================================================================================
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, 2000
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 May 1, 2000, 2,030,754 shares of the Registrant's $0.008
par value common stock were outstanding.
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PROFESSIONAL BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants Report 3
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 4
Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999 5
Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2000 and 1999 6
Consolidated Statements of Changes in
Shareholders Equity for the three months ended March 31, 2000 and 1999 7
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters To A Vote of Security Holders 28
Item 5. Other Information 28
Item 6 Exhibits and Reports on Form 8-K 29
SIGNATURES 32
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
Independent Accountant's Report
To the Board of Directors and Shareholders
Professional Bancorp, Inc. and Subsidiary
We have reviewed the accompanying condensed consolidated balance sheet of
Professional Bancorp, Inc. and Subsidiary as of March 31, 2000 and the related
condensed consolidated statements of operations and comprehensive loss, changes
in shareholder's equity, and cash flows for the three months ended March 31,
2000. These financial statements are the responsibility of the Company's
management.
Our review was conducted in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Professional Bancorp, Inc. and
Subsidiary as of December 31, 1999, and the related consolidated statements of
operations and comprehensive loss, stockholders' equity and cash flows for the
year then ended not presented herein; and in our report dated January 28, 2000
(except for Note 8 and Note 11 as to which the dates are February 1, 2000 and
March 22, 2000, respectively) we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1999,
is fairly presented, in all material respects, in relation to the balance sheet
from which it has been derived.
Moss Adams LLP
Los Angeles, California
May 11, 2000
3
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands) MARCH 31, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED) (AUDITED)
ASSETS
Cash and due from banks:
<S> <C> <C>
Noninterest-bearing $ 26,817 $ 15,721
Interest-bearing 797 697
Federal funds sold 38,500 27,000
----------- -------------
Cash and cash equivalents 66,114 43,418
Securities available-for-sale (cost of $48,803 and
$48,187 in 2000 and 1999, respectively) 45,949 45,525
Securities held-to-maturity (fair value of $17,232
and $17,901 in 2000 and 1999, respectively) 17,519 18,200
Loans (net of allowance for loan losses of $6,984
and $5,873 in 2000 and 1999, respectively) 48,339 156,484
Premises and equipment, net 1,084 1,152
Deferred tax asset 2,844 2,844
Accrued interest receivable and other assets
5,922 5,867
----------- -------------
TOTAL ASSETS $ 287,771 $ 273,490
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Demand, noninterest-bearing $ 115,130 $ 109,561
Demand, interest-bearing 15,787 16,033
Savings and money market 94,044 84,783
Time deposits 45,583 45,651
----------- -------------
Total deposits 270,544 256,028
Convertible notes 679 679
Accrued interest payable and other liabilities
1,864 1,915
----------- -------------
Total liabilities 273,087 258,622
----------- -------------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.008 par value; 12,500,000 shares
Authorized; 2,100,221 issued
and 2,030,754 outstanding in both 2000 and 17 17
Additional paid-in-capital 21,271 21,271
Accumulated deficit (3,210) (3,221)
Treasury stock, at cost (69,467 shares in both 1999 (537) (537)
Unrealized loss on securities available-for-sale, net
of taxes (2,857) (2,662)
----------- -------------
Total shareholders' equity 14,684 14,868
----------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ $
287,771 273,490
=========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands) --------------------------
2000 1999
------------ ------------
INTEREST INCOME
<S> <C> <C>
Loans $ 3,575 $ 2,884
Securities 1,007 1,322
Federal funds sold and securities purchased
under agreements to resell 472 83
Interest-bearing deposits in other banks 5 32
------------ ------------
TOTAL INTEREST INCOME 5,059 4,321
------------ ------------
INTEREST EXPENSE
Deposits 998 724
Convertible notes 11 16
Federal funds purchased and securities
sold under agreements to repurchase - 109
------------ ------------
TOTAL INTEREST EXPENSE 1,009 849
------------ ------------
NET INTEREST INCOME 4,050 3,472
Provision for loan losses 1,093 125
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,957 3,347
------------ ------------
OTHER OPERATING INCOME
Net gain (loss) on sale securities - 35
available-for-sale
Merchant discount 72 62
Mortgage brokering fees 5 55
Service charges on deposits 235 229
Other income 138 135
------------ ------------
TOTAL OTHER OPERATING INCOME 450 516
------------ ------------
OTHER OPERATING EXPENSES
Salaries and employee benefits 1,847 1,705
Occupancy 367 387
Furniture and equipment 174 209
Meetings and business development 15 73
Donations 11 24
Other promotion 64 70
Legal fees 130 92
Audit, accounting and examinations 52 43
Professional services 313 308
Strategic planning and other outside 28 6
consulting
Office supplies 52 63
Telephone 98 62
Postage 33 36
Messenger service 16 6
FDIC assessment 29 6
Other assessments 40 44
Other expense 127 160
------------ ------------
TOTAL OTHER OPERATING EXPENSES 3,396 3,294
------------ ------------
Earnings before taxes 11 569
Provision for income taxes - 233
============ ============
NET EARNINGS $ 11 $ 336
============ ============
EARNINGS PER SHARE
Basic $ 0 $ $0.17
Diluted $ 0 $ $0.16
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31,
--------------------------------
2000 1999
-------------- --------------
(In thousands)
<S> <C> <C>
Net earnings $ 11 $ 336
Other comprehensive income, net of tax - -
Unrealized holding gains (losses) arising
during the period (195) (179)
Reclassification adjustment - -
-------------- --------------
Other comprehensive income (195) (179)
-------------- --------------
Comprehensive income (Loss) $ (184) $ 157
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTH PERIOD ENDING MARCH 31, 2000
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON STOCK PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE
(in thousands) SHARES AMOUNT CAPITAL DEFICIT) STOCK INCOME (LOSS) TOTAL
------ ------ ------- -------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 2,030,754 $ 17 $ 21,271 $ (3,221) $ (537) $ (2,662) $ 14,868
Conversion of Notes (Note 12)
Cash Dividends - - - - - - -
Change in net unrealized holding
loss on securities available-for-sale - - - - - (195) (195)
Net earnings (loss) - - - 11 - - 11
-----------------------------------------------------------------------------------------------
Balance, March 31, 2000 2,030,754 $ 17 $ 21,271 $ (3,210) $ (537) $ (2,857) $ 14,684
===============================================================================================
See accompanying notes to consolidated financial statements.
