Employer, all such plans,
lists, disks, documentation, programs, reports, memoranda, diaries, notes,
records, letters, manuals and all other documents and information of Employer.
Upon termination of Executive's employment for any reason, Executive shall
immediately deliver all such documents, without retaining any copies thereof, to
Employer.
8. Termination of Employment.
-------------------------
(a) Death or Incapacity. This Agreement shall terminate automatically
upon Executive's death during the Term. This Agreement shall also terminate on
the date of the determination by the Board that the Incapacity of Executive has
occurred during the Term ("Incapacity Effective Date").
(b) Cause. Employer may terminate Executive's employment for Cause,
as defined herein.
(c) Good Reason. Executive may terminate his employment for Good
Reason, as defined herein.
(d) Written Notice. Executive may terminate this Agreement at any
time upon ninety (90) days' prior written notice to Employer.
(e) At Will. Employer may terminate this Agreement by written notice
to Executive at any time for any reason.
(f) Notice of Termination. Any termination (except by death) shall be
communicated by a Notice of Termination to the other party hereto given in
accordance with Section 14 of this Agreement. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination under the provision so indicated, (iii) in
the case of termination by Employer for Cause or for Incapacity, confirms that
such termination is pursuant to a resolution of the Board (which, in the case of
Cause, is pursuant to Section 8(b) hereof), and (iv) if the Date of Termination
(as defined below) is other than the date of such notice, specifies the
termination date. The failure by Executive or Employer to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason, Incapacity or Cause shall not serve to waive any right of Executive
or Employer, respectively, hereunder or preclude Executive
-3-
<PAGE>
or Employer, respectively, from asserting such fact or circumstance in enforcing
Executive's or Employer's rights hereunder.
(g) Date of Termination. "Date of Termination" means (i) if
Executive's employment is terminated by Employer for Cause, or by Employer other
than for Cause, death or Incapacity, the date of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if Executive's
employment is terminated by Executive for Good Reason, the Date of Termination
shall be thirty (30) days after the date of the Notice of Termination, however
Employer may specify an earlier date in its discretion after its receipt of the
notice from Executive, (iii) if Executive's employment is terminated by reason
of death or Incapacity, the Date of Termination shall be the date of death of
Executive or the Incapacity Effective Date, as the case may be, and (iv) if
Executive's employment is terminated by Written Notice by Executive, the Date of
Termination shall be ninety (90) days after the date of the Notice of
Termination.
9. Obligations of Employer Upon Termination.
----------------------------------------
(a) Obligations Upon Termination. Upon termination of this Agreement
for any reason, Employer's sole obligation to Executive (except as otherwise
expressly set forth herein) shall be to pay any accrued but unpaid salary or
bonus up to the Date of Termination, less withholding and other taxes as
required by law, and provide to Executive any other accrued amounts or benefits
required to be paid or provided or which Executive is eligible to receive under
any Employer plan in which Executive participated (such other amounts and
benefits shall be hereinafter referred to as the "Accrued Benefits"). Any salary
or bonus shall be paid to Executive within thirty (30) days after the Date of
Termination; and any benefits shall be paid pursuant to the applicable Employer
plan.
(b) Excise Tax Limitation. To the extent that the payments and
benefits provided under this Agreement and payments or benefits provided to, or
for the benefit of, Executive under any other Employer plan or agreement (such
payments or benefits are collectively referred to as the "Payments") would be
subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the
Internal Revenue Code of 1986, as amended, the Payments shall be reduced (but
not below zero) if and to the extent necessary so that no Payment to be made or
benefit to be provided to Executive shall be subject to the Excise Tax.
10. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit Executive's continuing or future participation in any Employer plan for
which Executive may qualify, nor shall anything herein limit or otherwise affect
such rights as Executive may have under any contract or agreement with Employer
or any of Employer's subsidiaries. Amounts which are vested benefits or which
Executive is otherwise entitled to receive under any Employer plan at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice, program, contract or agreement except as explicitly
modified by this Agreement.
