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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 JUNE 30, 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 July 25, 2000, 2,030,754 shares of the Registrant's $0.008 par value
common stock were outstanding.
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1
<PAGE>
PROFESSIONAL BANCORP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Report 3
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations
for the three and six months ended June 30, 2000
and 1999 5
Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2000
and 1999 6
Consolidated Statements of Changes in
Shareholders Equity for the six months ended June
30, 2000 and 1999 7
Consolidated Statements of Cash Flows for the
six months ended June 30, 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 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters To A Vote of Security Holders 31
Item 5. Other Information 31
Item 6 Exhibits and Reports on Form 8-K 32
Signatures 35
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
Independent Accountants' 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 June 30, 2000 and the related
condensed consolidated statements of operations and comprehensive loss, changes
in shareholder's equity, and cash flows for the three month and six month period
ended June 30, 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
July 28, 2000
3
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands) JUNE 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED) (AUDITED)
ASSETS
<S> <C> <C>
Cash and due from banks:
Noninterest-bearing $ 28,571 $ 15,721
Interest-bearing 405 697
Federal funds sold 47,450 27,000
--------- ---------
Cash and cash equivalents 76,426
43,418
Securities available-for-sale (cost of $48,058 and
$47,748 in 2000 and 1999, respectively) 45,540 45,086
Securities held-to-maturity (fair value of $16,316
and $18,340 in 2000 and 1999, respectively) 16,597 18,639
Loans (net of allowance for loan losses of $7,276
and $5,873 in 2000 and 1999, respectively) 121,351 156,484
Premises and equipment, net 1,027 1,152
Deferred tax asset 2,844 2,844
Accrued interest receivable and other assets 4,618 5,867
--------- ---------
TOTAL ASSETS $ 268,403 $ 273,490
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Demand, noninterest-bearing $ 116,322 $ 109,561
Demand, interest-bearing 16,644 16,033
Savings and money market 89,549 84,783
Time deposits 28,188 45,651
--------- ---------
Total deposits 250,703 256,028
Convertible notes 679 679
Accrued interest payable and other liabilities 2,045 1,915
--------- ---------
Total liabilities 253,427 258,622
--------- ---------
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 1999 17 17
Additional paid-in-capital 21,271 21,271
Accumulated deficit (3,256) (3,221)
Treasury stock, at cost (69,467 shares in both 2000 and 1999) (537)
(537)
Unrealized loss on securities available-for-sale, net of taxes (2,519) (2,662)
--------- ---------
Total shareholders' equity 14,976 14,868
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 268,403 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands)
-------- -------- -------- -------
2000 1999 2000 1999
-------- -------- -------- -------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans $ 2,990 $ 3,194 $ 6,565 $ 6,078
Securities 1,006 1,057 2,013 2,379
Federal funds sold and securities purchased
under agreements to resell 696 163 1,169 246
Interest-bearing deposits in other banks 11 5 16 37
------- ------- ------- -------
TOTAL INTEREST INCOME 4,703 4,419 9,763 8,740
------- ------- ------- -------
INTEREST EXPENSE
Deposits 847 737 1,845 1,461
Convertible notes 14 14 25 30
Federal funds purchased and securities
sold under agreements to repurchase -- -- -- 109
------- ------- ------- -------
TOTAL INTEREST EXPENSE 861 751 1,870 1,600
------- ------- ------- -------
NET INTEREST INCOME 3,842 3,668 7,893 7,140
Provision for loan losses 650 1,047 1,743 1,172
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,192 2,621 6,150 5,968
------- ------- ------- -------
OTHER OPERATING INCOME
Net gain (loss) on sale securities available-for-sale -- 4 -- 40
Merchant discount 71 79 143 140
Mortgage brokering fees 3 8 8 63
Service charges on deposits 247 229 482 458
Other income 155 128 293 263
------- ------- ------- -------
TOTAL OTHER OPERATING INCOME 476 448 926 964
------- ------- ------- -------
OTHER OPERATING EXPENSES
Salaries and employee benefits 1,944 1,786 3,791 3,491
Occupancy 366 351 733 738
Furniture and equipment 197 214 371 423
Meetings and business development 14 48 29 121
Donations 25 66 36 90
Other promotion 56 73 120 143
Legal fees 297 226 427 318
Audit, accounting and examinations 105 130 157 173
Professional services 243 334 556 643
Strategic planning and other outside consulting 11 16 39 23
Office supplies 79 63 131 127
Telephone 94 61 192 124
Postage 35 33 68 69
Messenger service 29 8 45 14
FDIC assessment 30 6 59 13
Other assessments 43 48 83 92
Other expense 147 142 274 297
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES 3,715 3,605 7,111 6,899
------- ------- ------- -------
Earnings before taxes (47) (536) (35) 33
Provision for income taxes -- (277) -- (43)
------- ------- ------- -------
NET EARNINGS $ (47) $ (259) $ (35) $ 76
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ (.02) $ (0.13) $ (.02) $ .04
Diluted $ (a) $ (a) $ (a) $ .04
(a) Anti dilutive
</TABLE>
See accompanying notes to consolidated financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
2000 1999 2000 1999
----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Net earnings (loss) $ (46) $ (259) $ (35) $ 76
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising
during the period 338 (857) 144 (1,047)
Reclassification adjustment -- 8 -- 19
------- ------- ------- -------
Other comprehensive income 338 (849) 144 (1,028)
------- ------- ------- -------
Comprehensive income (Loss) $ 292 $(1,108) $ 109 $ (952)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTH PERIOD ENDING JUNE 30, 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>
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
-- -- -- -- -- 143 143
Net earnings (loss) -- -- -- (35) -- -- (35)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 2,030,754 $ 17 $ 21,271 $ (3,256) $ (537) $ (2,519) $ 14,976
========= ========== ========== ========== ========== ========== ==========
SIX MONTH PERIOD ENDING JUNE 30, 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, 1998 1,996,344 $ 17 $ 20,874 $ 5,239 $ (537) $ (271) $ 25,322