THREE MONTH PERIOD ENDING MARCH 31, 1999
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON STOCK PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE
(in thousands) SHARES AMOUNT CAPITAL DEFICIT) STOCK INCOME (LOSS) TOTAL
------ ------ ------- -------- ----- ------------- -----
Balance, December 31, 1999 1,996,344 $ 17 $ 20,874 $ 5,239 $ (537) $ (271) $ 25,321
Conversion of Notes (Note 12) 18,663 215 - - - 215
Cash Dividends - - - - - - -
Change in net unrealized holding
loss on securities
available-for-sale - - - - - (179) (179)
Net earnings (loss) - - - 336 - - 336
-----------------------------------------------------------------------------------------------
Balance, March 31, 2000 2,015,007 $ 17 $ 21,089 $ 5,575 $ (537) $ (450) $ 25,693
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
<TABLE>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS) T THREE MONTHS ENDED MARCH 31,
2000 1999
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 11 $ 336
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation and amortization 96 113
Provision for loan losses 1.094 125
(Gain) loss on sales of securities available-for-sale - (35)
Amortization of convertible note expense 11 5
Increase in deferred tax asset - (137)
Decrease (increase) in accrued interest receivable and other assets (56) 366
Increase (decrease) in accrued interest payable and other (62) (175)
liabilities
Net amortization of premiums and discounts
on securities held-to-maturity 34 65
Net amortization of premiums and discounts
on securities available-for-sale 36 90
-------------- ------------
Net cash provided by operating activities 1,164 753
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of securities held-to-maturity - 250
Maturities of securities available-for-sale - -
Sales of securities available-for-sale - 25,592
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity 647 1,746
Mortgage-backed securities available-for-sale 643 3,871
Purchases of securities available-for-sale (1,305) (499)
Net (increase) decrease in loans 7,052 (15,852)
Purchase of bank premises and equipment, net (28) (113)
-------------- ------------
Net cash provided by investing activities 7,016 14,995
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 14,584 (14,257)
Net increase (decrease) in time deposits (68) 3,827
Cash dividends - -
---------------- ----------------
Net cash provided by (used in) in financing activities 14,516 (10,430)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,696 5,318
---------------- ----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,419 31,965
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66,114 37,283
================ ================
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest 865 697
Income taxes - 145
Supplemental disclosure of noncash items:
Pretax change in unrealized losses on securities available for sale (195) (179)
securities
Conversion of notes - 215
</TABLE>
See accompanying notes to consolidated financial statements.
8
<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, 2000, and the results of operations
for the three months ended March 31, 2000 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31,
2000. 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, 1999.
9
<PAGE>
NOTE 2 - EARNINGS PER SHARE
The actual number of shares outstanding at March 31, 2000 was
2,030,754. Basic earnings per share 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 earnings per share 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
MARCH 31,
----------------------------------
----------------- ----------------
2000 1999
(In thousands)
<S> <C> <C>
Net Income
used in basic earnings per share computation $ 11 $ 336
Adjustments to net income per
assumed effect of dilutive securities:
Interest on convertible notes, net of tax effect - 16
---------- -------------
Adjusted earnings used in diluted earnings per
share computation $ 11 $ 352
---------- -------------
Weighted average number of shares
outstanding for computation basic earnings
per share 2,030,754 2,007,127
Effect of dilutive securities:
Options and warrants (a) 65,018
Convertible notes (a) 77,101
---------- -------------
Weighted average number of shares
outstanding for calculation of diluted
earnings per share 2,030,754 2,149,246
Basic earnings per share $ 0.00 $ 0.17
Diluted earnings per share $ 0.00 $ 0.16
<FN>
(a) No effect has been given to dilutive securities because the impact is
anti-dilutive.
</FN>
</TABLE>
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 1999 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, 1999.
10
<PAGE>
RESULTS OF OPERATIONS
The Company recorded net earnings of $11,000 for the first quarter of
2000, compared with net earnings of $336,000 or $0.17 per basic share for the
first quarter of 1999. The Company had total assets of $287.8 million at March
31, 2000, compared to $249.2 million at March 31, 1999.
Return on average shareholders' equity for the first quarter of 2000
and 1999, were 0.29% and 5.19%, respectively. Additionally, return on average
assets for the first quarter of 2000 and 1999 were 0.02% and 0.53%,
respectively.
Total assets increased $14.3 million, or 5.2%, to $287.8 million at
March 31, 2000 from $273.5 million at December 31, 1999. Total cash and cash
equivalents increased $22.7 million, or 52.3% to $66.1 million from $43.4
million at December 31, 1999.
Total investment securities decreased $257,000, or 0.4% to $63.5
million at March 31, 2000 compared to $63.7 million at December 31, 1999.
Net loans decreased $8.1 million, or 5.2%, to $148.3 million at March
31, 2000 compared to $156.5 million at December 31, 1999. Commercial loans
decreased $5.3 million, or 4.3% to $119.1 million from $124.4 million at
December 31, 1999. At March 31, 2000 and December 31, 1999, there was a single
cash secured loan of $12.8 million which was paid off in April 2000. Real estate
secured loans increased $820,000, or 3.0%, to $28.4 million at March 31, 2000
compared to $27.5 million at December 31, 1999.
At March 31, 2000, nonperforming loans totaled $9.9 million, or 6.4%,
of gross loans compared with $8.4 million or 5.2% of gross loans at December 31,
1999. The allowance for loan losses as a percent of nonperforming loans was
70.7% at March 31, 2000 compared to 69.8% at December 31, 1999.
Total deposits increased $14.5 million, or 5.7%, to $270.5 million at
March 31, 2000 from $256.0 million at December 31, 1999.
Other operating expense increased $102,000, or 3.1%, to $3.4 million
for the first quarter of 2000 compared to $3.3 million for the same period in
1999. The increase was due primarily to higher staffing levels and increased
legal fees associated with loan workout activities.
The decrease of net earnings in the first quarter of 2000 is primarily
due to increased provisions for loan losses. The Company recorded provisions for
loan losses of $1.1 million for the three-month period ended March 31, 2000.
This compares to a $125,000 provision recorded for the same period in 1999. The
additional provision is primarily due to the deterioration of two large loans
and a general increase in the allowance for loan losses during the quarter.
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, 2000, net interest income increased 17.1% to $5.1
million from $4.3 million for the quarter ended March 31, 1999. The increase in
net interest income for the first quarter of 2000 as compared to the same period
in 1999 is primarily the result of a $30.6 million, or 13.4 %, increase in
average interest earning assets.
11
<PAGE>
Net interest income, when expressed as a percentage of average total
interest earning assets, is referred to as the net interest margin. The
Company's net interest income is affected by the change in the amount and mix of
interest-earning assets and interest-bearing liabilities. It is also affected by
changes in yields earned on interest-earning assets and rates paid on deposits
and other borrowed funds. The net interest margin was 6.27%, for the first
quarter of 2000 compared to 6.18% for the same period in 1999.