11. Non-Solicitation and Non-Competition. During the Term hereof,
------------------------------------
Executive agrees that he shall not, directly or indirectly, either individually
or as an owner, partner, director, agent, employee, consultant or otherwise,
solicit, endeavor to entice away from Employer or any of Employer's subsidiaries
or otherwise engage in any activity intended to disrupt or terminate the
relationship of Employer or any of Employer's subsidiaries with any of their
clients, customers, employees or agents. During the Term hereof, Executive
agrees that he shall not, directly or indirectly, either individually or as an
owner, partner, director, agent, employee, consultant or otherwise, compete with
Employer or any of Employer's subsidiaries or PBI.
-4-
<PAGE>
12. Remedies. Executive agrees that any breach by Executive of the terms
--------
of Section 6, 7 or 11 hereof would result in irreparable injury and damage to
Employer and Employer's parents and/or subsidiaries for which Employer and
Employer's parents and subsidiaries would have no adequate remedy at law.
Therefore, in the event of Executive's breach or threatened breach of Sections
6, 7, or 11 hereof, Executive agrees that Employer and Employer's parents and
subsidiaries shall be entitled to an immediate preliminary restraining order and
an injunction restraining and enjoining Executive to prevent such breach or
threatened breach or continued breach by Executive and any and all persons or
entities acting for and/or with Executive, without having to prove damages, and
to all costs and expenses, including reasonable attorneys' fees and costs, in
addition to any other remedies to which Employer or Employer's subsidiaries may
be entitled at law or in equity. In addition to or in lieu of the above,
Employer or Employer's subsidiaries may pursue all other remedies available to
Employer and Employer's subsidiaries for such breach or threatened breach,
including the recovery of damages and reasonable attorneys' fees, from
Executive.
13. Successors; Binding Agreement. This Agreement shall be binding upon
-----------------------------
the respective successors, assigns, heirs, and representatives of the parties.
14. Notices. Any notice, request or other information to be given or
-------
served hereunder by any party to another shall be deemed given or served
hereunder by any party to another if in writing and delivered personally or sent
by prepaid registered or certified mail, return receipt requested, to:
If to PBI: Professional Bancorp, Inc.
606 Broadway
Santa Monica, California 90401
ATTN: Ms. Julie P. Thompson, Chairman of the
Board
If to Bank: First Professional Bank, N.A.
606 Broadway
Santa Monica, California 90401
ATTN: Mr. Gene Gaines, Chief Executive Officer
If to Executive: Mr. Larry Patapoff
1710 Calle Alto
San Dimas, CA 91773
or to such other address as any party may designate for itself by notice to the
other party given in accordance with the provisions hereof.
15. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties with respect to the subject matter hereof and supersedes any and all
other agreements or understandings, written or oral, relating to such subject
matter. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement or promise not contained in this
Agreement concerning its subject matter shall be valid or binding.
16. Modification; Waiver. No provision of this Agreement may be modified,
--------------------
waived or discharged unless such modification, waiver or discharge is agreed to
in writing and signed by each party hereto. No waiver by any party hereto at
any time of any breach by any other party hereto of, or
-5-
<PAGE>
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
17. Non-Assignability. Executive acknowledges that his services are
-----------------
unique and personal. Accordingly, Executive may not assign any of his rights or
delegate his duties or obligations under this Agreement.
18. Governing Law. This Agreement shall be governed and construed and the
-------------
legal relationship and obligations of the parties determined in accordance with
the laws of the State of California.
19. Severability. Should any provision of this Agreement for any reason
------------
be declared invalid, void or unenforceable by a court of competent jurisdiction,
the validity and binding effect of any remaining portion shall not be affected,
and the remaining portions of this Agreement shall remain in full force and
effect as if this Agreement had been executed with said provision eliminated.
20. Survival. The provisions of Sections 6, 7, and 11 shall survive the
--------
termination or expiration of this Agreement.
21. Arbitration. In the event that any dispute shall arise among the
-----------
parties concerning the provisions of this Agreement or the performance of any
part of their obligations hereunder, or in the event of an alleged breach of
this Agreement by any of the parties hereto, and the parties are unable to
mutually adjust and settle same, such dispute or disputes (other than dispute(s)
concerning an alleged or threatened breach by Executive of Sections 6, 7, or 11
hereof) shall be submitted to binding arbitration in Santa Monica or Los
Angeles, California pursuant to the applicable commercial rules of the American
Arbitration Association, and the decision and determination of the arbitrator(s)
shall be final and binding upon the parties.
