<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 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 April 30,1999, 2,015,007 shares of the Registrant's $0.008 par value
common stock were outstanding.
<PAGE>
PROFESSIONAL BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income
for the three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks:
Noninterest-bearing $ 23,634,480 $ 20,992,183
Interest-bearing 1,748,323 572,519
Federal funds sold 11,900,000 10,400,000
------------ ------------
Cash and cash equivalents 37,282,803 31,964,702
Securities available-for-sale (cost of $52,348,000 and
$81,369,000 in 1999 and 1998, respectively) 51,555,380 80,891,072
Securities held-to-maturity (fair value of $22,009,000
and $24,135,000 in 1999 and 1998, respectively) 22,019,378 24,080,592
Loans (net of allowance for loan losses of $2,360,000
and $2,200,000 in 1999 and 1998, respectively) 131,245,653 115,518,693
Premises and equipment, net 1,390,863 1,390,128
Deferred tax asset 1,380,029 1,242,748
Accrued interest receivable and other assets 4,358,067 4,613,504
------------ ------------
$249,232,173 $259,701,439
============ ============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, noninterest-bearing $ 99,091,935 $109,421,629
Demand, interest-bearing 14,415,909 16,710,541
Savings and money market 73,868,384 75,500,642
Time deposits 32,775,304 28,947,934
------------ ------------
Total deposits 220,151,532 230,580,746
Convertible notes 879,000 1,116,000
Accrued interest payable and other liabilities 2,509,238 2,683,582
------------ ------------
Total liabilities 223,539,770 234,380,328
------------ ------------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares
authorized; 2,064,710 and 2,064,710 issued
and 2,015,007 and 1,996,344 outstanding in 1999 and 1998, respectively 16,676 16,526
Additional paid-in-capital 21,088,441 20,873,603
Retained earnings 5,574,817 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 (450,280) (271,042)
------------ ------------
Total shareholders' equity 25,692,403 25,321,111
------------ ------------
$249,232,173 $259,701,439
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION> Three Months Ended
(Unaudited) March 31,
1999 1998
-----------------------------------
<S> <C> <C>
Interest income
Loans $ 2,884,346 $ 2,475,744
Securities 1,321,744 1,285,175
Federal funds sold and securities purchased
under agreements to resell 83,386 246,920
Interest-bearing deposits in other banks 31,467 1,546
------------ ------------
Total interest income 4,320,943 4,009,385
------------ ------------
Interest expense
Deposits 723,844 790,094
Convertible notes 16,547 108,189
Federal funds purchased and securities
sold under agreements to repurchase 108,737 3,055
------------ ------------
Total interest expense 849,128 901,338
------------ ------------
Net interest income 3,471,815 3,108,047
Provision for loan losses 125,000 -
------------ ------------
Net interest income after provision
for loan losses 3,346,815 3,108,047
------------ ------------
Other operating income
Net gain (loss) on sale securities available-for-sale 35,344 -
Merchant discount 61,512 58,684
Mortgage brokering fees 54,786 13,946
Service charges on deposits 229,067 256,947
Other income 135,435 137,358
------------ ------------
Total other operating income 516,144 466,935
------------ ------------
Other operating expenses
Salaries and employee benefits 1,705,445 1,537,855
Occupancy 386,991 348,571
Furniture and equipment 208,959 190,472
Meetings and business development 72,991 32,075
Donations 23,781 36,936
Other promotion 69,772 67,938
Legal fees 91,635 92,346
Audit, accounting and examinations 42,990 43,540
Professional services 308,442 357,014
Strategic planning and other outside consulting 6,230 53,915
Office supplies 63,199 66,013
Telephone 62,350 68,667
Postage 35,585 41,002
Messenger service 6,041 9,218
FDIC assessment 6,403 6,153
Other assessments 43,672 43,181
Imprinted checks 5,627 12,743
Other expense 153,999 125,008
------------ ------------
Total other operating expenses 3,294,112 3,132,647
------------ ------------
Earnings before taxes 568,847 442,335
Provision for income taxes 233,304 138,000
------------ ------------
Net earnings $ 335,543 $ 304,335
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities, net of tax of ($200,259) $ 198,698
$137,280 and $138,962 for 1999 and 1998, respectively.