Conversion of Notes (Note 12) 19,529 -- 224 -- -- -- --
224
Cash Dividends -- -- -- (101) -- -- (101)
Change in net unrealized holding loss
on securities available-for-sale
-- -- -- -- -- (1,028) (1,028)
Net earnings (loss) -- -- -- 76 -- -- 76
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1999 2,015,873 $ 17 $ 21,098 $ 5,214 $ (537) $ (1,299) $ 24,493
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
2000 1999
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ (35) $ 76
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation and amortization 208 294
Provision for loan losses 1,463 1,172
(Gain) loss on sales of securities available-for-sale -- (39)
Amortization of convertible note expense 7 9
Increase in deferred tax asset -- (1,349)
Decrease (increase) in accrued interest receivable and other assets 1,348 744
Increase (decrease) in accrued interest payable and other liabilities 123 (593)
Net amortization of premiums and discounts
on securities held-to-maturity 76 121
Net amortization of premiums and discounts
on securities available-for-sale
50 149
-------- --------
Net cash provided by operating activities 3,240 584
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of securities held-to-maturity -- 250
Maturities of securities available-for-sale 1,305 --
Sales of securities available-for-sale -- 27,187
Principal payments and maturities of:
Mortgage-backed securities held-to-maturity 1,967 2,954
Mortgage-backed securities available-for-sale 1,704 5,736
Purchases of securities available-for-sale (3,370) (1,947)
Net (increase) decrease in loans 33,569 (27,558)
Purchase of bank premises and equipment, net (82) (291)
-------- --------
Net cash provided by investing activities 35,093 6,331
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 12,138 (8,055)
Net increase (decrease) in time deposits (17,463) 3,806
Cash dividends -- (101)
-------- --------
Net cash provided by (used in) in financing activities (5,325) (4,350)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,008 2,565
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,418 31,964
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 76,426 $ 34,529
======== ========
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest 1,467 1,606
Income taxes -- 1,120
Supplemental disclosure of noncash items:
Pretax change in unrealized losses on securities available for sale securities 143 1,816
Conversion of notes -- 215
See accompanying notes to consolidated financial statements.
</TABLE>
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 June 30, 2000, and the results of
operations for the six months ended June 30, 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 June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Net Income (Loss)
used in basic earnings per share computation $ (47) $ (259) $ (35) $ 76
Adjustments to net income per
assumed effect of dilutive securities:
Interest on convertible notes, net of tax effect -- 8 -- 17
----------- ----------- ----------- -----------
Adjusted earnings used in diluted earnings per
share computation $ (47) $ (251) $ (35) $ 93
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding for computation basic earnings
per share 2,030,754 2,015,227 2,030,754 2,011,189
Effect of dilutive securities:
Options and warrants (a) 71,277 (a) 68,228
Convertible notes (a) 68,375 (a) 73,039
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding for calculation of diluted
earnings per share 2,030,754 2,154,879 2,030,754 2,152,456
Basic earnings per share $ (0.02) $ (0.13) $ (0.02) $ 0.04
Diluted earnings per share $ (a) $ (a) $ (a) $ 0.04
<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 a net loss of $47,000, or $(0.02) per basic
share, for the second quarter of 2000, compared with a net loss of $259,000, or
$(0.13) per basic share for the second quarter of 1999. The improvement during
the second quarter of 2000 compared to 1999 resulted primarily from the increase
in average interest earning assets and a lower provision for loan losses in
2000. The Company had total assets of $268.4 million at June 30, 2000, compared
to $253.8 million at June 30, 1999.
The net loss for the first six months of 2000 was $35,000, or $(0.02)
per basic share compared to net earnings of $76,000, or $0.04 per basic and
diluted share. The decrease between the first half of 2000 compared with the
first half of 1999 was primarily due to the increase for provision for loan
losses of $571,000 and the increase of other operating expenses of $212,000.
These increases were partially offset by an increase in net interest income of
$753,000.
Return on average shareholders' equity for the second quarter and
first half of 2000 were (1.26%) and (0.47%), respectively, compared to (4.01%)
and 0.59% for the second quarter and first half of 1999, respectively.
Additionally, return on average assets for the second quarter and first half of
2000 was (0.07%) and (0.02%), respectively, compared to (0.40%) and 0.06% for
the second quarter and first half of 1999, respectively.
Pre-tax operating earnings, which exclude the impact of gains or
losses on the sale of securities and the provision for loan losses, increased
$96,000, or 18.9%, to $603,000 for the second quarter of 2000 compared to
$507,000 for the second quarter of 1999. Operating earnings for the first half
of 2000 increased $543,000 or 46.6% to $1.7 million compared to $1.2 million for
the first half of 1999. The increase was primarily due to the growth in average
interest earning assets from $246.5 million and $252.2 million for the second
quarter and first half of 2000, respectively, compared to $226.5 million and
$227.2 million for the second quarter and first half of 1999, respectively.
Additionally, the overall level of interest rates increased during 2000 compared
to 1999.
Total cash and cash equivalents increased $33.0 million, or 76.0% to
$76.4 million from $43.4 million at December 31, 1999. This increase was
primarily due to a reduction of the Bank's loan portfolio and an increase in
deposits.
Total investment securities decreased $1.6 million, or 2.5% to $62.1
million at June 30, 2000 compared to $63.7 million at December 31, 1999.
Gross loans decreased $33.8 million, or 20.8%, to $128.8 million at
June 30, 2000 compared to $162.6 million at December 31, 1999. Commercial loans
decreased $30.0 million, or 24.1%, to $94.4 million from $124.4 million at
December 31, 1999. Real estate secured loans increased $200,000, or 0.7%, to
$27.7 million at June 30, 2000 compared to $27.5 million at December 31, 1999.