22. Key Person Insurance. Executive agrees to make all reasonable
--------------------
efforts to obtain any key person insurance requested by Employer.
IN WITNESS WHEREOF, PBI and the Bank have caused this Agreement to be
executed in their corporate names by an officer duly authorized to enter into
and execute this Agreement, and Executive has affixed his signature hereto, as
of the date and year first above written.
PROFESSIONAL BANCORP, INC.
By:________________________________________
Julie P. Thompson, Chairman of the Board
FIRST PROFESSIONAL BANK, N.A.
By:________________________________________
Julie P. Thompson, Chairman of the Board
___________________________________________
LARRY PATAPOFF
-6-
<PAGE>
EXHIBIT A
---------
POSITION DESCRIPTION
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF
FIRST PROFESSIONAL BANK, N.A. AND PROFESSIONAL BANCORP, INC.
. Prepares monthly, quarterly and annual financial statements for PBI and
the Bank.
. Prepares all public and regulatory reports required of PBI and the Bank
by law and any regulatory authorities, and ensures compliance by PBI and
the Bank with all reporting requirements of federal, state and local law
and applicable regulatory authorities.
. Maintains a good relationship with PBI's and the Bank's independent
public accountants and coordinates the accountants review of financial
statements and public reports of PBI and the Bank.
. Develops and recommends to the Board long-term strategies and visions for
PBI and the Bank that leads to creation of shareholder value.
. Develops and recommends to the Board annual business plans and budgets
and capital plans that support the Bank's long-term strategy.
. Consistently strives to achieve the Bank's financial and operating goals
and objectives.
<PAGE>
EXHIBIT B
---------
DEFINITIONS
As used in this Agreement:
(a) "Board" means the Board of Directors of PBI and the Bank.
(b) "Cause" means (i) willful malfeasance or willful or reckless
misconduct by Executive in connection with his employment duties hereunder, (ii)
continuing refusal by Executive to perform his duties under this Agreement after
notice of such refusal to perform such duties was given to Executive by
Employer, (iii) failure of Executive to cure a material breach by Executive of
the provisions of this Agreement within fifteen (15) days after written
notification by Employer to Executive specifying the breach, (iv) the
determination by a state or federal banking agency or governmental authority
having jurisdiction over Employer or Employer's subsidiaries that Executive is
not suitable to act in the capacity for which he is employed by Employer, (v)
Executive's willful and intentional violation of any federal banking laws, or of
the Bylaws, rules, policies or resolutions of Employer, or of the rules or
regulations of the Federal Deposit Insurance Corporation, OCC or other
regulatory agency or governmental authority having jurisdiction over Employer or
Employer's subsidiaries, or (vi) the commission by Executive of any felony or a
misdemeanor involving moral turpitude. Termination for Cause shall only be made
by a resolution adopted in good faith by a majority of the Board at a meeting of
the Board called and held for that purpose (after ten (10) days prior written
notice of the meeting to Executive and reasonable opportunity for Executive to
be heard by the Board at the meeting prior to such vote.)
(c) "Good Reason" shall mean the failure of the Employer to cure any
material breach by Employer of any provision of this Agreement within fifteen
(15) days after written notification by Executive to Employer specifying the
breach.
(d) "Incapacity" means any permanent physical or mental illness or
disability of Executive which continues for a period of three consecutive months
or more and which at any time after such three-month period the Board shall
reasonably determine renders Executive incapable of substantially performing his
duties during the remainder of the Term.
<PAGE>
Exhibit 10.20
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made effective as of the 21st day of
October, 1999, between FIRST PROFESSIONAL BANK, N.A. ("Employer") and GENE
GAINES ("Executive").
RECITALS
--------
WHEREAS, Employer desires to employ Executive as its Chief Executive Officer,
and Executive desires to be employed by Employer, on the terms and subject to
the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing promises and the terms,
covenants and conditions set forth herein, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, the definitions set forth on
-----------
Exhibit B hereto shall apply unless the context clearly indicates otherwise.