Reclassification adjustment, net of tax of $14,548. $ 21,021 -
------------ ------------
Comprehensive income (loss) $ 156,305 $ 503,033
============ ============
Earnings per share
Basic $0.17 $0.22
Diluted $0.16 $0.17
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 335,543 $ 304,335
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 112,706 142,425
Provision for loan losses 125,000 -
(Gain) loss on sales of securities available-for-sale (35,344) -
Amortization of convertible note expense 4,807 24,959
Decrease (increase) in deferred tax asset (137,281) (214,292)
Decrease in accrued interest receivable and other assets 365,896 144,786
Increase in accrued interest payable and other liabilities (174,344) (280,737)
Net amortization of premiums and discounts
on securities held-to-maturity 64,854 77,409
Net amortization of premiums and discounts
on securities available-for-sale 90,538 71,647
------------ ------------
Net cash provided by operating activities 416,832 270,532
------------ ------------
Cash flows from investing activities:
Proceeds from:
Maturities of securities held-to-maturity 250,000 1,537,903
Maturities of securities available-for-sale - 2,119,408
Sales of securities available-for-sale 25,591,731 -
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity 1,746,360 943,926
Mortgage-backed securities available-for-sale 3,871,492 2,646,830
Purchases of securities available-for-sale (499,243) -
Net (increase) decrease in loans (15,851,960) 4,990,021
Purchase of bank premises and equipment, net (113,439) (115,516)
------------ ------------
Net cash provided (used) by investing activities 14,994,941 12,122,572
------------ ------------
Cash flows from financing activities:
Net decrease in demand deposits and savings accounts (14,256,584) (14,121,145)
Net increase in time deposits 3,827,370 5,413,641
Proceeds from exercise of stock options - 3,794,363
------------ ------------
Net cash used in financing activities (10,429,214) (4,913,141)
------------ ------------
Net decrease in cash and cash equivalents 5,318,102 7,479,963
------------ ------------
Cash and cash equivalents, beginning of period 31,964,702 54,339,670
------------ ------------
Cash and cash equivalents, end of period $ 37,282,804 $ 61,819,633
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 3,639,185 $ 1,048,454
Income taxes $ 145,000 $ 2,000
Supplemental disclosure of noncash items:
Decrease (increase) in unrealized losses on securities available for sale securities,
net of tax $ (179,238) $ 198,698
Conversion of notes 214,988 $ 165,271
Tax benefit on stock options exercised - $ 560,384
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Professional Bancorp, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
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 March 31, 1999, and the results of operations for
the three months ended March 31, 1999 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31,
1999. These unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles on a basis
consistent with the Company's audited financial statements, and these interim
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1998.
Note 2 - Adoption of New Accounting Standards
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), and has
restated all prior period earnings per share data. SFAS No. 128 replaces
primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings.
The Company adopted, effective January 1, 1998, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
SFAS No. 130 requires companies to report comprehensive income and its
components in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital. Comprehensive income includes all changes in equity during a period
except those resulting from investments by stockholders and distributions to
stockholders. For the three months ended March 31, 1999 and 1998, net earnings
totaled $335,543 and $304,335, other comprehensive income totaled ($179,238) and
$198,698 and total comprehensive income totaled $156,305 and $503,033,
respectively.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
Professional Bancorp, Inc. (the "Company"), holding company for First
Professional Bank, N.A. (the "Bank"), recorded net earnings of $335,543 or $0.17
per share for the first quarter of 1999, compared with net earnings of $304,335
or $0.22 per share for the first quarter of 1998. The Company had total assets
of $249,232,000 at March 31, 1999, compared to $259,701,000 at December 31,
1998.
Loans
The following table sets forth the amount of loans outstanding by category
and the percentage of each category to the total loan portfolio.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1999
-----------------------------------------------------
(in thousands) Amount % of Total Amount % of Total
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Commercial $103,554 77.4% $ 93,952 79.7%
Real estate secured commercial 18,378 13.7 11,698 9.9
-------- -------- -------- --------
121,932 91.1 105,650 89.6
Equity lines of credit 5,605 4.2 5,931 5.0
Other lines of credit 4,795 3.6 4,817 4.1
Installment 1,486 1.1 1,482 1.3
Lease financing - - 32 -
-------- -------- -------- --------
Gross loans 133,818 100.0% 117,912 100.0%
-------- --------
Less:
Allowance for loan losses 2,360 2,200
Deferred loan fees, net 212 193
-------- --------
Net loans $131,246 $115,519
======== ========
</TABLE>
In accordance with management's credit administration and regulatory
policy, loans are placed on nonaccrual status when the collection of principal
or interest is questionable. Generally, this means that loans are placed on
nonaccrual status when interest is 90 days or more past due, unless the loan is
well secured and in the process of collection or in the process of renewal.
Nonperforming loans and nonperforming assets do not include accruing loans 90
days or more past due where loan quality is not impaired, but rather the renewal
in process is pending receipt of the borrower's updated financial information.
Credit administrative policies discourage the use of "short-term"
extensions while awaiting receipt of updated financial packages from borrowers.
The policy is aimed at facilitating timely credit renewals. However, as a
result of this policy, aggregate "past due" volumes will not necessarily be
correlative to absolute asset quality measurement.
7
<PAGE>
The following table sets forth information about nonperforming assets
(which include nonaccrual loans, other real estate owned and other repossessed
assets), accruing loans 90 days or more past due, and certain ratios.