These decreases were the result of loans being paid off in full, which includes
one cash secured loan in the amount of $12.8 million. Management is focusing its
efforts on reducing the concentration and risk off large loans. Concurrently,
management is adjusting its underwriting to address industry concentration risk.
Both of these efforts contributed to the decrease in loans.
At June 30, 2000, nonperforming loans totaled $15.3 million, or
11.9%, 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 47.6% at June 30, 2000 compared to 69.8% at December 31, 1999.
11
<PAGE>
Total deposits decreased $5.3 million, or 2.1%, to $250.7 million at
June 30, 2000 from $256.0 million at December 31, 1999. Non-interest-bearing
demand deposit increased $6.7 million or 6.1% to $116.3 million at June 30, 2000
from $109.6 million at December 31, 1999. Time deposits decreased $17.5 million,
or 38.3% to $28.2 million at June 30, 2000 from $45.7 million at December 31,
1999. The decrease was primarily due to the use of a $12.8 million certificate
of deposit held at the Bank to pay off a loan in April, 2000.
Other operating expense increased $110,000, or 3.1%, to $3.7 million
for the second quarter of 2000 compared to $3.6 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 second quarter of 2000 is
primarily due to increased provisions for loan losses. The Company recorded
provisions for loan losses of $650,000 for the three-month period ended June 30,
2000, compared to a $1.0 million provision recorded for the same period in 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 June 30, 2000, net interest income increased 4.7% to $3.8 million
from $3.7 million for the quarter ended June 30, 1999. The increase in net
interest income for the second quarter of 2000 as compared to the same period in
1999 is primarily the result of a $20.0 million, or 8.8%, increase in average
interest earning assets.
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 6.24%, for the second
quarter of 2000 compared to 6.50% for the same period in 1999.
Average yield on interest earning assets decreased 19 basis points to
7.63% for the three months ended June 30, 2000 from 7.82% for the same period in
1999. While overall market interest rates generally were higher in 2000 than
1999, the level of non-accrual loans during the second quarter of 2000 reduced
the yield. Average cost on interest bearing liabilities increased 9 basis points
to 2.44% for the three months ended June 30, 2000 from 2.35% for the same period
in 1999. Average non-interest bearing demand deposits for the second quarter of
2000 increased $15.1 million, or 15.1%, to $115.1 million from $100.0 million
for the same period in 1999. Average yield on interest earning assets decreased
two basis points to 7.74% for the six months ended June 30, 2000 from 7.76% for
the same period in 1999. Again, the level of non-accrual loans during the first
half of 2000 reduced the yield. Average cost on interest bearing liabilities
increased one basis point to 2.49% for the six months ended June 30, 2000 from
2.48% for the same period in 1999. Average non-interest bearing demand deposits
for the first six months of 2000 increased $15.9 million, or 16.3%, to $113.7
million from $97.8 million for the same period in 1999.
Average federal funds sold increased $29.8 million, or 215.9%, to
$43.6 million for the three months ended June 30, 2000 from $13.8 million for
the same period in 1999. The average yield on federal funds increased 164 basis
points to 6.39% for the second quarter of 2000 from 4.75% for the same period in
1999. The result was an increase in interest on federal funds sold of $533,000
to $696,000 for the second quarter of 2000 compared to $163,000 for the same
period in 1999. Average federal funds sold increased $27.8 million, or 266.5%,
to $38.2 million for the six months ended June 30, 2000 from $10.4 million for
the same period in 1999. The average yield on federal funds increased 135 basis
points to 6.12% for the first six months of 2000 from 4.77% for the same period
in 1999. The result was an increase in interest on federal funds sold of
$923,000 to $1.2 million for the first six months of 2000 compared to $246,000
for the same period in 1999. The increased volume was primarily due to the
decrease in the Bank's loan portfolio and the increase in deposits.
12
<PAGE>
Average total investment securities decreased $9.8 million, or 13.5%,
to $62.6 million for the three months ended June 30, 2000 from $72.4 million
during the same period in 1999. The average yield on securities increased 57
basis points to 6.43% for the second quarter of 2000 from 5.86% for the same
period in 1999. The net result was a decrease in interest on securities of
$51,000 to $1.0 million for the second quarter of 2000 compared to $1.1 million
for the same period in 1999. Average total investment securities decreased $19.1
million, or 23.3%, to $62.9 million for the six months ended June 30, 2000 from
$82.0 million during the same period in 1999. The average yield on securities
increased 55 basis points to 6.40% for the six months ending June 30, 2000 from
5.85% for the same period in 1999. The net result was a decrease in interest on
securities of $366,000 to $2.0 million for the six months ended June 30, 2000
compared to $2.4 million for the same period in 1999.
Average loans increased $70,000, or 0.1%, to $139.2 million for the
three months ended June 30, 2000 compared to $139.1 million during the same
period in 1999. While the volume of loans was substantially the same, the yield
on loans decreased 62 basis points to 8.59% for the second quarter of 2000 from
9.21% for the same period in 1999. The decline in yield was primarily due to the
increase in non-accrual loans and was partially offset by the rise in interest
rates. The net result was a decrease in interest on loans of $204,000 to $3.0
million for the second quarter of 2000 compared to $3.2 million for the same
period in 1999. Average loans increased $17.2 million, or 12.9%, to $150.6
million for the six months ended June 30, 2000 compared to $133.4 million during
the same period in 1999. The yield on loans decreased 47 basis points to 8.72%
for the first six months ended June 30, 2000 from 9.19% for the same period in
1999.