2. Employment and Term. Employer hereby employs Executive and Executive
-------------------
hereby accepts employment, upon the terms and conditions set forth herein. The
term of this Agreement (the "Term") shall be for a period of one year,
commencing October 20, 1999 and ending on October 19, 2000, unless earlier
terminated in accordance with the provisions hereof. This Agreement shall
automatically renew for successive one-year periods thereafter, unless
terminated by either party giving written notice of termination to the other
party at least ninety (90) days prior to the expiration of the then-current one-
year term.
3. Duties. Executive shall serve as the Chief Executive Officer of Employer
------
and shall perform the duties and have the responsibilities set forth on Exhibit
A attached hereto and incorporated herein by reference, and shall have the
authority and perform such other duties, services and responsibilities incident
to such position as are customary of the Chief Executive Officer of a bank, and
such other reasonable duties and responsibilities as are determined from time to
time by the Board. Executive shall report to the Board. Executive shall devote
one hundred percent (100%) of his business time, attention and skill to the
performance of his duties hereunder, except that Executive is permitted to spend
a reasonable amount of business time to complete his obligations under his
Consulting Agreement with Shapiro Consulting Group, and shall perform his duties
to the best of his ability and subject to the policies and instructions of the
Board. Executive will not, without the prior written approval of Employer,
engage in any other business activity which would interfere with the performance
of his duties, services and responsibilities hereunder or which is in violation
of policies established from time to time by the Board.
4. Compensation.
------------
(a) Salary. Executive will receive an annual base salary of One Hundred
Fifty Thousand Dollars ($150,000) during the Term (the "Annual Base Salary"),
payable in equal bi-weekly installments. Salary payments shall be subject to
withholding and all other applicable taxes. Executive's Annual Base Salary shall
be reviewed at least annually by the Compensation Committee of the Board and may
be increased in the discretion of the Board based upon Executive's performance,
Employer's performance and profitability and other factors generally used by
Employer and in the industry in adjusting salaries of executive employees.
(b) Annual Bonus. Executive may be eligible to receive an annual bonus
in an amount of up to 50% of his Annual Base Salary, based upon the attainment
of either (i) specific corporate budgetary and strategic objectives or (ii)
specific individual performance objectives, any of which shall be set by the
Board. Bonuses, if any, may be payable in a combination of a lump sum cash
<PAGE>
payment and the issuance of options to purchase shares of common stock of
Employer's parent company, Professional Bancorp, Inc. ("PBI"), to be allocated
as mutually agreed upon by the parties.
(c) Stock Options. In consideration of Executive agreeing to enter into
this Agreement, on November 1, 1999, Employer caused PBI to grant to Executive
fully vested stock options to purchase 30,000 shares of PBI's common stock at an
exercise price of $11.16 per share. These 30,000 options shall be exercisable on
the earlier of: (i) the closing of the sale of all or substantially all of the
assets of Employer or PBI to, or the merger of Employer or PBI with, a third
party, (ii) on the fifteen month anniversary date of the effective date of this
Agreement if Employer or PBI has not entered into a Definitive Agreement to sell
all or substantially all of its assets to or to merge with a third party, or
(ii) the date Employer terminates this Agreement at will pursuant to Section
8(e) hereof or Employee terminates this Agreement for Good Cause pursuant to
Section 8(c) hereof. On the nine month anniversary date of the effective date of
this Agreement, if by such date PBI or Employer has not entered into a
Definitive Agreement to sell all or substantially all of its assets to or to
merge with a third party, Employer shall cause PBI to grant to Executive fully
vested and immediately exercisable options to purchase 20,000 shares of PBI's
common stock at an exercise price determined pursuant to the applicable stock
option plan. Executive shall be eligible to receive additional performance-based
options, consistent with PBI's applicable stock option plans, as determined by
the Compensation Committee of the Board. All options are subject to the terms of
the applicable stock option plan(s).
(d) Severance. If Employer terminates this Agreement at will pursuant to
Section 8(e) hereof or if Employee terminates this Agreement for Good Reason
pursuant to Section 8(c) hereof, Employer will continue to pay Executive the
monthly base salary that he is earning at the time of the Notice of Termination
for twelve months following the date of the Notice of Termination.