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1999 1998
---- ----
<S> <C> <C>
Nonperforming loans $2,423 $1,359
Other real estate owned (OREO)
Other repossessed assets 272 272
------ ------
Total nonperforming assets $2,695 $1,631
====== ======
Accruing loans 90 days or more past due $1,540 $ 100
====== ======
Nonperforming loans to total loans(1) 1.81% 1.15%
Nonperforming assets(1)
to total loans 2.01% 1.38%
to total loans, OREO and repossessed assets 2.01% 1.38%
to total assets 1.08% 0.63%
</TABLE>
(1) Nonperforming loans and nonperforming assets do not include accruing
loans 90 days or more past due.
The total accrued interest on loans 90 days or more past due and still
accruing was approximately $43,000 at March 31, 1999, and the Company had no
accrued interest due on loans 90 days past due at December 31, 1998. The
$1,540,000 in accruing loans over 90 days or more past due and still accruing as
of March 31, 1999 were all in the process of being renewed, paid off or the
credit quality was not impaired. As a result of the Company's practice to
discourage "short-term" extensions, these loans are carried as "past due" to
ensure proper underwriting and administrative controls.
The Company maintains the allowance for loan losses at a level considered
adequate by management to provide for potential loan losses. While the Company's
policy is to charge-off in the current period those loans for which a loss is
considered probable, there also exists the risk of future losses which cannot be
precisely quantified or attributed to particular loans. Reasonable estimates of
these future amounts are included in the allowance for loan losses.
8
<PAGE>
The following table provides a summary of the Company's allowance for loan
losses and charge-off and recovery activity during the three months ended March
31, 1999, the year ended December 31, 1998, and the three months ended March 31,
1998:
<TABLE>
<CAPTION>
Period Ended
------------
March 31, December 31, March 31,
(in thousands) 1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 2,200 $ 1,802 $ 1,802
Provision for loan losses 125 406 -
-------- -------- --------
2,325 2,208 1,802
-------- -------- --------
Loan charge-offs 15 269 50
Recoveries on loans previously charged-off (50) (261) (73)
-------- -------- --------
Net charge-offs (recoveries) (35) 8 (23)
-------- -------- --------
Balance at end of period $ 2,360 $ 2,200 $ 1,825
======== ======== ========
Loans outstanding at end of period $133,818 $117,912 $100,857
Average loans outstanding during period 125,538 103,548 102,640
Net charge-offs (recoveries) to average loans -0.03% 0.01% -0.09%
outstanding
Allowance for loan losses:
to total loans 1.76 1.87 1.81
to nonperforming loans/(1)/ 97.40 161.88 316.29
to nonperforming assets/(1)/ 87.57 134.89 214.96
</TABLE>
/(1)/ Nonperforming loans and nonperforming assets do not include accruing
loans 90 days or more past due.
Management considers a loan to be impaired when, based upon available
information and current events, it believes that it is probable the Company will
be unable to collect all amounts due on a timely basis in accordance with the
contractual terms of the loan agreement. Impairment of a loan is measured by
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Impairment is recognized
by the establishment of a valuation allowance equal to the excess of the
Company's recorded investment in the loan over its measured value.
The Company had $2,742,000 in impaired loans as of March 31,1999. The
carrying value of impaired loans for which there is a related allowance for loan
losses was $260,000, with the amount of specific allowance for loan losses
allocated to these loans of $123,000. There was $2,389,000 in impaired loans
for which there were a general allowance allocated consistent with the Company's
allowance for loan loss methodology. The average recorded investment in
impaired loans during the first three months of 1999 was approximately
$2,289,000 and income recorded utilizing the cash basis and accrual basis method
of accounting was $54,000. Impaired loans at March 31, 1999, included
$2,423,000 of nonaccrual loans. Included in impaired loans as of March 31, 1999
were $487,000 of troubled debt restructured loans, $123,000 of which, were on
nonaccrual and the remaining $364,000 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 loans
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 $1,131,085. 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.
9
<PAGE>
The Company had $907,000 in impaired loans as of March 31, 1998. The
carrying value of impaired loans for which there is a related allowance for loan
losses was $213,000, with the amount of specific allowance for loan losses
allocated to these loans of $80,000. There were $694,000 in impaired loans for
which there was a general allowance allocated consistent with the Company's
allowance for loan loss methodology. The average recorded investment in
impaired loans during the first three months of 1998 was approximately
$1,053,000 and income recorded utilizing the cash basis and accrual basis method
of accounting was $22,000. Nonaccrual loans at March 31, 1998, included
$577,000 of the impaired loans. Included in impaired loans as of March 31, 1998
were $408,000 of restructured loans, $78,000 of which, were on nonaccrual and
the remaining $329,000 were in compliance with the modified terms.