Average interest-bearing liabilities increased $13.4 million, or
10.5%, to $141.3 million for the three months ended June 30, 2000 compared to
$127.9 million during the same period in 1999. The cost of interest-bearing
liabilities increased nine basis points to 2.44% for the second quarter of 2000
compared to 2.35% for the second quarter of 1999. Average interest-bearing
liabilities increased $19.8 million, or 15.2%, to $150.0 million for the six
months ended June 30, 2000 compared to $130.2 million during the same period in
1999. The cost of interest-bearing liabilities increased one basis point to
2.49% for the six months ended June 30, 2000 compared to 2.48% during the same
period in 1999.
Average convertible notes decreased $200,000, or 22.8%, to $679,000
for the three months ended June 30, 2000 from $879,000 during the same period in
1999. Average convertible notes decreased $240,000, or 26.1%, to $679,000 for
the six months ended June 30, 2000 from $919,000 during the same period in 1999.
Decreases in convertible bonds are a result of conversions to stock.
13
<PAGE>
The following tables present the distribution of average assets, liabilities and
shareholders' equity as well as the total dollar amount of interest income from
average interest-earning assets and resultant yields, and the dollar amounts of
interest expense and average interest-bearing liabilities, expressed both in
dollars and rates for the three months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
---- ----
------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(in thousands) BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ---- -------- ------- ---- --------
Assets
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities $ 62,568 6.43% $ 1,006 $ 72,389 5.86% $ 1,057
Loans(1) 139,159 8.59 2,990 139,089 9.21 3,194
Federal funds sold 43,572 6.39 696 13,751 4.75 163
Interest-earning deposits - banks 1,197 3.69 11 1,317 1.51 5
--------- --------- --------- ---------
Total interest-earning assets 246,496 7.63 4,703 226,546 7.82 4,419
--------- --------- --------- ---------
Deferred loan fees (174) (219)
Allowance for loan losses (7,067) (2,303)
Noninterest-earning assets:
Cash and due from banks 24,555 24,700
Premises and equipment 1,090 1,404
Other assets 8,389 5,986
--------- ---------
Total assets $ 273,289 $ 256,114
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 15,975 0.69% $ 28 $ 13,688 0.70% $ 24
Savings and money market deposits 92,274 2.04 471 79,559 1.81 359
Time deposits under $100,000 7,313 4.01 73 8,716 4.19 91
Time deposits of $100,000 and over 25,101 4.38 275 25,107 4.20 263
Convertible notes 679 8.07 14 879 6.04 13
Repurchase agreements -- -- -- -- -- --
--------- --------- --------- ---------
Total interest-bearing liabilities 141,342 2.44 861 127,949 2.35 750
--------- --------- --------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 115,119 99,951
Other liabilities 2,006 2,405
Shareholders' equity 14,822 25,809
--------- ---------
Total liabilities and shareholders' $ 273,289 $ 256,114
equity ========= =========
Interest income as a percentage of average
Earning assets 7.63% 7.82%
Interest expense as a percentage of average
Interest-bearing liabilities 2.44% 2.35%
Net interest margin and income 6.24% $ 3,842 6.50% $ 3,669
========= =========
<FN>
(1) Nonaccrual loans are included in average balances and rate calculations.
</FN>
</TABLE>
14
<PAGE>
The following tables present the distribution of average assets,
liabilities and shareholders' equity as well as the total dollar amount of
interest income from average interest-earning assets and resultant yields, and
the dollar amounts of interest expense and average interest-bearing liabilities,
expressed both in dollars and rates for the six months ended June 30, 2000 and
1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
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 $ 62,938 6.40% $ 2,013 $ 82,045 5.85% $ 2,379
Loans(1) 150,584 8.72 6,565 133,369 9.19 6,078
Federal funds sold 38,163 6.12 1,169 10,413 4.77 246
Interest-earning deposits - banks 503 6.47 16 1,359 5.35 36
--------- --------- --------- ---------
Total interest-earning assets 252,188 7.74 9,763 227,186 7.76 8,740
--------- --------- --------- ---------
Deferred loan fees (184) (212)
Allowance for loan losses (6,532) (2,089)
Noninterest-earning assets:
Cash and due from banks 25,955 24,293
Premises and equipment 1,102 1,424
Other assets 8,737 5,940
--------- ---------
Total assets $ 281,266 $ 256,542
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 15,138 0.69% $ 52 $ 13,699 0.73% $ 50
Savings and money market deposits 94,753 2.02 959 80,078 1.90 755
Time deposits under $100,000 7,450 4.00 149 8,707 4.27 184
Time deposits of $100,000 and over 31,946 4.29 685 22,460 4.24 472
Convertible notes 679 7.39 25 919 6.54 30
Repurchase agreements -- -- -- 4,368 5.02 109
--------- --------- --------- ---------
149,966 2.49 1,870 130,231 2.48 1,600
--------- --------- --------- ---------
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 113,668 97,795
Other liabilities 2,649 2,656
Shareholders' equity 14,983 25,860
--------- ---------
Total liabilities and shareholders' $ 281,266 $ 256,542
equity ========= =========
Interest income as a percentage of average
Earning assets 7.74% 7.76%
Interest expense as a percentage of average
Interest-bearing liabilities 2.49% 2.48%
Net interest margin and income 6.26% $7,893 6.34% $ 7,140
====== =========
<FN>
(1) Nonaccrual loans are included in average balances and rate calculations.