Average yield on interest earning assets increased 14 basis points to
7.83% for the three months ended March 31, 2000 from 7.69% for the same period
in 1999. Average cost on interest bearing liabilities decreased 5 basis points
to 2.55% for the three months ended March 31, 2000 from 2.60% for the same
period in 1999. Average noninterest bearing demand deposits for the first
quarter of 2000 increased $18.0 million, or 18.9%, to $113.6 million from $95.6
million for the same period in 1999.
Average federal funds sold increased $25.7 million, or 363.5%, to $32.8
million for the three months ended March 31, 2000 from $7.1 million for the same
period in 1999. The average yield on federal funds increased 99 basis points to
5.77% for the first quarter of 2000 from 4.78% for the same period in 1999. The
result was an increase in interest on federal funds sold to $472,000 for the
first quarter of 2000 compared to $83,000 for the same period.
Average total investment securities decreased $28.5 million, or 31.0%,
to $63.3 million for the three months ended March 31, 2000 from $91.8 million
during the same period in 1999. The average yield on securities increased 52
basis points to 6.36% for the first quarter of 2000 from 5.84% for the same
period in 1999. The net result was a decrease in interest on securities of
$315,000 to $1.0 million for the first quarter of 2000 compared to $1.3 million
for the same period in 1999.
Average loans increased $34.4 million, or 27.0%, to $162.0 million for
the three months ended March 31, 2000 from $127.6 million during the same period
in 1999. While the volume of loans increased substantially, the benefit was
partially offset by a decline in the yield on loans of 34 basis points to 8.83%
for the first quarter of 2000 from 9.17% for the same period in 1999. The net
result was an increase in interest on loans of $691,000 to $3.6 million for the
first quarter of 2000 compared to $2.9 million for the same period in 1999.
Average convertible notes decreased $279,000, or 29.1%, to $679,000 for
the three months ended March 31, 2000 from $958,000 during the same period in
1999.
Average securities sold under agreements to repurchase decreased to
zero for the three months ended March 31, 2000 from $8.8 million during the same
period in 1999. These borrowings were used primarily in the first quarter of
1999 to temporarily fund asset growth. The result of not borrowing in the first
quarter of 2000 was a decrease in interest expense of $109,000 compared to the
same period in 1999.
12
<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, 2000
and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---------------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(in thousands) BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ---- -------- ------- ---- --------
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Securities $ 63,308 6.36 % $ 1,007 $ 91,809 5.84 % $ 1,322
Loans(1) 162,007 8.83 3,575 127,615 9.17 2,884
Federal funds sold 32,766 5.77 472 7,069 4.78 83
Interest-earning deposits - banks 421 4.97 5 1,400 9.11 32
------------ -------- --------- ---------
Total interest-earning assets 258,502 7.83 5,059 227,893 7.69 4,321
------------ -------- --------- ---------
Deferred loan fees (193) (204)
Allowance for loan losses (5,998) (1,873)
Noninterest-earning assets:
Cash and due from banks 26,737 23,864
Premises and equipment 1,114 1,440
Other assets 9,083 6,021
------------ ------------
Total assets $ 289,245 $ 257,141
============ ============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 14,300 0.69 % $ 25 $ 13,716 0.76 % $ 26
Savings and money market deposits 98,301 2.03 499 80,617 1.99 396
Time deposits under $100,000 6,505 3.93 64 8,699 4.32 93
Time deposits of $100,000 and over 38,794 4.23 410 19,776 4.28 208
Convertible notes 679 6.71 11 958 7.10 17
Repurchase agreements - - - 8,784 5.02 109
------------ -------- --------- ---------
Total interest-bearing 158,579 2.55 1,009 132,550 2.60 849
liabilities ------------ -------- --------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 113,632 95,602
Other liabilities 1,891 3,078
Shareholders' equity 15,143 25,911
------------ ------------
Total liabilities and $ 289,245 $ 257,141
shareholders' equity ============ ============
Interest income as a percentage of
average
Earning assets 7.83 % 7.69 %
Interest expense as a percentage of
average
Interest-bearing liabilities 2.55 % 2.60 %
Net interest margin and income 6.27 % $ $4,050 6.18 % $ $3,472
====== ======
<FN>
(1) Nonaccrual loans are included in average balances and rate calculations.
</FN>
</TABLE>
13
<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, 2000 and 1999. 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 THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
(in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Securities $ (443) $ 129 $ (314) $ 99 $ (62) $ 37
Loans 760 (71) 689 572 (163) 409
Federal funds sold 367 22 389 (136) (27) (163)
Interest-bearing deposits - banks (16) (10) (26) 24 5 29
-------- -------- ------ ------- -------- -------
$ 668 $ 70 $ 738 559 (247) 312
-------- -------- ------ ------- -------- -------
Increase (decrease) in interest expense:
Interest-bearing demand deposits $ 1 $ (2) $ (1) $ - $ (6) $ (6)
Savings and money market deposits 88 2 90 1 (15) (14)
Time deposits under $100,000 (25) 8 (17) 13 (6) 7
Time deposits of $100,000 and over 201 - 201 (34) (19) (53)
Convertible notes (5) - (5) (78) (14) (92)
Repurchase agreements (54) (54) (108) 106 - 106
-------- -------- ------ ------- -------- -------
206 (46) 160 8 (60) (52)
-------- -------- ------ ------- -------- -------
Increase (decrease) in net interest $ 462 $ 116 $ 578 $ 551 $ (187) $ 364
income ======== ======== ====== ======= ======== =======
</TABLE>
14
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined by management based upon
the Company's loan loss experience, the performance of loans in the Company's
portfolio, the quality of loans in the Company's portfolio, evaluation of
collateral for such loans, the economic conditions affecting collectibility of
loans, the prospects and financial condition of the respective borrowers or
guarantors and such other factors which in management's judgment deserve
recognition in the estimation of probable loan losses. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance or to take charge-offs (reductions in the
allowance) in anticipation of losses.
The Company recorded provisions for loan losses of $1.1 million and
$125,000 for the three month period ended March 31, 2000 and 1999, respectively.
The provision for loan loss for the first quarter of 2000 was due primarily to
the deterioration of two loans and a general increase in the allowance for loan
losses. Net recoveries to average outstanding loans for the first three months
of 2000 and 1999 were 0.01% and 0.03%, respectively.
OTHER OPERATING INCOME
For the three months ended March 31, 2000, other operating income
totaled $450,000 compared with $516,000 for the same period in 1999. The
decrease was primarily related to a $50,000 reduction in mortgage brokering fees
on a comparative basis, for the periods presented.