5. Fringe Benefits.
---------------
(a) Incentive Plans/Benefits. Subject to the eligibility requirements of
each plan, Executive shall be entitled to participate in all medical or health
plans, dental and vision plans, life insurance plans, disability plans,
401(K)/savings and retirement plans, welfare plans, incentive plans, equity-
based plans and all other benefits generally available to full-time officers or
senior management employees of Employer in effect from time to time. All
insurance is subject to the terms of the policies in effect and to Executive's
insurability under such policies.
(b) Auto Allowance. Executive shall be entitled to an auto allowance of
Five Hundred Dollars ($500) per month.
(c) Vacation. Executive shall receive twenty (20) paid vacation days per
year.
(d) Business Expenses. In accordance with the policies relating to
Employer's senior executive employees, Employer will reimburse Executive for
reasonable out-of-pocket expenses incurred by Executive in the performance of
his duties hereunder. All such reimbursements will be made upon submission to
Employer of written expense reports or other documentation which describe and
substantiate such business expenses and which are in such form as Employer may
from time to time prescribe for its executive employees.
-2-
<PAGE>
6. Confidential Information. Executive acknowledges that in his positions
------------------------
with Employer, he will be exposed to and receive information relating to the
confidential affairs of Employer, Employer's subsidiaries and PBI, including but
not limited to, Employer's, Employer's subsidiaries' and PBI's customer lists,
financial information, strategic plans, business and marketing plans and
strategies, information concerning Employer's, Employer's subsidiaries' and
PBI's products, promotions, customers, development, financing, expansion plans,
business policies and practices, and other information considered by Employer,
Employer's subsidiaries and PBI to be confidential, proprietary and in the
nature of trade secrets (the "Confidential Information"). Executive
acknowledges that the Confidential Information is a valuable, special and unique
asset of Employer's, Employer's subsidiaries' and PBI's businesses. Executive
agrees to keep all Confidential Information confidential and shall not, during
the Term or thereafter, directly or indirectly disclose all or any part of the
Confidential Information in any manner whatsoever to any person, firm,
corporation, association or other entity other than outside professionals
employed by Employer or use such Confidential Information for his own personal
benefit, without the prior written consent of Employer, unless such disclosure
is made in the ordinary course of Employer's business and is necessary and
advances the best interests of Employer.
7. Employer Documents. Executive expressly agrees that all plans, customer
------------------
lists, reports, manuals, documents, files, studies, instruments and other
materials used and/or developed by Executive relating to Employer, Employer's
subsidiaries and PBI and their respective customers are solely the property of
Employer, Employer's respective subsidiary or PBI and that Executive has no
right, title or interest therein. During Executive's employment with Employer
and after termination thereof, regardless of the reason therefor, Executive
shall hold in a fiduciary capacity for the benefit of Employer, all such plans,
lists, disks, documentation, programs, reports, memoranda, diaries, notes,
records, letters, manuals and all other documents and information of Employer.
Upon termination of Executive's employment for any reason, Executive shall
immediately deliver all such documents, without retaining any copies thereof, to
Employer.
8. Termination of Employment.
-------------------------
(a) Death or Incapacity. This Agreement shall terminate automatically
upon Executive's death during the Term. This Agreement shall also terminate on
the date of the determination by the Board that the Incapacity of Executive has
occurred during the Term ("Incapacity Effective Date").
(b) Cause. Employer may terminate Executive's employment for Cause, as
defined herein.
(c) Good Reason. Executive may terminate his employment for Good Reason,
as defined herein.
(d) Written Notice. Executive may terminate this Agreement at any time
upon ninety (90) days' prior written notice to Employer.
(e) At Will. Employer may terminate this Agreement by written notice to
Executive at any time for any reason.
(f) Notice of Termination. Any termination (except by death) shall be
communicated by a Notice of Termination to the other party hereto given in
accordance with Section 14 of this Agreement. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the
-3-
<PAGE>
specific termination provision in this Agreement relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination under the provision so indicated, (iii) in
the case of termination by Employer for Cause or for Incapacity, confirms that
such termination is pursuant to a resolution of the Board (which, in the case of
Cause, is pursuant to Section 8(b) hereof), and (iv) if the Date of Termination
(as defined below) is other than the date of such notice, specifies the
termination date. The failure by Executive or Employer to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason, Incapacity or Cause shall not serve to waive any right of Executive
or Employer, respectively, hereunder or preclude Executive or Employer,
respectively, from asserting such fact or circumstance in enforcing Executive's
or Employer's rights hereunder.