</FN>
</TABLE>
15
<PAGE>
The Company's net interest income is affected by changes in the
amount and mix of interest-earning assets and interest-bearing liabilities,
referred to as "volume change." It is also affected by changes in yields earned
on interest-earning assets and interest rates paid on interest-bearing deposits
and other borrowed funds, referred to as a "rate change." The following table
sets forth changes in interest income and interest expense for each major
category of interest-earning assets and interest-bearing liabilities, and the
amount of change attributable to volume and rate changes for the three and six
months ended June 30, 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 SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 JUNE 30, 2000 AND 1999
(in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
Increase (decrease) in interest income:
<S> <C> <C> <C> <C> <C> <C>
Securities $(152) $ 97 $ (54) $(591) $ 208 $(383)
Loans 2 (214) (212) 756 (323) 433
Federal funds sold 458 73 531 825 88 913
Interest-bearing deposits - banks -- 7 6 (26) 6 (20)
----- ----- ----- ----- ----- -----
$ 308 $ (37) $ 271 964 (21) 943
----- ----- ----- ----- ----- -----
Increase (decrease) in interest expense:
Interest-bearing demand deposits $ 4 $-- $ 4 $ 5 $ (3) $ 2
Savings and money market deposits 61 49 111 145 51 196
Time deposits under $100,000 (14) (4) (18) (25) (11) (37)
Time deposits of $100,000 and over -- 11 11 202 6 208
Convertible notes (3) 4 1 (8) 3 (5)
Repurchase agreements -- -- -- (54) (54) (109)
----- ----- ----- ----- ----- -----
48 61 108 263 (8) 255
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest income $ 260 $ (97) $ 163 $ 700 $ (12) $ 688
===== ===== ===== ===== ===== =====
</TABLE>
16
<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 $650,000 and $1.0
million for the three month period ended June 30, 2000 and 1999, respectively.
The Company recorded provisions for loan losses of $1.7 million and $1.2 million
for the six months ended June 30, 2000 and 1999, respectively. The increase in
provision for loan losses for 2000 was due primarily to the increase in
non-performing loans and the need for a general increase in the allowance for
loan losses. Net charge-offs (recoveries) to average outstanding loans for the
six months ending June 30, 2000 and 1999 were 0.23% and 1.17%, respectively.
OTHER OPERATING INCOME
For the three months ended June 30, 2000, other operating income
totaled $476,000 compared with $448,000 for the same period in 1999. The
increase was primarily related to an $18,000 increase in service charges on
deposits and other nonrecurring transactions.
OTHER OPERATING EXPENSE
Other operating expenses for the three months ending June 30, 2000,
totaled $3.7 million compared with $3.6 million for the same period in 1999. The
increase primarily occurred in salaries and other employee benefits and legal
fees, and was partially offset by reductions in donations, business development
and auditing expenses.
Salaries and other employee benefits increased approximately $300,000
to $3.8 million for the first six months of 2000 from $3.5 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 increased
$109,000 to $427,000 for the first six months of 2000 compared to $318,000 for
the same period in 1999. Legal expenses related to the workout of problem loans
may be recovered after the loan is fully paid. Professional services decreased
approximately $87,000 to $556,000 for the first six months of 2000 compared to
$643,000 for the same period in 1999. The decrease was primarily due to the
termination of a consulting agreement during the second quarter of 2000.
INCOME TAXES
For the three and six months ended June 30, 2000, no income tax
benefit was recorded. For the three and six months ended June 30, 1999, the
company recorded a tax benefit of $277,000 and $43,000, respectively.
17
<PAGE>
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
The Company reported total investment securities of $62.1 million at
June 30, 2000. This represented a decrease of $1.6 million, or 2.5%, from $63.7
million at December 31, 1999.
Securities available-for-sale increased $454,000, or 1.0%, to $45.5
million at June 30, 2000. The unrealized loss on securities held-for-sale was
$2.5 million as of June 30, 2000, representing a $143,000 reduction of the
accumulated unrealized loss. The following table sets forth the amortized cost
and fair value of securities available-for-sale as of June 30, 2000 and December
31, 1999.
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
---- ---- ---- -----
U.S. Government agency and
<S> <C> <C> <C> <C>
Mortgage-backed securities $37,744 $ 6 $ 1,867 $35,883
Small Business Administration securities 617 1 5 613
Municipal securities 2,550 -- 161 2,389
Collateralized mortgage obligations 7,147 -- 492 6,655
------- ------- ------- -------
Total $48,058 $ 7 $ 2,525 $45,540
======= ======= ======= =======
DECEMBER 31, 1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
---- ---- ---- -----
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
Collateralized mortgage obligations 7,157 -- 549 6,608
------- ------ ------- -------
Total $47,748 $ -- $ 2,662 $45,086
======= ====== ======= =======
</TABLE>
During the three months ended June 30, 2000, no securities
available-for-sale were sold and $2.1 million of securities were purchased and
classified as available for sale.
18
<PAGE>
Securities held-to-maturity decreased $2.0 million, or 11.0%, to
$16.6 million at June 30, 2000, from $18.6 million at December 31, 1999. The
amortized cost and fair value of securities held-to-maturity as of June 30,
2000, and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
---- ---- ---- -----
<S> <C> <C> <C> <C>
FRB Stock $ 405 $ -- $ -- $ 405
U.S. Government securities 3,026 3 29 3,000
U.S. Government agency securities 1,500 -- 27 1,473
U.S. Government agency
mortgage-backed securities 11,666 11 238 11,439
------- ------- ------- -------
Total $16,597 $ 14 $ 294 $16,317
======= ======= ======= =======
DECEMBER 30, 2000
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAIN LOSS VALUE
---- ---- ---- -----
FRB Stock $ 439 $ -- $ -- $ 439
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 $18,639 $ 10 $ 309 $18,340
======= ======= ======= =======
</TABLE>
19
<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>
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
(in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Commercial $ 94,378 73.28% $ 124,403 76.52%
Real estate secured 27,727 21.53 27,538 16.94
--------- ------ --------- ------
122,105 94.81 151,941 93.46
Equity lines of credit 3,238 2.51 4,330 2.66
Other lines of credit 1,628 1.26 4,689 2.88
Installment
Gross loans 1,817 1.42 1,608 1.00
--------- ------ --------- ------
128,788 100.00% 162,568 100.00%
Less:
Allowance for loan losses (7,276) (5,873)
Deferred loan fees, net (161) (211)
--------- ---------
Net loans $ 121,351 $ 156,484
========= =========
</TABLE>
Gross loans outstanding decreased by $33.8 million, or 20.8%, to
$128.8 million at June 30, 2000 compared to $162.6 at December 31, 1999. A
substantial portion of the decrease was due to the pay off of a single $12.8
million loan. The table above indicates that the loan portfolio mix at June 30,
2000 was relatively 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 group practices,
large single-specialty groups, multi-specialty medical groups and other
outpatient health care service companies. Approximately 74% and 77% of gross
loans at June 30, 2000 and December 31, 1999, respectively, 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 measurements.