Investment Securities
The following table sets forth the amortized cost and fair value of
securities available-for-sale as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
---- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. Government securities $ - $ - $ - $ -
U.S. Government agency and
mortgage-backed securities 39,710 16 630 39,096
Small Business Administration securities 779 - 13 766
Municipal securities 2,551 2 14 2,539
Federal Reserve Bank Stock 439 - - 439
Collateralized mortgage obligations 8,870 11 166 8,715
------- ---- ---- -------
Total $52,349 $ 29 $823 $51,555
======= ==== ==== =======
December 31, 1998
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
---- ---- ---- -----
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>
10
<PAGE>
The amortized cost and fair value of securities held-to-maturity as of
March 31, 1999, and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
----- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,041 $ 86 $ - $ 3,127
U.S. Government agency securities 2,000 5 - 2,005
U.S. Government agency
mortgage-backed securities 16,978 2 101 16,879
------- ---- ---- -------
Total $22,019 $ 93 $101 $22,011
======= ==== ==== =======
December 31, 1998
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
---- ---- ---- -----
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 three months ended March 31, 1999 and the twelve months ended
December 31, 1998, securities available-for-sale were sold for aggregate
proceeds of $25,556,000 and $15,337,000, respectively. These sales resulted in
gross realized gains and losses of $89,000 and ($54,000) for the three months
ended March 31, 1999 and $12,000 and ($18,000) for the twelve months period
ended December 31, 1998.
Deposits
Total deposits at March 31, 1999 were $220,152,000, a decrease of
$10,429,000 or 4.5% 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.
11
<PAGE>
The following table sets forth the amount of deposits by category and the
percentage of each category to total deposits as of March 31, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(in thousands) Amount % of Total Amount % of Total
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $ 99,092 45.01% $109,422 47.46%
Demand, interest-bearing 14,416 6.55 16,711 7.25
Savings deposits 12,091 5.49 12,553 5.44
Money market deposits 61,778 28.06 62,948 27.30
Time deposits under $100,000 9,263 4.21 8,625 3.74
Time deposits of $100,000 and over 23,512 10.68 20,323 .81
-------- ----- -------- -----
$220,152 100.0% $230,581 100.0%
======== ===== ======== =====
</TABLE>
Historically, deposit levels increase substantially at year-end as clients
increase cash reserves required for first and second quarter tax payments and
bonuses. In addition, increasing competition for operating cash deposits comes
from broker dealer products and accounts. In order to minimize the effects of
such "disintermediation" from the Company to such accounts, the Company is
currently offering to clientele such accounts through its CNET products. The
CNET product is a money market mutual fund. The goal of the fund is to provide
as high a level of current income as is consistent with preservation of
principal and liquidity. The fund is managed by The Cadre Network Health
Financial Services Liquid Asset Fund, and is not insured by the FDIC and is not
an obligation of, or guaranteed by the Company or its subsidiaries and is
subject to investment risk, including possible loss of principal invested.
Capital
The Office of the Comptroller of the Currency (the "OCC"), the Bank's
primary regulator, has established minimum leverage ratio guidelines for
national banks. These guidelines provide for a minimum Tier 1 capital leverage
ratio (Tier 1 capital to adjusted average total assets) of 3.0% for national
banks that meet certain specified criteria, including having the highest
regulatory rating. All other national banks will generally be required to
maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an additional
cushion of 100 to 200 basis points. The OCC has not advised the Bank of any
specific minimum Tier 1 capital leverage ratio applicable to it.
The Federal Reserve Bank, as Bancorp's primary regulator, has similarly
established minimum leverage ratio guidelines for bank holding companies. These
guidelines also provide for a minimum Tier 1 leverage ratio of 3.0% for bank
holding companies that meet certain specified criteria, including having the
highest regulatory rating. All other bank holding companies will generally be
required to maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an
additional cushion of 100 to 200 basis points. The Federal Reserve Bank has not
advised the Bancorp of any specific minimum Tier 1 capital leverage ratio
applicable to it.
Risk-based capital standards were implemented on December 31, 1992. Since
December 31, 1992, banking organizations have been expected to meet a minimum
ratio for qualifying total capital to risk-weighted assets of 8.0%, 4.0% of
which must be Tier 1 capital. A banking organization's risk-based capital
ratios are obtained by dividing its qualifying capital by its total risk-
adjusted assets and risk-weighted off-balance sheet items.
12
<PAGE>
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."