(g) Date of Termination. "Date of Termination" means (i) if Executive's
employment is terminated by Employer for Cause, or by Employer other than for
Cause, death or Incapacity, the date of the Notice of Termination or any later
date specified therein, as the case may be, (ii) if Executive's employment is
terminated by Executive for Good Reason, the Date of Termination shall be thirty
(30) days after the date of the Notice of Termination, however Employer may
specify an earlier date in its discretion after its receipt of the notice from
Executive, (iii) if Executive's employment is terminated by reason of death or
Incapacity, the Date of Termination shall be the date of death of Executive or
the Incapacity Effective Date, as the case may be, and (iv) if Executive's
employment is terminated by Written Notice by Executive, the Date of Termination
shall be ninety (90) days after the date of the Notice of Termination.
9. Obligations of Employer Upon Termination.
----------------------------------------
(a) Obligations Upon Termination. Upon termination of this Agreement for
any reason, Employer's sole obligation to Executive (except as otherwise
expressly set forth herein) shall be to pay any accrued but unpaid salary or
bonus up to the Date of Termination, less withholding and other taxes as
required by law, and provide to Executive any other accrued amounts or benefits
required to be paid or provided or which Executive is eligible to receive under
any Employer plan in which Executive participated (such other amounts and
benefits shall be hereinafter referred to as the "Accrued Benefits"). Any salary
or bonus shall be paid to Executive within thirty (30) days after the Date of
Termination; and any benefits shall be paid pursuant to the applicable Employer
plan.
(b) Excise Tax Limitation. To the extent that the payments and benefits
provided under this Agreement and payments or benefits provided to, or for the
benefit of, Executive under any other Employer plan or agreement (such payments
or benefits are collectively referred to as the "Payments") would be subject to
the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended, the Payments shall be reduced (but not below
zero) if and to the extent necessary so that no Payment to be made or benefit to
be provided to Executive shall be subject to the Excise Tax.
10. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit Executive's continuing or future participation in any Employer plan for
which Executive may qualify, nor shall anything herein limit or otherwise affect
such rights as Executive may have under any contract or agreement with Employer
or any of Employer's subsidiaries. Amounts which are vested benefits or which
Executive is otherwise entitled to receive under any Employer plan at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice, program, contract or agreement except as explicitly
modified by this Agreement.
-4-
<PAGE>
11. Non-Solicitation and Non-Competition. During the Term hereof, Executive
------------------------------------
agrees that he shall not, directly or indirectly, either individually or as an
owner, partner, director, agent, employee, consultant or otherwise, solicit,
endeavor to entice away from Employer or any of Employer's subsidiaries or
otherwise engage in any activity intended to disrupt or terminate the
relationship of Employer or any of Employer's subsidiaries with any of their
clients, customers, employees or agents. During the Term hereof, Executive
agrees that he shall not, directly or indirectly, either individually or as an
owner, partner, director, agent, employee, consultant or otherwise, compete with
Employer or any of Employer's subsidiaries or PBI.
12. Remedies. Executive agrees that any breach by Executive of the terms of
--------
Section 6, 7 or 11 hereof would result in irreparable injury and damage to
Employer and Employer's parents and/or subsidiaries for which Employer and
Employer's parents and subsidiaries would have no adequate remedy at law.
Therefore, in the event of Executive's breach or threatened breach of Sections
6, 7, or 11 hereof, Executive agrees that Employer and Employer's parents and
subsidiaries shall be entitled to an immediate preliminary restraining order and
an injunction restraining and enjoining Executive to prevent such breach or
threatened breach or continued breach by Executive and any and all persons or
entities acting for and/or with Executive, without having to prove damages, and
to all costs and expenses, including reasonable attorneys' fees and costs, in
addition to any other remedies to which Employer or Employer's subsidiaries may
be entitled at law or in equity. In addition to or in lieu of the above,
Employer or Employer's subsidiaries may pursue all other remedies available to
Employer and Employer's subsidiaries for such breach or threatened breach,
including the recovery of damages and reasonable attorneys' fees, from
Executive.