OTHER OPERATING EXPENSE
Other operating expenses for the first three months of 2000 increased
to $3.4 million from $3.3 million for the same period in 1999. The increase
primarily occurred in salaries and other employee benefits and legal fees.
Salaries and other employee benefits increased approximately $142,000
to $1.8 million for the first three months of 2000 from $1.7 million for the
same period in 1999. The increase primarily relates to an increase in staff and
salaries and increased group health insurance expenses. Legal fees and
audit/accounting fees increased $47,000 during the first three months of 2000 as
compared to the same period in 1999, primarily due to an increase of $38,000 in
legal expenses related to lending activities. Legal expenses related to the
workout of problem loans may be recovered after the loan is fully paid.
INCOME TAXES
For the three months ended March 31, 2000, there was no provision for
income taxes compared to $233,000 for the same period in 1999.
15
<PAGE>
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
The Company reported total investment securities of $63.5 million at
March 31, 2000. This represented a decrease of $257,000, or 0.4% from $63.7
million at December 31, 1999.
Securities available-for-sale increased $424,000, or 0.9%, to $45.9
million at March 31, 2000. The unrealized loss on securities held-for-sale was
$2.9 million at the end of the first quarter. The following table sets forth the
amortized cost and fair value of securities available-for-sale as of March 31,
2000 and December 31, 1999.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
- -------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. Government securities $ 1,291 $ - $ 1 $ 1,290
U.S. Government agency and
mortgage-backed securities 36,737 - 2,122 34,615
Small Business Administration securities 636 - 10 626
Municipal securities 2,551 - 175 2,375
Federal Reserve Bank Stock 439 - 18 421
Collateralized mortgage obligations 7,152 - 531 6,622
-------------- ------------- --------------- --------------
Total $ 48,806 $ - $ 2,857 $ 45,949
============== =============== ============= ===============
DECEMBER 31, 1999
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
- -------------- ---- ---- ---- -----
U.S. Government securities $ - $ - $ - $ -
U.S. Government agency and
mortgage-backed securities 37,393 - 1,924 35,469
Small Business Administration securities 647 - 16 631
Municipal securities 2,551 - 173 2,378
Federal Reserve Bank Stock 439 - - 439
7,157 - 549 6,608
------------- -------------- -------------- --------------
Total $ 48,187 $ - $ 2,662 $ 45,525
============= ============== ============== ==============
</TABLE>
During the three months ended March 31, 2000, no securities
available-for-sale were sold. Also, during the first quarter, $1.3 million in U.
S. treasury bills were purchased with a maturity date of June 6, 2000 and a
yield of 5.77%.
16
<PAGE>
Securities held-to-maturity decreased $681,000, or 3.7%, to $17.5
million at March 31, 2000, from $18.2 million at December 31, 1999. The
amortized cost and fair value of securities held-to-maturity as of March 31,
2000, and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
- -------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. Government securities $ 3,029 $ - $ 29 $ 3,000
U.S. Government agency securities 1,750 - 30 1,720
U.S. Government agency
mortgage-backed securities 12,740 26 255 12,511
------------- ------------- ------------ ---------------
Total $ 17,519 $ 26 $ 314 $ 17,231
============= ============= ============ ===============
DECEMBER 31, 1999
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
- -------------- ---- ---- ---- -----
U.S. Government securities $ 3,032 $ 10 $ 25 $ 3,017
U.S. Government agency securities 1,750 - 31 1,719
U.S. Government agency - - - -
mortgage-backed securities 13,418 253 13,165
------------- ------------ ------------ -------------
Total $ 18,200 $ 10 $ 309 $ 17,901
============= ============ ============ =============
</TABLE>
17
<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>
MARCH 31, 2000 DECEMBER 31, 1999
--------------- -------------------
(in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Commercial $ 119,115 76.60 % $ 124,403 76.52%
Real estate secured 28,358 18.24 27,538 16.94
---------- ------- ------------ ------
147,473 94.84 151,941 93.46
Equity lines of credit 3,614 2.32 4,330 2.66
Other lines of credit 2,920 1.88 4,689 2.88
Installment 1,502 .96 1,608 1.00
---------- ------- ------------ ------
Gross loans 155,509 100.00 % 162,568 100.00 %
Less:
Allowance for loan losses (6,984) (5,873)
Deferred loan fees, net
---------- ------- ------------ ------
(186) (211)
----------- ------------
Net loans $ 148,339 156,484
=========== ============
</TABLE>
Gross loans outstanding decreased by $7.0 million, or 4.34 %, to $155.5
million at March 31, 2000 compared to $162.6 at December 31, 1999. The table
above indicates that the loan portfolio mix at March 31, 2000 was substantially
the same as December 31, 1999.
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. The commercial loans are primarily concentrated
in the same sectors of the medical community from which the Company's deposit
base is drawn and consists of medical practitioners, small groups practices,
large single-specialty groups, multi-specialty medical groups and other
outpatient health care service companies. Approximately 77% of gross loans at
March 31, 2000 and December 31, 1999 were commercial loans which were unsecured
or collateralized by various business and personal property assets, including
equipment and accounts receivable, contracts, and the proceeds thereof,
including capitation payments. As a matter of policy, the Company's commercial
loan borrowers are required to submit financial statements and other financial
data (for example, accounts receivable agings and enrollment summaries) on a
periodic basis, in conformity with loan policies and procedures and regulatory
guidelines, to loan officers for their review in monitoring the financial
position and cash flow trends of borrowers. Under this policy, management
generally gives a higher level of attention to borrowers failing to submit the
required financial information. Senior lending officers review delinquency
reports, overdrafts, borrowers' payment histories and periodic financial data to
monitor creditworthiness and identify potential problem loans.
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.
18
<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) 2000 1999
---- ----
<S> <C> <C>
Nonperforming loans $ 9,884 $ 8,412
Other real estate owned (OREO) - -
Other repossessed assets - -
------------- -------------
Total nonperforming assets $ 9,884 $ 8,412
============== =============
Accruing loans 90 days or more past due $ 7,372 2,891
============= =============
Allowance for loan losses as a percent of nonperforming
loans 70.66 % 69.82 %
Nonperforming loans to gross loans(1) 6.36 % 5.17 %
Nonperforming assets(1)
to gross loans 6.36 % 5.17 %
to gross loans, OREO and repossessed assets 6.36 % 5.17 %
to total assets 3.43 % 3.08 %
<FN>
(1) Nonperforming loans and nonperforming assets do not include
accruing loans 90 days or more past due.