20
<PAGE>
LARGE LOANS
The Bank has 32 client relationships where the total amount of loans
outstanding and available credit from loan commitments exceeds $2.0 million for
any single borrower/relationship. As of June 30, 2000, the Bank had $61.3
million in loans outstanding, representing 48.6% of gross loans and $82.5
million of credit available to these relationships. As of June 30, 2000, five
relationships with loans outstanding totaling $12.0 million had $11.1 million in
loans outstanding which were on non-accrual status.
As of December 31, 1999, the Bank had $83.9 million in loans
outstanding, representing 51.6% of gross loans, and $21.5 million in credit
available to 35 relationships each of which exceeded $2.0 million. At the end of
1999, two relationships totaling $5.2 million in loans outstanding had $3.3
million which were on non-accrual status.
In addition, to the 35 client relationships discussed above, there
were four other large loan relationships which totaled $14.1 million.
Approximately $10.3 million of these loans were charged off during the year
leaving a loan balance of $3.8 million currently being carried as non-accrual
loans.
As of December 31, 1999, there were four client relationships, with
loans outstanding totaling $14.9 million, that have loan amounts outstanding and
available loan commitments that are in excess of the Bank's current legal
lending limit of $3.3 million and are therefore considered non-conforming as
defined in 12USC84. Regulations prohibit the further extension of credit of any
kind to these borrowers. The aggregate loans of the borrower are "grandfathered"
until any of the borrower's credit facilities mature at which time the Bank must
make every effort to bring the loans into conformity with the reduced lending
limits unless to do so would be inconsistent with safe and sound banking
practices.
Management is focusing its efforts on reducing the concentration and
risk of large loans. These efforts may include selling the entire loan, selling
a portion of the loans to other lending institutions and restructuring the loans
when appropriate. Additionally, the Bank has adopted a house limit, which is
lower than the legal lending limit, for evaluating any future lending
commitments.
DELINQUENCIES
Loans past due 30-89 days decreased $4.1 million, or 74.6%, to $1.4
million as of June 30, 2000 from $5.5 million at December 31, 1999.
Approximately $3.7 million of this decrease migrated to nonaccrual status and
$400,000 was paid off in full. Loans over 90 days past due and still accruing
decreased $2.7 million, or 93.1%, to $206,000 as of June 30, 2000 from $2.9
million at December 31, 1999. The net decrease was comprised of $2.2 million of
loans that were put on nonaccrual status, one loan in the amount of $655,000 was
paid in full, and five loans, totalling $200,000, that became 90 days past due
in the year 2000.
21
<PAGE>
The following table sets forth information about nonperforming assets
(which include nonaccrual loans, other real estate owned and other repossessed
assets), accruing loans 90 days or more past due, and certain ratios.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(in thousands) 2000 1999
---- ----
<S> <C> <C>
Nonperforming loans $ 15,281 $ 8,412
Other repossessed assets 146 --
----------- ---------
Total nonperforming assets $ 15,427 $ 8,412
-========== =========
Accruing loans 90 days or more past due $ 206 $ 2,891
-========== =========
Allowance for loan losses as a percent of
nonperforming loans
47.62% 69.82%
Nonperforming loans to gross loans(1) 11.87% 5.17%
Nonperforming assets(1)
to gross loans 11.98% 5.17%
to gross loans, OREO and repossessed assets 11.96% 5.17%
to total assets 5.42% 3.08%
<FN>
(1) Nonperforming loans and nonperforming assets do not include
accruing loans 90 days or more past due.
</FN>
</TABLE>
Nonperforming assets increased to $15.4 million at June 30, 2000 from
$8.4 million at December 31, 1999. This increase was primarily due to four
borrowers with loans totaling $7.4 million being placed on nonaccrual status
during the first six months ended June 30, 2000.
The $206,000 of loans over 90 days or more past due and still
accruing as of June 30, 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, loans totaling
$2.2 million were placed on nonaccrual and one loan in the amount of $655,000
was cured during the six months ended June 30, 2000.
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.
22
<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 a 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 migration is
one, to determine the adequacy of the allowance for loan losses for reserves
nonspecific to certain credits.
This program is consistent with the methodologies in Banking Circular
201. Amongst others, consideration is given to historical and current trends in
past due loans, charged-off loans, nonaccruals, the nature and mix of the loan
portfolio, and 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 June 30, 2000, management believes a $7.3 million
allowance for loan losses, which constitutes 5.65% of gross loans, is 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.
23
<PAGE>
The following table provides a summary of the Company's allowance for
loan losses and charge-off and recovery activity during the six months ended
June 30, 2000, and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30, JUNE 30,
(in thousands) 2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $ 5,873 $ 2,200
Provision for loan losses 1,743 1,172
---------
7,616 3,372
--------- ---------
Loans charged-off 752 1,636
Recoveries on loans previously charged-off (412) (77)
--------- ---------
Net charge-off (recoveries) 340 1,559
--------- ---------
Balance at end of period $ 7,276 $ 1,813
========= =========
Gross loans outstanding at end of period $ 128,788 $ 143,962
Average gross loans outstanding during period 150,584 133,369
Net charge-off (recoveries) to average gross loans outstanding
0.23% 1.17%
Allowance for loan losses:
to gross loans 5.65% 1.26%
to nonperforming loans(1) 47.61% 78.79%
to nonperforming assets(1) 47.16% 70.46%
<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 $7.3 million at June 30, 2000
compared to $1.8 million at June 30, 1999. The increase was primarily due to the
increase in nonperforming 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.