The following table presents the capital ratios for the Company and the
Bank, compared with the standards for "well-capitalized" depository institutions
(which standards do not apply to bank holding companies) and the minimum
required capital ratios to be deemed "adequately capitalized" under applicable
federal regulations, as of March 31, 1999.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------- -------------------------- --------------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Company
Leverage /(1)/ $26,143 10.17% $10,280 4.00% $12,850 5.00%
Tier 1 Risk-Based 26,143 16.33 6,402 4.00 9,603 6.00
Total Risk-Based 29,027 18.14 12,804 8.00 16,005 10.00
Bank
Leverage $22,972 8.95% $10,263 4.00% $12,828 5.00%
Tier 1 Risk-Based 22,972 14.36 6,397 4.00 9,595 6.00
Total Risk-Based 24,976 15.62 12,794 8.00 15,992 10.00
</TABLE>
/1/ The minimum required by the FRB is 3%; for all but the most highly rated
bank holding companies, the FRB expects a leverage ratio of 3% plus 100 to 200
basis points.
The Company and the Bank, at March 31,1999, 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.
During March 1998, the Company received approximately $3,490,000 in
additional capital due to the exercise of 276,515 in stock options. On May 29,
1998, the Company gave notice of its' intent to call for partial redemption of
$2,625,000 principal amount of the Professional Bancorp, Inc., 8.50% Convertible
Subordinated Reset Notes due March 1, 2004. As a result of this call,
approximately $2,552,000 of the notes converted to 200,955 shares of common
stock and $73,000 in notes were redeemed by the June 30, 1998 redemption date.
For the three months ended March 31, 1999, approximately $237,000 of notes were
converted to 18,663 shares of common stock.
Liquidity
The Company's primary source of liquidity is dividends from the Bank.
Dividends from the Bank to the Company are subject to certain regulatory
restrictions. Under federal banking law, dividends declared by the Bank in any
calendar year may not, without the approval of the OCC, exceed its net earnings,
as defined, for that year combined with its retained net earnings for the
proceeding two years. The Company's annual operating expenses and interest
obligations with respect to its convertible notes are approximately $662,000.
However, based upon the above redemption, Bancorp operating expenses will be
reduced by approximately $560,000 on an annual basis.
13
<PAGE>
The Bank's primary sources of liquidity are federal funds sold to other
banks and the investment securities portfolio. For the three months ended March
31,1999, federal funds sold averaged $7,069,000 and compared to $18,368,000 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
March 31, 1999, were $51,555,000 and $22,001,000, respectively.
The Bank sells securities under agreements to repurchase. Securities sold
under repurchase agreements are recorded as short-term obligations. During the
first three months of 1999, the highest daily outstanding balance and the
average balance of securities sold under agreements to repurchase were
$25,000,000 and $8,784,000, respectively; the average rate paid was 4.95%. At
March 31, 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 reports at least
quarterly reporting to the Audit Committee and Board of Directors of the
Company. The task force, which meets monthly, consists of members of senior
management representatives from key areas within the Company. The task force,
among other roles, monitors and report progress, and provides direction toward
preparation for the Year 2000 date change.
Assessment: The task force has developed an overall strategy which identifies
and categorizes internal information and operating systems, and external
vendors, customers, auditors and business partners, according to risk of
business disruption. Each operating system, process, vendor, or other business
partner is risk assessed based upon the impact on the Company's business. High
risk processes and systems have been categorized as "mission critical" and have
been prioritized in our Year 2000 risk mitigation process. Testing plans have
been developed, and we have completed testing all mission critical and many
other identified systems. The testing of substantially all systems is scheduled
to be completed by June 30, 1999. We have identified contingency plans and
alternatives, including
14
<PAGE>
replacement or elimination, for mission critical systems and other systems in
the event that such actions become necessary. Also, we have integrated the Year
2000 business risks into our overall bankwide business resumption plans. We will
test mission critical and other systems on an ongoing basis to reasonably
determine that they will continue to operate after the Year 2000.
In addition, as a lending institution, the Company is exposed to potential risk
if it's customers suffer Year 2000 related difficulties. Therefore, we have
developed, and implemented, a process to assess the potential risks to the
Company of both our lending and deposit customer's preparedness for the Year
2000 date change. Also, potential borrower's readiness for Year 2000 is assessed
and included within the credit underwriting and approval process.
Remediation: The remediation phase includes upgrading or replacing information
or operating systems, vendor certifications, and other associated changes. We
have begun renovation of systems, including non-information technology systems,
that have been identified as non-compliant to Year 2000, including replacing
some personal computers, or upgrading software and other operating systems. The
renovation of mission critical systems where indicated is complete. The extent
of our identified renovation needs have been budgeted within our corporate
budgeting process. The remaining system renovation is anticipated to be
complete by June 30, 1999.
Additionally, we have received vendor responses or certification for all of our
mission critical systems, along with most of our other information and operating
systems. These responses are monitored continually to determine the vendors'
progress toward preparedness.
Validation/Implementation: As operating systems are validated, upgraded, and
successfully tested the systems are integrated into ongoing operations. As with
any new system, or system change, internal/external users are provided training,
connectivity with other systems is determined and integration into current
processes occurs. Validation and implementation of mission critical systems was
completed by December 31, 1998. In addition, we have instituted an independent
third party review of our Year 2000 efforts for all mission critical systems.