</FN>
</TABLE>
Nonperforming loans increased to $9.9 million at March 31, 2000 from
$8.4 million at December 31, 1999. This increase was primarily due to a single
borrower being placed on nonaccrual status during the first quarter of 2000.
The $7.4 million in accruing loans over 90 days or more past due and
still accruing as of March 31, 2000 were all in the process of being collected,
renewed, paid off or the credit quality was not impaired. Of the $2.9 million in
accrual loans over 90 days or more past due at December 31, 1999 one loan for
$1.5 million remained in the category at March 31, 2000. Two additional large
loans totaling $5.1 million were included in this category at March 31, 2000.
Subsequent to March 31, 2000 one loan for $2.3 million was renewed and is
current. The two other loans totaling $4.3 million have been placed on
nonaccrual status. It is the Company's practice to discourage "short-term"
extensions, these loans are carried as "past due" to ensure proper underwriting
and administrative controls.
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.
19
<PAGE>
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, considerations is given to historical and current trends in
past due loans, charged-off loans, nonaccruals, and 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 polices and procedures, and timely problem loan identification are integral
to the sound determination of the allowance for loan losses. Based on
information available at March 31, 2000, management believes that a $7.0 million
allowance for loan losses, which constitutes 4.49% 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 judgement
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 judgements of
information available to them at the time of their examination.
20
<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, 2000, and the three months ended March 31, 1999:
<TABLE>
<CAPTION>
PERIOD ENDED
------------
MARCH 31, MARCH 31,
(in thousands) 2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $ 5,873 $ 2,200
Provision for loan losses 1,093 125
-------------- --------------
6,966 2,325
-------------- --------------
Loan charge-offs 276 15
Recoveries on loans previously charged-off (294) (50)
-------------- --------------
Net charge-offs (recoveries) (18) (35)
-------------- --------------
Balance at end of period $ 6,984 2,360
============== ==============
Gross loans outstanding at end of period $ 155,509 $ 133,818
Average gross loans outstanding during period 162,007 127,615
Net charge-offs (recoveries) to average gross loans
outstanding - % -0.30 %
Allowance for loan losses:
to gross loans 4.49 % 1.76 %
to nonperforming loans(1) 70.66 % 97.40 %
to nonperforming assets(1) 70.66 % 87.57 %
<FN>
(1) Nonperforming loans and nonperforming assets do not include accruing
loans 90 days or more past due.
</FN>
</TABLE>
The allowance for losses on loans was $7.0 million at March 31, 2000,
an increase of $1.1 million from at December 31, 1999. The increase was
primarily due to the deterioration of two loans and an increase in the provision
for loan losses relating to identified weaknesses in a small number of loans, of
substantial dollar amounts, which may take an extended period of time to
resolve.
Net loan recoveries for the three months ended March 31, 2000 amounted
to $18,000, as compared to $35,000 for the same period in 1999.
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 $10.9 million in impaired loans as of March 31, 2000.
The carrying value of impaired loans for which there is a related allowance for
loan losses was $4.5 million, with the amount of specific allowance for loan
losses allocated to these loans of $2.2 million. There was $6.4 million 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 2000 was
approximately $9.8 million and there was no income recorded utilizing either the
cash basis and accrual basis method of accounting. Impaired loans at March 31,
2000 included $9.8 million of nonaccrual loans.
21
<PAGE>
The Company had approximately $8.7 million in impaired loans as of
December 31, 1999. The carrying value of impaired loans for which there is a
related allowance for loan losses was $414,000, with the amount of specific
allowance for loan losses allocated to these loans of $134,000. There were $8.3
million in impaired loans for which there was no related specific allowance for
loan losses. The average recorded investment in impaired loans during 1999 was
$4.4 million and there was no income recorded utilizing either the cash basis or
accrual basis method of accounting. Impaired loans at December 31, 1999,
included $8.4 million of nonaccrual loans.
DEPOSITS
Total deposits at March 31, 2000 were $270.5 million, an increase of
$14.5 million or 5.7% from $256.0 at December 31, 1999. The Company attracts
deposits primarily from individuals and businesses related to the health care
services industry, as well as other professionals and professional services
firms. The Company has no brokered deposits and the Company's practice is to not
purchase brokered deposits.
The following table sets forth the amount of deposits by category and
the percentage of each category to total deposits as of March 31, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000
DECEMBER 31, 1999
(in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $ 115,130 42.55 % $ 109,561 42.79 %
Demand, interest-bearing 15,787 583 16,033 6.26
Savings deposits 14,811 5.47 12,606 4.92
Money market deposits 79,233 29.29 72,177 28.19
Time deposits under $100,000 7,400 2.74 7,222 2.82
Time deposits of $100,000 and over 38,183 14.12 38,429 15.02
------------ ----------- ------------ -----------
$ 270,544 100.00 % $ 256,028 100.00 %
============= =========== ============= ===========
</TABLE>
At March 31, 2000 and December 31, 1999, there was a $12.8 million
time deposit which was collateral for a loan of the same amount. The loan was
paid off with this deposit in April, 2000.
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 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.
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.
22
<PAGE>
The Federal Deposit Insurance Act of 1991 contains "prompt corrective
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, 2000.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ -------------------------- ---------------------------------
(in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
COMPANY
<S> <C> <C> <C> <C> <C> <C>
Leverage (1) $ 14,983 5.23 % $ 11,449 4.00 % $ 14,311 5.00 %
Tier 1 Risk-Based 14,983 9.25 % 6,479 4.00 % 9,718 6.00 %
Total Risk-Based 17,748 10.96 % 12,958 8.00 % 16,197 10.00 %
BANK
Leverage 13,822 4.85 % 11,407 4.00 % 14,259 5.00 %
Tier 1 Risk-Based 13,822 8.55 % 6,466 4.00 % 9,698 6.00 %
Total Risk-Based 15,889 9.83 % 12,931 8.00 % 16,164 10.00 %
<FN>
(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.
</FN>
</TABLE>
As the Bank's principal regulator, the OCC examines and evaluates the
financial condition, operations and policies and procedures of nationally
chartered banks on a regular basis as part of its legally prescribed oversight
responsibilities. The OCC conducted an examination of the Bank in 1999 and
determined that the Bank required special supervisory attention. To implement
this corrective action, the OCC and the Bank entered into a formal agreement
("Formal Agreement") on March 22, 2000.