Loans charged-off for the six months ended June 30, 2000 decreased to
$752,000, compared to $1.6 million for the same period in 1999. Loans
charged-off during the first half of 1999 included a single loan of $1.5
million.
Recoveries for the six months ended June 30, 2000 increased to
$412,000 from $77,000 for the same period in 1999. The increase was primarily
due to the recovery on three loans totaling $303,000.
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 $15.5 million in impaired loans as of June 30, 2000.
The carrying value of impaired loans for which there is a related allowance for
loan losses was $10.4 million, with the amount of specific allowance for loan
losses allocated to these loans of $2.3 million. There was $5.1 million in
impaired loans for which there were general allowances allocated consistent with
the Company's allowance for loan loss methodology. The average recorded
investment in impaired loans during the second quarter of 2000 was approximately
$13.2 million and there was no income recorded utilizing either the cash basis
or accrual basis method of accounting. Impaired loans at June 30, 2000 included
$15.3 million of nonaccrual loans.
24
<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 June 30 2000 were $250.7 million, a decrease of
$5.3 million or 2.1% from $256.0 million 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 June 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
(in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
-----------------------------------------------------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $116,322 46.40% $109,561 42.79%
Demand, interest-bearing 16,644 6.64 16,033 6.26
Savings deposits 14,869 5.93 12,606 4.92
Money market deposits 74,680 29.79 72,177 28.19
Time deposits under $100,000 7,082 2.82 7,222 2.82
Time deposits of $100,000 and over 21,106 8.42 38,429 15.02
-------- ------- --------- ------
$250,703 100.00% $256,028 100.00%
======== ======= ======== ======
</TABLE>
At 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.
25
<PAGE>
Federal banking agencies risk-based capital standards were
implemented on December 31, 1992. Since December 31, 1992, banking organizations
have been expected to meet a minimum ratio for qualifying total capital to
risk-weighted assets of 8.0%, 4.0% of which must be Tier 1 capital. A banking
organization's risk-based capital ratios are obtained by dividing its qualifying
capital by its total risk-adjusted assets and risk-weighted off-balance sheet
items.
The Federal Deposit Insurance Act of 1991 contains "prompt 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 June 30, 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) $14,937 5.52% $10,827 4.00% $13,534 5.00%
Tier 1 Risk-Based 14,937 9.29% 6,433 4.00% 9,650 6.00%
Total Risk-Based 17,691 11.00% 12,867 8.00% 16,084 10.00%
BANK
Leverage 13,828 5.14% 10,756 4.00% 13,445 5.00%
Tier 1 Risk-Based 13,828 8.66% 6,387 4.00% 9,581 6.00%
Total Risk-Based 15,889 9.95% 12,775 8.00% 15,969 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.
26
<PAGE>
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 April, 2000, the Bank hired a full time
Senior Lending Officer.
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, 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
June 30, 2000 and the required ratios by September 30, 2000:
REQUIRED BY THE
FORMAL EXCESS
ACTUAL AGREEMENT (DEFICIENCY)
---------------- --------------- -----------------
(In thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------- --------------- -----------------
Leverage $13,828 5.14 $13,445 5.00 $ 383 0.14%
Tier 1 Risk Based 13,828 8.92 9,581 6.00 4,247 2.66
Total Risk Based 15,889 9.95 15,969 10.00 (80) -0.05
As of June 30, 2000, the Bank's Tier 1 leverage and Tier 1 risk
based capital ratios met the "well-capitalized" criteria and exceed the levels
imposed by the Formal Agreement. The Bank's total risk based capital ratio has a
deficiency of five basis points. 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 before declaring or paying any dividends, increasing any borrowings 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.
27
<PAGE>
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 six months ended June 30, 2000, no notes were converted into
shares of common stock. The principal balance of notes outstanding at June 30,
2000 were $679,000.
LIQUIDITY
The Bank's primary sources of liquidity are federal funds sold to
other banks and the investment securities portfolio. For the three months ended
June 30, 2000, federal funds sold averaged $43.6 million, compared to $1.4
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 June 30, 2000, were $45.5 million and $16.3 million,
respectively.
The Bank sells securities under agreements to repurchase. Securities
sold under repurchase agreements are recorded as short-term obligations. During
the six months ended June 30, 2000, there were no securities sold under
agreements to repurchase.
The Company's primary source of liquidity is dividends from the Bank.
Dividends by the Bank to the Company are subject to 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. At June 30, 2000, the Company had cash of $886,000. 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.
28
<PAGE>
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.