Significant progress has been accomplished in our efforts to prepare for the
Year 2000-century date change. All of our mission critical systems have been
tested and none have failed. Additionally, we are 85% complete assessing,
renovating, testing and implementing Year 2000 preparedness for all other
identified systems. Management currently estimates the overall cost of Year 2000
risk mitigation not to exceed $100,000 in operating expenses and $300,000 in
fixed asset purchases of which approximately 75% has been incurred. These costs
are included within our ongoing budget and planning process.
We continue with the execution of our Year 2000 Preparedness Plan and remain on
schedule to meet our internal timeline and regulatory expectations and continue
to project that we will complete renovation and implementation prior to June 30,
1999. Also, we have developed and presented internal and external awareness
programs, which reinforce the awareness and the need for preparedness to the
Year 2000 problem for the Company's Board of Directors, employees, and our
customers. Based upon the information we have developed through our Year 2000
Preparedness Plan, we have not identified risks associated with the date change
to Year 2000 that will have a material financial impact on the Company.
Results of Operations
The Company reported consolidated net earnings of $335,543 for the first
quarter of 1999, compared with net earnings of $304,335 for the first quarter of
1998. Basic and diluted earnings per share for the first quarter of 1999 were
$0.17 and $0.16, respectively, compared to $0.22 basic and $0.17 diluted
earnings per share for the same period in 1998. Return on average shareholders'
equity for the first quarter of 1999 and 1998, were 5.25% and 7.29%,
respectively. Additionally, return on average assets for the first quarter of
1999 and 1998, were 0.53% and 0.52%, respectively.
15
<PAGE>
The improvement in net earnings for the first quarter of 1999
as compared to 1998, are primarily the result of growth in the loan portfolio,
increase in non-interest income and containment of non-interest expense for the
three months ended March 31, 1999.
Net Interest Income
The Company's earnings depend primarily on net interest income, which is
the difference between the interest and fees earned on loans and investments
less the interest paid on deposits, borrowings and convertible notes. For the
quarter ended March 31, 1999, net interest income increased 11.7% to $3,472,000
from $3,108,000 for the quarter ended March 31, 1998. The increase in net
interest income is primarily the result of a 10.5% or $21,608,000 million
increase in average interest-earning assets, for the three months ended March
31, 1999 as compared to the same period in 1998. For the three months ended
March 31, 1999 and 1998, the net interest margin was 6.18% and 6.11%,
respectively.
16
<PAGE>
The following tables present the distribution of average assets,
liabilities and shareholders' equity as well as the total dollar amount of
interest income from average interest-earning assets and resultant yields, and
the dollar amounts of interest expense and average interest-bearing liabilities,
expressed both in dollars and rates for the three months ended March 31, 1999
and 1998.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
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 $ 91,809 5.84% $1,322 $ 85,079 6.13% $1,285
Loans/(1)/ 127,615 9.17 2,884 102,640 9.78 2,475
Federal funds sold 7,069 4.78 83 18,368 5.45 247
Interest-earning deposits - banks 1,400 9.11 31 198 4.10 2
-------- ------ -------- ------
Total interest-earning assets 227,893 7.69 4,321 206,285 7.88 4,009
-------- ------ -------- ------
Deferred loan fees (204) (145)
Allowance for loan losses (1,873) (1,808)
Noninterest-earning assets:
Cash and due from banks 23,864 22,716
Premises and equipment 1,440 1,549
Accrued interest receivable 1,321 -
Other assets 4,699 6,566
-------- --------
Total assets $257,141 $235,163
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 13,715 0.76% $ 26 $ 13,630 0.94% $ 31
Savings and money market deposits 80,617 1.99 396 80,367 2.07 410
Time deposits under $100,000 8,699 4.32 93 7,550 4.62 86
Time deposits of $100,000 and over 19,776 4.28 209 22,895 4.65 262
Convertible notes 958 7.00 17 5,375 8.15 108
Repurchase agreements 8,784 5.02 109 222 5.58 3
-------- ------ -------- ------
Total interest-bearing liabilities 132,550 2.60 849 130,039 2.81 901
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 95,602 84,719
Other liabilities 3,078 3,234
Shareholders' equity 25,912 17,171
-------- --------
Total liabilities and shareholders' equity $257,141 $235,163
======== ========
Interest income as a percentage of average
earning assets 7.69% 7.88%
Interest expense as a percentage of average
interest-bearing liabilities 2.60% 2.81%
Net interest margin and income 6.18% $3,472 6.11% $3,108
====== ======
</TABLE>
/(1)/ Nonaccrual loans are included in average balances and rate calculations.