Pursuant to the Formal Agreement, the Bank is required to: maintain
certain regulatory capital levels; appoint a full time president and a full time
senior lending officer; establish a loan workout department; implement an
overdraft policy; improve the management of the loan portfolio; establish an
independent loan review system; immediately take action to protect the Bank's
interest in criticized assets; establish an organizational structure with clear
lines of authority for the CEO and President; develop a conflict of interest
policy which includes relationships with officers, directors and consultants;
develop a three year strategic plan; develop a profit plan to improve and
sustain earnings and a capital plan to meet and maintain a well capitalized
regulatory requirements. The agreement also establishes a schedule for
compliance and requires additional regulatory reporting by the Bank.
In early November, the Board hired Gene Gaines as Chief Executive
Officer of the Bank; and effective February 1, 2000, Mr. Gaines was also
appointed as the full time President and Chairman of the Board of the Bank and
the Chairman of the Board and the Chief Executive Officer of the Company.
Following that hiring, current management and the Boards of the Company and the
Bank have implemented significant changes to the policies and organization of
the Bank and the Company. In early December 1999, the Bank established a loan
workout department and hired a senior vice president to review, develop and
implement loan workout policies. In February, 2000, The Bank hired a full time
Senior Lending Officer.
23
<PAGE>
On February 15, 2000, the credit administration department revised and
implemented certain policies regarding extensions of credit. On March 1, 2000,
the Board revised the Bank's organizational structure to clarify the roles and
responsibilities of the Bank's CEO and its President. On March 6, 2000, the
Board authorized the 30-day notification for termination of the consulting
agreement with Network Health Financial Services, Inc.
In connection with the Formal Agreement, the Bank is preparing
additional organizational and policy revisions, is hiring a permanent senior
lending officer and is revising and expanding the Bank's loan portfolio
management program. As a further commitment in its Formal Agreement, the Bank is
developing and implementing a three-year strategic plan as well as profit and
capital plans. These efforts are intended to meet the OCC's requirement that the
Bank achieve the "well-capitalized" standard by September 30, 2000.
The Formal Agreement requires the Bank to achieve by September 30, 2000
and to maintain (i) a capital leverage ratio equal to at least 5%, (ii) Tier 1
capital to risk weighted assets ratio equal to at least 6%, and (iii) a total
capital to risk weighted assets of at least 10%.
The following table sets forth the capital ratio for the Bank as of
March 31, 2000 and the required ratios by September 30, 2000:
<TABLE>
<CAPTION>
REQUIRED BY THE
FORMAL EXCESS
ACTUAL AGREEMENT (DEFICIENCY)
------------ --------- ----------- ---------- ------------ ----------
(In thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ --------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Leverage $ 13,822 4.85 $ 14,259 5.00 $ (437) -0.15
Tier 1 Risk Based 13,822 8.55 9,698 6.00 4,124 2.55
Total Risk Based 15,889 9.83 16,164 10.00 (275) -0.17
</TABLE>
The Company and the Bank, at March 31, 2000, were considered
"adequately-capitalized". 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.
As the Company's principal regulator, the Federal Reserve Bank of San
Francisco ("FRB") examines and evaluates the financial condition, operations and
policies and procedures of bank holding companies on a regular basis as part of
its legally prescribed oversight responsibilities. The FRB conducted an
examination of the Company in 2000 and determined that the Company required
special supervisory attention. To implement this corrective action, the FRB and
the Company entered into a Memorandum of Understanding ("MOU") on April 26,
2000.
Pursuant to the MOU, the Company is required to: obtain prior approval
for dividend declarations or payments, increasing any borrowing or incurring any
debt, repurchasing any of its stock, engaging in new lending activities,
engaging in any new line of business, appoint a new director, or hiring or
promoting any new senior executive officer; submit an acceptable capital plan to
improve and maintain required capital levels and submit an acceptable plan to
enhance the board's supervision of operations and management of the consolidated
organization, including the policies and procedures related to credit
administration. The agreement also establishes a schedule for compliance and
requires additional regulatory reporting by the Company.
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 first three months ended March 31, 2000, no notes were converted
into shares of common stock. The principal balance of notes outstanding at March
31, 2000 were $679,000.
24
<PAGE>
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 three months ended
March 31, 2000, federal funds sold averaged $32.8 million, compared to $7.1
million for the same period in 1999. 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, 2000, were $45.9 million and $17.2 million,
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 2000, there were no securities sold under agreements
to repurchase.
On a stand-alone basis, the Company's primary source of liquidity is
dividends from the Bank. Dividends by the Bank to the Company are subject to
regulatory restrictions. At March 31, 2000, the Company had cash of $432,000.
Under applicable law, the Bank cannot currently, and for the next several years
will probably not be able to, pay dividends to the Company with out the prior
approval of the OCC. No assurance can be given that the OCC will permit the
payment of dividends and the refusal to do so may require the Company to look to
other sources of liquidity such as borrowings or the issuance of various types
of securities.
YEAR 2000
The Year 2000 issue presented a very real and significant challenge to
the Company, along with the entire financial services industry. This problem had
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 have produced inaccurate or unpredictable
results when dates change in the year 2000. Such occurrences could have had a
material adverse effect on the Company's financial condition, results of
operations, or business as the Company, like most financial organizations, was
significantly subject to the potential Year 2000 issues due to the nature of
financial information.
Management had successfully developed and implemented a Year 2000
Preparedness Plan. There is no known impact on the Company related to the Year
2000 issue. The Company will continue to monitor and test systems for each new
century date milestone, including October 1, 2000.
25
<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
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
---- ---- ---- ---- ---- ----- ----- -----
(U.S. $ EQUIVALENT IN THOUSANDS)
ASSETS (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES
U.S. government securities
Fixed $ 1,291 $ 1,010 $ $ 2,019 $ - $ - $ 4,320 $ 4,289
Weighted average
interest rate 5.77 % 6.81 % 5.89 % 6.07 %
U.S. government agency and
mortgage-backed securities
Fixed - - - 1,750 219 34,755 36,724 34,563
Weighted average interest rate 5.65 % 7.02 % 6.44 % 6.18 %
Variable - - - - - 14,503 14,503 14,284
Weighted average interest rate 5.97 % 5.97 %
Municipal securities
Fixed - - - - - 2,551 2,551 2,375
Weighted average interest rate 4.27 % 4.27 %
Small Business Administration securities
Variable - - - - - 636 636 626
Weighted average interest rate 7.13 % 7.13 %
Collateralized mortgage securities
Fixed - - - - - 7,152 7,152 6,622
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 8,346 15,103 4,530 3,589 8,998 4,174 44,740 44,291
Weighted average
interest rate 7.54 % 5.98 % 8.09 % 8.59 % 8.16 % 8.11 % 7.33 %
Variable 45,999 18,915 10,116 9,796 18,292 7,651 110,769 110,769
Weighted average
interest rate 9.82 % 10.00 % 10.17 % 10.18 % 10.17 % 9.87 % 9.97 %
</TABLE>
26
<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
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
---- ---- ---- ---- ---- ----- ----- -----
(U.S. $ EQUIVALENT IN THOUSANDS)
LIABILITIES (1)
DEPOSITS
Noninterest-bearing transaction
<S> <C> <C> <C> <C> <C> <C> <C> <C>
accounts 115,129 $ - $ - $ - $ - $ - $$ 115,129 $ 115,129
Weighted average interest rate 0.00 % - - - - - 0.00 %
Interest-bearing transaction
accounts 15,787 - - - - - 15,787 15,787
Weighted average interest rate 0.76 % - - - - - 0.76 %
Savings and money market accounts 94,044 - - - - - 94,044 94,044
Weighted average interest rate 2.20 % - - - - - 2.20 %
Certificates of deposit and
other time deposits
Fixed 43,873 1,710 - - - - 45,583 45,666
Weighted average interest rate 4.25 % 4.49 - - - - 4.25 %
CONVERTIBLE NOTES - - - - - 6.79 679 679
Weighted average interest rate - - - - - 8.09. % 8.09 %
OFF-BALANCE SHEET ASSETS - - - - - - - -
------------------------
<FN>
(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.