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
2000 2001 2002 2003 2004 AFTER
---- ---- ---- ---- ---- -----
(U.S. $ EQUIVALENT IN THOUSANDS)
ASSETS (1)
SECURITIES
U.S. government securities
<S> <C> <C> <C> <C> <C> <C>
Fixed $ -- $ 1,009 $ -- $ 2,017 $ -- $ --
Weighted average interest rate --% 6.81% -- 5.89% -- --
U.S. government agency and
mortgage-backed securities
Fixed -- -- 860 2,700 195 36,215
Weighted average interest rate -- -- 7.17% 6.61% 6.46% 6.42%
Variable -- -- -- -- -- 13,634
Weighted average interest rate -- -- -- -- -- 6.38%
Municipal securities
Fixed -- -- -- -- -- 2,550
Weighted average interest rate -- -- -- -- -- 4.27%
Small Business Administration securities
Variable -- -- -- -- -- 615
Weighted average interest rate -- -- -- -- -- 7.37%
Collateralized mortgage securities
Fixed -- -- -- -- -- 4,453
Weighted average interest rate -- -- -- -- -- 6.54%
Variable -- -- -- -- -- --
Weighted average interest rate
Federal Reserve Bank Stock
Fixed -- -- -- -- -- 405
Weighted average interest rate -- -- -- -- -- 6.08%
LOANS
Fixed 6,919 2,729 4,407 3,552 8,947 4,696
Weighted average interest rate 7.79% 8.37% 8.08% 8.59% 8.16% 8.42%
Variable 34,836 19,204 8,554 9,317 17,152 8,475
Weighted average interest rate 10.08% 10.75% 10.60% 10.68% 10.68% 10.47%
FAIR
TOTAL VALUE
ASSETS (1) ----- -----
SECURITIES
U.S. government securities
Fixed $ 3,026 $ 3,000
Weighted average interest rate 6.20%
U.S. government agency and
mortgage-backed securities
Fixed 39,970 37,964
Weighted average interest rate 6.45%
Variable 13,634 13,289
Weighted average interest rate 6.38%
Municipal securities
Fixed 2,550 2,389
Weighted average interest rate 4.27%
Small Business Administration securities
Variable 615 611
Weighted average interest rate 7.87%
Collateralized mortgage securities
Fixed 4,453 4,197
Weighted average interest rate 6.54% --
Variable --
Weighted average interest rate
Federal Reserve Bank Stock
Fixed 405 405
Weighted average interest rate 6.08%
LOANS
Fixed 31,249 30,760
Weighted average interest rate 8.17%
Variable 97,538 97,538
Weighted average interest rate 10.46%
</TABLE>
29
<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
2000 2001 2002 2003 2004 AFTER
---- ---- ---- ---- ---- -----
(U.S. $ EQUIVALENT IN THOUSANDS)
LIABILITIES (1)
DEPOSITS
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing transaction accounts 116,322 $ -- $ -- $ -- $ -- $ --
Weighted average interest rate 0.00% -- -- -- -- --
Interest-bearing transaction accounts 16,644 -- -- -- -- --
Weighted average interest rate 0.73% -- -- -- -- --
Savings and money market accounts 89,549 -- -- -- -- --
Weighted average interest rate 2.25% -- -- -- -- --
Certificates of deposit and other time deposits
Fixed 26,599 1,589 -- -- -- --
Weighted average interest rate 4.37% 4.37% -- -- -- --
CONVERTIBLE NOTES -- -- -- -- 679 --
Weighted average interest rate -- -- -- -- 8.09 --%
OFF-BALANCE SHEET ASSETS -- -- -- -- -- --
------------------------ -- -- -- -- -- --
TOTAL VALUE
----- -----
LIABILITIES (1)
DEPOSITS
Noninterest-bearing transaction accounts $ 116,322 $ 116,322
Weighted average interest rate 0.00%
Interest-bearing transaction accounts 16,644 16,644
Weighted average interest rate 0.73%
Savings and money market accounts 89,549 89,549
Weighted average interest rate 2.25%
Certificates of deposit and other time deposits
Fixed 28,188 28,215
Weighted average interest rate 4.37%
CONVERTIBLE NOTES 679 679
Weighted average interest rate 8.09%
OFF-BALANCE SHEET ASSETS -- --
------------------------
</TABLE>
(1) The Company used certain assumptions to estimate fair values and
expected maturities. For loans, expected maturities are contractual maturities
adjusted for estimated prepayments of principal based on market indicators.
Investment securities are at quoted market rates and stated maturities. For loan
fair value computations, the company used a discounted cashflow model with
discount rates based upon prevailing market rates for similar types of loans,
incorporating adjustments for credit risk. For deposit liabilities, fair values
were calculated using discounted cashflow models based on market interest rates
for different product types and maturity dates for which the deposits are held.
EXCHANGE RATE SENSITIVITY
All of the Company's derivative financial instruments and other
financial instruments are denominated in US dollars. The Company does not have,
or anticipate having, any foreign currency exchange rate exposure.
COMMODITY PRICE SENSITIVITY
The Company does not have, or anticipate having, any derivative commodity
instruments.
30
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on June
28, 2000. At the meeting, the following individuals were elected to serve as the
Company's Board of Directors until the 2001 Annual Meeting of Shareholders and
until their successors are elected and have qualified.
FOR AUTHORITY WITHHELD
--------------------------------------------------------------------------------
Richard A. Berger 1,491,018 93,130
Gene F. Gaines 1,491,293 92,855
Ronald L. Katz, M.D. 1,491,283 92,865
Robert J. Margolis, M.D. 1,491,283 92,865
Lynn O. Poulson 1,491,293 92,855
William C. Walbrecher, Jr. 1,491,293 92,855
--------------------------------------------------------------------------------
The appointment of Moss Adams LLP as independent public accountants
of the Company for the year ended December 31, 2000 was ratified at the 2000
Annual Meeting of Shareholders by the following:
FOR AGAINST OR WITHHELD ABSTAINED
--------------------------------------------------------------------------------
1,447,014 134,800 2,234
ITEM 5. OTHER INFORMATION
Form 8-K was filed on August 11, 2000, announcing the Definitive
Agreement to be acquired by First Community Bank.
31
<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).
32
<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).
33
<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).
10.26* Employee agreement dated December 1, 1999 with Robert Dyck and the
Bank.
10.27* Employee agreement dated March 6, 2000 wif Athar Khan and the Bank.
10.28* Employee agreement dated April 4, 2000 with Patti Derry and the Bank.
10.29* Employee agreement dated May 11, 2000 with Jae Souverielle and the
Bank.
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 (filed as Exhibit 23.3 in the
Company's 2000 10-Q and incorporated by this reference).
27 Financial Data Schedule
*Identified as a management contract or compensatory agreement.
34
<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: August 14, 2000 /S/GENE F. GAINES
------------------
Gene F. Gaines
Chief Executive Officer
and President
Date: August 14, 2000 /S/ LARRY PATAPOFF
------------------
Chief Financial Officer
35