17
<PAGE>
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
"volume change." It is also affected by changes in yields earned on interest-
earning assets and interest rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities, and the amount of
change attributable to volume and rate changes for the three months ended March
31,1999 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
March 31, 1999 and 1998
-----------------------
(in thousands) Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Increase (decrease) in interest income:
Securities $ 99 $ (62) $ 37
Loans 572 (163) 409
Federal funds sold (136) (27) (163)
Interest-bearing deposits - banks 24 5 29
----- ----- -----
559 (247) 312
----- ----- -----
Increase (decrease) in interest expense:
Interest-bearing demand deposits - (6) (6)
Savings and money market deposits 1 (15) (14)
Time deposits under $100,000 13 (6) 7
Time deposits of $100,000 and over (34) (19) (53)
Convertible notes (78) (14) (92)
Repurchase agreements 106 (0) 106
----- ----- -----
8 (60) (52)
----- ----- -----
Increase (decrease) in net interest income $ 551 $(187) $ 364
===== ===== =====
</TABLE>
Interest income represents interest earned on loans, investment securities
and federal funds sold. Interest income increased 7.8% or $312,000 to
$4,321,000 for the three months ended March 31, 1999 from $4,009,000 for the
same period in 1998. The increase in interest income for the three months ended
March 31, 1999 as compared to the same period in 1998, was primarily the result
of a 16.5% or $409,000 increase in interest income earned on loans, a 2.9% or
$37,000 increase in interest income earned on securities. These increases were
offset to a lessor extent by a 66.4% or $164,000 decrease in federal funds sold
for the three months ended March 31, 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 March 31, 1999
was $849,000 compared to $901,000 for the same period in 1998, a decrease of
5.8%. The decrease in interest expense for the period ended March 31, 1999 as
compared to the same period in 1998, is primarily related to a $91,000 decrease
in interest expenses on convertible notes. Average convertible notes outstanding
decreased to $958,000 for the three months ended March 31, 1999, from $5,375,000
for the same three month period in 1998. In addition, interest expense was
further impacted by an increase in average repurchase agreements outstanding
during the period ended March 31, 1999 as compared to the same period in 1998.
Interest expense on repurchase agreements increased to $109,000 for the three
months period ended March 31, 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 growth in the loan portfolio.
18
<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 $125,000 for the three
months period ended March 31, 1999, compared to zero provisions for loan losses
for the same period in 1998. The increase in the provision for loan losses in
1999 is in response to growth in the loan portfolio and increases in
nonperforming loans in the first quarter of 1999. Net charge-offs (recoveries)
to average outstanding loans for the first quarter of 1999 and 1998 were
(0.03%) and (0.09%), respectively.
Other Operating Income
For the three months ended March 31, 1999, other operating income totaled
$516,000 compared with $467,000 for the same period in 1998. The increase was
primarily related to a $42,000 increase in mortgage brokering fees and a $35,000
net gain recognized on the sale of securities during the three months ended
March 31, 1999 as compared to no gain recognized during the same period in 1998.
Other Operating Expense
Other operating expense for the first quarter of 1999, increased to
$3,294,000 for the three months period ended March 31, 1999 from $3,133,000 for
the same period in 1998. The increase primarily occurred in salaries and other
employee benefits and business development expenses, offset to a lessor extent
by decreases in professional services and strategic planning and other outside
consulting expenses.
Salaries and other employee benefits increased approximately $167,000 to
$1,705,000 for the first quarter of 1999, compared to $1,538,000 for the first
quarter of 1998. The increase primarily relates to an increased number of
employees as the Company became more fully staffed and increased group insurance
expenses during the quarter ended March 31, 1999 as compared to the same quarter
in 1998.
Professional services and strategic planning and other outside consulting
decreased 13.6% and 88.4%, respectively, during the three months period ended
March 31, 1999, as compared to the same periods in 1998. The utilization of
services of outside professionals to augment staffing and support service
training has declined as the Company returns to full staffing.
Income Taxes
For the three months ended March 31, 1999, the provision for income taxes was
$233,000 compared to $138,000 for the same period in 1998.
Management of the Company is not aware of any trends, events, uncertainties
or recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on the liquidity, capital resources
or operations of the Company.