</FN>
</TABLE>
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.
27
<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
Form 8-K filed on January 5, 2000, announcing the engagement of
Moss Adams LLP as its Independent Auditors.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT NO.
- -----------
3.1 Articles of Incorporation (filed as Exhibit 3.3 to the
Company's 1989 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 the Company's 1995 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 the Company's 1995 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
the Company's 1992 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
the Company's 1998 Form 10-K 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 4.1 in
the Company's 1992 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 the
Company's 1995 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 the Company's
1990 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 the Company's
1992 Proxy Statement and incorporated herein by this
reference).
10.4* 1998 Stock Option Plan (filed as an Exhibit "A" to the
Company's 1998 Proxy Statement 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 the
Company'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 in the Company's 1998 Form 10-K 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 the Company's 1992 10-K Report and incorporated herein by
this reference).
29
<PAGE>
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 the Company's
Form 8-K filed July 22, 1996 and incorporated herein by this
reference).
10.10 Lease for premises at 606 Broadway, Santa Monica, California
(filed as Exhibit 10(a) to the Company'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 the Company'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 the Company'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 the Company'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 the Company'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 the Company'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 the Company'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 the Company'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 the Company's
1992 10-K Report and incorporated herein by this reference).
10.19* Employment agreement dated November 1, 1999 with Larry
Patapoff (filed as Exhibit 10.19 in the Company's September
30, 1999 10-Q and incorporated herein by this reference).
10.20* Employment agreement dated October 21, 1999 with Gene Gaines
(filed as Exhibit 10.20 in the Company's September 30, 1999
10-Q and incorporated herein by this reference).
10.21* First amendment to Employment Agreement with Gene Gaines
effective February 1, 2000 (filed as Exhibit 10.21 in the
Company's 1999 10-K Report and incorporated herein by this
reference).
10.22* First amendment to Employment Agreement with Larry Patapoff
effective February 1, 2000 (filed as Exhibit 10.22 in the
Company's 1999 10-k Report and incorporated herein by this
reference.)
10.23 Regulatory Agreement with OCC dated March 22, 2000 (filed as
Exhibit 10.23 in the Company's 1999 10-k Report and
incorporated herein by this reference.)
10.24 Key Employee Incentive Agreement between the Bank and Nancy
Ferretti-Foster dated December 21, 2000 (filed as Exhibit
10.24 in the Company's 1999 10-k Report and incorporated
herein by this reference.)
30
<PAGE>
10.25 Key Employee Incentive Agreement between the Bank and Sharon
Schmidt dated December 21, 1999 (filed as Exhibit 10.25 in the
Company's 1999 10-k Report and incorporated herein by this
reference).
21 Subsidiaries of the Registrant (filed as Exhibit in the
Company's 1986 10-K Report and incorporated herein by this
reference).
23.1 Consent of Moss Adams LLP (filed as Exhibit 23.1 in the
Company's 1999 10-k Report and incorporated herein by this
reference).
23.2 Consent of KPMG LLP (filed as Exhibit 23.2 in the Company's
1999 10-k Report and incorporated herein by this reference).
23.3 Memorandum of Understanding between Professional Bancorp, Inc.
and The Federal Reserve Bank of San Francisco
27 Financial Data Schedule
*Identified as a management contract or compensatory agreement.
31
<PAGE>
(B) REPORTS ON FORM 8-K: FORM 8K FILED ON JANUARY 6, 2000 ANNOUNCING THE
ENGAGEMENT OF MOSS ADAMS LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANT.
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, 2000 /S/GENE F. GAINES
Gene F. Gaines
Chief Executive Officer and President
Date: May 15, 2000 /S/ LARRY PATAPOFF
Chief Financial Officer
32
MEMORANDUM OF UNDERSTANDING
BETWEEN
Professional Bancorp, Inc.
Santa Monica, California
And the
Federal Reserve Bank of San Francisco
Professional Bancorp, Inc., Santa Monica, California ("Bancorp"), a
registered one-bank holding company and the Federal Reserve Bank of San
Francisco (the "Reserve Bank"), as evidenced by the signatures of their duly
appointed officers below, have hereby entered into this Memorandum of
Understanding (the "Memorandum"). This Memorandum evidences the understanding of
Bancorp and the Reserve Bank regarding the satisfactory resolution of issues
disclosed in the December 31, 1999, Report of Inspection (the Report) prepared
by the Reserve Bank. Accordingly, Bancorp agrees to adopt the following plans,
policies, procedures, and courses of action:
1 . Bancorp shall not declare or pay any dividends without the prior
written approval of the Reserve Bank. Requests for permission to pay a dividend
shall be received in writing thirty (30) days prior to the proposed declaration
date. Such requests shall contain sufficient documentation to demonstrate that
the proposed dividend is in compliance with the Board of Governors' dividend and
capital adequacy guidelines.