13. Successors; Binding Agreement. This Agreement shall be binding upon the
-----------------------------
respective successors, assigns, heirs, and representatives of the parties.
14. Notices. Any notice, request or other information to be given or served
-------
hereunder by any party to another shall be deemed given or served hereunder by
any party to another if in writing and delivered personally or sent by prepaid
registered or certified mail, return receipt requested, to:
If to Employer: First Professional Bank, N.A.
606 Broadway
Santa Monica, California 90401
ATTN: Ms. Julie P. Thompson, Chairman of the Board
If to Executive: Mr. Gene Gaines
1018 Second Street, Unit 1
Santa Monica, California 90403
or to such other address as any party may designate for itself by notice to the
other party given in accordance with the provisions hereof.
15. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties with respect to the subject matter hereof and supersedes any and all
other agreements or understandings, written or oral, relating to such subject
matter. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement or promise not contained in this
Agreement concerning its subject matter shall be valid or binding.
-5-
<PAGE>
16. Modification; Waiver. No provision of this Agreement may be modified,
--------------------
waived or discharged unless such modification, waiver or discharge is agreed to
in writing and signed by each party hereto. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
17. Non-Assignability. Executive acknowledges that his services are unique
-----------------
and personal. Accordingly, Executive may not assign any of his rights or
delegate his duties or obligations under this Agreement.
18. Governing Law. This Agreement shall be governed and construed and the
-------------
legal relationship and obligations of the parties determined in accordance with
the laws of the State of California.
19. Severability. Should any provision of this Agreement for any reason be
------------
declared invalid, void or unenforceable by a court of competent jurisdiction,
the validity and binding effect of any remaining portion shall not be affected,
and the remaining portions of this Agreement shall remain in full force and
effect as if this Agreement had been executed with said provision eliminated.
20. Survival. The provisions of Sections 6, 7, and 11 shall survive the
--------
termination or expiration of this Agreement.
21. Arbitration. In the event that any dispute shall arise between the
-----------
parties concerning the provisions of this Agreement or the performance of any
part of their obligations hereunder, or in the event of an alleged breach of
this Agreement by either of the parties hereto, and the parties are unable to
mutually adjust and settle same, such dispute or disputes (other than dispute(s)
concerning an alleged or threatened breach by Executive of Sections 6, 7, or 11
hereof) shall be submitted to binding arbitration in Santa Monica or Los
Angeles, California pursuant to the applicable commercial rules of the American
Arbitration Association, and the decision and determination of the arbitrators
shall be final and binding upon the parties.
22. Key Person Insurance. Executive agrees to make all reasonable efforts to
--------------------
obtain any key person insurance requested by Employer.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed in its
corporate name by an officer duly authorized to enter into and execute this
Agreement, and Executive has affixed his signature hereto, as of the date and
year first above written.
FIRST PROFESSIONAL BANK, N.A.
By:
----------------------------------------
Julie P. Thompson, Chairman of the Board
-------------------------------------------
GENE GAINES
-6-
<PAGE>
EXHIBIT A
---------
POSITION DESCRIPTION
CHIEF EXECUTIVE OFFICER OF FIRST PROFESSIONAL BANK, N.A.
. Fosters a corporate culture that promotes ethical practices, encourages
individual integrity, and fulfills social responsibility.
. Maintains a positive and ethical work climate that is conducive to
attracting, retaining, and motivating a diverse group of top-quality
employees at all levels.
. Develops and recommends to the Board long-term strategies and visions for
the Bank that leads to creation of shareholder value.
. Develops and recommends to the Board annual business plans and budgets
and capital plans that support the Bank's long-term strategy.
. Ensures that the day-to-day business affairs of the Bank are
appropriately managed and Bank employees are appropriately supervised.
. Consistently strives to achieve the Bank's financial and operating goals
and objectives.
. Ensures continuous improvement in the quality and value of the products
and services provided by the Bank.
. Strives to ensure that the Bank achieves and maintains a satisfactory
competitive position within its industry.