19
<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
------ ------ ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(U.S. $ equivalent in thousands)
ASSETS (1)
- ----------
Securities
U.S. government securities
Fixed $ - $ - $1,016 $ - $ 2,024 $ - $ 3,040 $ 3,127
Weighted average interest rate 6.81% 5.89% 6.35%
U.S. government agency and
mortgage-backed securities
Fixed - - - - 2,000 38,642 40,642 40,194
Weighted average interest rate 5.65% 6.42% 6.04%
Variable - - - - - 18,046 18,046 17,769
Weighted average interest rate 5.84% 5.84%
Municipal securities
Fixed - - - - - 2,551 2,551 2,539
Weighted average interest rate 5.72% 5.72%
Small Business Administration securities
Variable - - - - - 782 782 769
Weighted average interest rate 5.81% 5.81%
Collateralized mortgage securities
Fixed - - - - - 7,177 7,177 7,177
Weighted average interest rate 5.86% 5.86%
Variable - - - - - 1,693 1,693 1,693
Weighted average interest rate 5.47% 5.47%
Federal Reserve Bank Stock
Fixed - - - - - 439 439 439
Weighted average interest rate - - - - - 6.00% 6.00%
Loans
Fixed 6,900 1,826 2,525 5,164 3,692 5,798 26,007 25,827
Weighted average interest rate 8.96% 7.09% 8.52% 7.96% 8.40% 7.89% 8.28%
Variable 47,131 12,911 7,605 11,302 16,020 12,842 107,811 107,811
Weighted average interest rate 8.97% 9.09% 9.05% 9.16% 9.07% 8.61% 8.98%
</TABLE>
20
<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 $99,092 $ - $ - $ - $ - $ - $99,092 $99,092
Weighted average interest rate 0.00% - - - - - 0.00%
Interest-bearing transaction accounts 14,416 - - - - - 14,416 14,416
Weighted average interest rate 0.76% - - - - - 0.76%
Savings and money market accounts 73,868 - - - - - 73,868 73,868
Weighted average interest rate 1.99% - - - - - 1.99%
Certificates of deposit and other time deposits
Fixed 31,660 1,115 - - - - 32,775 32,656
Weighted average interest rate 4.55% 4.02% - - - -
Convertible notes - - - - - 958 958 875
Weighted average interest rate - - - - - 7.00% 7.00%
OFF-BALANCE SHEET ASSETS
- ------------------------
Interest rate swaps 15,000 - - - - - 15,000 15,000
Weighted average interest rate - pay 6.60% - - - - - 6.60%
Weighted average interest rate - receive 5.69% - - - - - 5.69%
</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.
21
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement regarding computation of per share earnings
(b) Reports on Form 8-K: No reports on Form 8-K were filed for
the quarter ended March 31, 1999.
22
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
PROFESSIONAL BANCORP, INC.
--------------------------
(Registrant)
Date: May 15, 1999 /s/ Julie P. Thompson
--------------------------------
Julie P. Thompson
Chairman of the Board
Date: May 15, 1999 /s/ Eric J. Woodstrom
--------------------------------
Acting - Chief Financial Officer
23
<PAGE>
EXHIBIT 11 - Computation of Basic and Diluted Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income
(used in basic EPS computation) $ 335,543 $ 304,335
Adjustments to net income per
assumed effect of dilutive securities:
Interest on convertible notes, net of tax effect 16,547 63,832
---------- ----------
Adjusted earnings for diluted earnings per
share computation $ 352,090 $ 368,167
========== ==========
Weighted average number of shares
outstanding for calculating basic earnings
per share 2,007,127 1,676,495
Effect of dilutive securities:
Options and warrants 65,018 55,300
Convertible notes 77,101 413,517
---------- ----------
Weighted average number of shares
outstanding for calculation of diluted
earnings per share 2,149,246 2,145,312
========== ==========
Basic earnings per share $ 0.17 $ 0.22
========== ==========
Diluted earnings per share $ 0.16 $ 0.17
========== ==========
/(1)/ Anti-dilutive
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 23,634,480
<INT-BEARING-DEPOSITS> 1,748,323
<FED-FUNDS-SOLD> 11,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,555,380
<INVESTMENTS-CARRYING> 22,019,378
<INVESTMENTS-MARKET> 0
<LOANS> 133,606,082
<ALLOWANCE> 2,360,429
<TOTAL-ASSETS> 249,232,173
<DEPOSITS> 220,151,532
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,509,237
<LONG-TERM> 879,000
0
0
<COMMON> 16,676
<OTHER-SE> 25,675,727
<TOTAL-LIABILITIES-AND-EQUITY> 248,232,173
<INTEREST-LOAN> 2,884,346
<INTEREST-INVEST> 1,321,744
<INTEREST-OTHER> 114,853
<INTEREST-TOTAL> 4,320,943
<INTEREST-DEPOSIT> 723,844
<INTEREST-EXPENSE> 849,128
<INTEREST-INCOME-NET> 3,471,815
<LOAN-LOSSES> 125,000
<SECURITIES-GAINS> 35,344
<EXPENSE-OTHER> 3,294,112
<INCOME-PRETAX> 568,847
<INCOME-PRE-EXTRAORDINARY> 335,543
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335,543
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 6.18
<LOANS-NON> 2,423,000
<LOANS-PAST> 1,540,000
<LOANS-TROUBLED> 486,986
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,200,000
<CHARGE-OFFS> 15,000
<RECOVERIES> 50,000
<ALLOWANCE-CLOSE> 2,360,000
<ALLOWANCE-DOMESTIC> 2,360,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