<PAGE>
2. Within sixty (60) days of the effective date of this Memorandum
Bancorp shall submit to the Reserve Bank an acceptable written plan to improve,
and thereafter maintain, an adequate capital position at Bancorp and First
Professional Bank, N.A. (the "Bank"). The plan shall, at a minimum, address and
consider:
(a) The current and future capital requirements of Bancorp, the Bank
and the consolidated organization, particularly in view of the volume of
adversely classified assets at the Bank and the potential for additional asset
quality problems at the Bank;
(b) the requirements! of Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure and Tier 1 Leverage Measure (Appendix A and D of
Regulation Y of the Board of Governors, 12 C.F.R. Part 225, App.A and D);
(c) formal requests by the Bank's regulator;
(d) anticipated levels of earnings of the Bank, with particular
attention to maintaining an adequate loan loss reserves at the Bank;
(e) the source and timing of additional funds that may be necessary to
achieve compliance with the capital plan developed and submitted pursuant to the
provisions of this paragraph; and,
(f) Bancorp's responsibility to act as a source of strength to its
subsidiary bank, in connection therewith, to use its assets to provide whatever
capital support to its subsidiary bank as may be required by the Reserve Bank in
a manner consistent with the Board of Governor's Policy Statement on the
<PAGE>
responsibility of bank holding companies to act as a source of strength to their
bank subsidiaries, dated April 24, 1987.
3. Within sixty (60) days of the effective date of this Memorandum, the
board of directors of Bancorp shall submit to the Reserve Bank an acceptable
written plan designed to enhance the board's supervision of the operations and
management of the consolidated organization. The plan shall, at a minimum,
address and consider:
(a) The steps that the board of directors proposes to take to improve
the condition of the Bank and the consolidated organization;
(b) the responsibilities of the board of directors regarding the
definition, approval, implementation, and monitoring of the proposed corrective
steps and the actions required by this Memorandum, and the procedures to be used
by the board of directors to ensure that its members fulfill their
responsibilities;
(c) a description of the detailed information that will be provided to
and assessed by the members of the board of directors in their oversight of the
operations and management of the consolidated organization, including
information on the Bank's and the consolidated organization's adversely
classified assets, loan loss reserve adequacy, capital levels, earnings, and
liquidity; and,
(d) the establishment of a periodic, internal review process to monitor
the management and operations of the consolidated organization, and Bancorp's
compliance with the requirements of this Memorandum.
<PAGE>
4. Bancorp shall not increase its borrowings or incur any debt,
including, but not limited to, the renewal of existing debt, without the prior
written approval of the Reserve Bank.
5. Bancorp shall not purchase, redeem or otherwise acquire, directly or
indirectly, any of its stock without the prior written approval of the Reserve
Bank.
6. Bancorp shall not, directly or indirectly, enter into any agreements
to acquire or divest of any interest in any entities or portfolios, or engage in
any new line of business, without the prior written approval of the Reserve
Bank. Requests pursuant to this paragraph shall be in received in writing, at
least thirty (30) days prior to the consummation of the proposed transaction.
The request shall contain a full description of the proposed transaction, its
purpose(s), and such other matters that may be pertinent to the proposed
acquisition to assist the Reserve Bank in its review of the proposed
transaction. Should the Reserve Bank disapprove, Bancorp will not proceed with
the transaction.
7. Within thirty (30) days after the end of each calendar year
following the date of this Memorandum, Bancorp shall submit to the Reserve Bank
its annual cash flow projections for the ensuing year.
<PAGE>
8. Within sixty (60) days of this Memorandum, Bancorp shall develop
acceptable written policies and procedures designed to strengthen and maintain
its records, systems and internal controls and shall submit a written
description of these policies and procedures to the Reserve Bank. These policies
and procedures shall include, without limitation:
(a) Corrective steps which are responsive to the criticisms of
Bancorp's current policies as set forth in the Report of Inspection, including,
but not limited to enhancing its policy for assessment and/or payment of
dividends, intercorporate tax allocations, transactions with affiliates and
loans and investments;
(b) the maintenance of accurate documentation regarding transactions
between the Bank and Bancorp including independent credit review for loans
purchased from the bank, prior to purchase; and,
(c) the requirement that the policies be reviewed, at a minimum,
annually.
9. Bancorp shall not, directly or indirectly, enter into, participate,
or, in any other manner, engage in any future lending activities with the bank,
without the prior written approval of the Reserve Bank.
10. During the term of this Memorandum or as otherwise required by law,
Bancorp shall comply with the provision of section 32 of the FDI Act with
<PAGE>
respect to the appointment of any new director or the hiring or promotion of any
new senior executive officer.
11. The plans, policies and procedures required by paragraphs 2, 3 and
8 hereof, shall be submitted to the Reserve Bank for review and approval within
the required time periods set forth in the Memorandum. Bancorp shall adopt the
approved plans, policies and procedures and then fully comply with them. During
the term of this Memorandum the approved plans, policies and procedures shall
not be amended or rescinded unless agreed to in writing by the Reserve Bank.
12. Within forty-five (45) days of the end of each calendar quarter
(June 30, September 30, December 31 and March 31) following the effective date
of this Memorandum, Bancorp shall submit to the Reserve Bank a written progress
report detailing the form and manner of all actions taken to comply with this
Memorandum and the results thereof. Along with such reports, Bancorp shall
submit to the Reserve Bank:
(a) The consolidated balance sheet as of the end of the reporting
period;
(b) the consolidated income statement through that reporting period;
(c) the parent company only cash flow statement;
<PAGE>
(d) a copy of all written submission filed by the Bank with its federal
regulatory agency pursuant to and formal written agreement or informal
supervisory agreement entered into between the Bank and such agency.
13. All correspondence regarding this Memorandum shall be sent to:
(a) Mr. Harold H. Blum
Director, Banking Supervision
Federal Reserve Bank of San Francisco
P.O. Box 7702
San Francisco, California 94120-7702
(b) Gene Gaines
Chief Executive Officer
Professional Bancorp, Inc.
606 Broadway
Santa Monica, California 90401
14. The provisions of this Memorandum shall be binding upon Bancorp and
each of its institution affiliated parties, in their capacities as such, and
their successors and assigns.
15. Each provision of this Memorandum shall remain effective and
enforceable until stayed, modified, terminated or suspended in writing by the
Reserve Bank.
IN WITNESS WHEREOF, the parties, through their authorized
representatives, have caused this Memorandum to be executed as of the
26th day of April, 2000.
<PAGE>
PROFESSIONAL BANCORP, INC. FEDERAL RESERVE BANK OF SAN FRANCISCO
By /s/ Gene F. Gaines By /s/ Harold Blum
------------------ ---------------
The undersigned directors each acknowledge that they have read the
foregoing Memorandum and approve of the consent thereto by
/s/ Richard A. Berger /s/ Lynn O. Poulson
- ---------------------------------- --------------------------------
Richard A. Berger Lynn 0. Poulson
/s/ Ron L. Katz /s/ Robert Margolis
- ---------------------------------- --------------------------------
Ronald L. Katz Robert Margolis
/s/ Gene F. Gaines
- ---------------------------
Gene F. Gaines