. Ensures that the Bank has en effective management team below the level of
the Chief Executive Officer, and has an active plan for their development
and succession.
. Ensures, in cooperation with the Board, that there is an effective
succession plan in place for the Chief Executive Officer position.
. Formulates and oversees the implementation of Bank corporate policies.
<PAGE>
EXHIBIT B
---------
DEFINITIONS
As used in this Agreement:
(a) "Board" means the Board of Directors of the Employer.
(b) "Cause" means (i) willful malfeasance or willful or reckless misconduct
by Executive in connection with his employment duties hereunder, (ii) continuing
refusal by Executive to perform his duties under this Agreement after notice of
such refusal to perform such duties was given to Executive by Employer, (iii)
failure of Executive to cure a material breach by Executive of the provisions of
this Agreement within fifteen (15) days after written notification by Employer
to Executive specifying the breach, (iv) the determination by a state or federal
banking agency or governmental authority having jurisdiction over Employer or
Employer's subsidiaries that Executive is not suitable to act in the capacity
for which he is employed by Employer, (v) Executive's willful and intentional
violation of any federal banking laws, or of the Bylaws, rules, policies or
resolutions of Employer, or of the rules or regulations of the Federal Deposit
Insurance Corporation, OCC or other regulatory agency or governmental authority
having jurisdiction over Employer or Employer's subsidiaries, or (vi) the
commission by Executive of any felony or a misdemeanor involving moral
turpitude. Termination for Cause shall only be made by a resolution adopted in
good faith by a majority of the Board at a meeting of the Board called and held
for that purpose (after ten (10) days prior written notice of the meeting to
Executive and reasonable opportunity for Executive to be heard by the Board at
the meeting prior to such vote.)
(c) "Good Reason" shall mean the failure of the Employer to cure any material
breach by Employer of any provision of this Agreement within fifteen (15) days
after written notification by Executive to Employer specifying the breach.
(d) "Incapacity" means any permanent physical or mental illness or disability
of Executive which continues for a period of three consecutive months or more
and which at any time after such three-month period the Board shall reasonably
determine renders Executive incapable of substantially performing his duties
during the remainder of the Term.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 0 24,379,114
<INT-BEARING-DEPOSITS> 0 503,881
<FED-FUNDS-SOLD> 0 26,000,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 47,311,283
<INVESTMENTS-CARRYING> 0 19,430,825
<INVESTMENTS-MARKET> 0 66,701,407
<LOANS> 0 148,954,343
<ALLOWANCE> 0 6,213,041
<TOTAL-ASSETS> 0 270,037,738
<DEPOSITS> 0 244,474,642
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 2,353,390
<LONG-TERM> 0 748,000
0 0
0 0
<COMMON> 0 16,758
<OTHER-SE> 0 22,444,948
<TOTAL-LIABILITIES-AND-EQUITY> 0 270,037,738
<INTEREST-LOAN> 3,433,006 9,511,179
<INTEREST-INVEST> 1,031,858 3,411,061
<INTEREST-OTHER> 335,823 618,184
<INTEREST-TOTAL> 4,800,688 13,540,424
<INTEREST-DEPOSIT> 858,649 2,319,750
<INTEREST-EXPENSE> 863,635 2,463,262
<INTEREST-INCOME-NET> 3,937,053 11,077,163
<LOAN-LOSSES> 4,426,000 5,598,000
<SECURITIES-GAINS> 0 39,610
<EXPENSE-OTHER> 3,581,567 10,480,118
<INCOME-PRETAX> (3,612,537) (3,579,281)
<INCOME-PRE-EXTRAORDINARY> (3,612,537) (3,579,281)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,363,322) (2,287,111)
<EPS-BASIC> (1.17) (1.14)
<EPS-DILUTED> (1.17) (1.17)
<YIELD-ACTUAL> 6.52 6.40
<LOANS-NON> 0 4,325
<LOANS-PAST> 0 2,990
<LOANS-TROUBLED> 0 999
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 0 2,200
<CHARGE-OFFS> 0 1,690
<RECOVERIES> 0 105
<ALLOWANCE-CLOSE> 0 6,213
<ALLOWANCE-DOMESTIC> 0 5,598
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
