SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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 November 8, 2000, 2,030,754 shares of the Registrant's $0.008 par
value common stock were outstanding.
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2000 and 1999 5
Consolidated Statements of Changes in
Shareholders Equity for the nine months ended September 30,
2000 and 1999. 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters To A Vote of Security Holders 33
Item 5. Other Information 33
Item 6 Exhibits and Reports on Form 8-K 34
Item 7 Signatures 37
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2
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED) (AUDITED)
ASSETS Cash and due from banks:
<S> <C> <C>
Noninterest-bearing $ 22,315 $ 15,721
Interest-bearing 432 697
Federal funds sold 78,650 27,000
----------- ---------
Cash and cash equivalents 101,397 43,418
Securities available-for-sale (cost of $49,542 and
$47,748 in 2000 and 1999, respectively) 47,665 45,086
Securities held-to-maturity (fair value of $15,479
and $18,340 in 2000 and 1999, respectively) 15,560 18,639
Loans (net of allowance for loan losses of $5,458
and $5,873 in 2000 and 1999, respectively) 110,508 156,484
Premises and equipment, net 900 1,152
Deferred tax asset 2,844 2,844
Accrued interest receivable and other assets 8,152 5,867
----------- ---------
TOTAL ASSETS $ 287,026 $ 273,490
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Demand, noninterest-bearing $ 119,815 $ 109,561
Demand, interest-bearing 14,244 16,033
Savings and money market 108,739 84,783
Time deposits 24,023 45,651
----------- ---------
Total deposits 266,821 256,028
Convertible notes 679 679
Accrued interest payable and other liabilities 2,541 1,915
----------- ---------
Total liabilities 270,041 258,622
----------- ---------
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 profit (deficit) (1,889) (3,221)
Treasury stock, at cost (69,467 shares in both 2000 (537) (537)
Unrealized loss on securities available-for-sale, net of taxes (1,877) (2,662)
----------- ---------
Total shareholders' equity
16,985 14,868
----------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 287,026 $ 273,490
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
PROFESSIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands, except per share data)
------------ ------------ ------------ -------------
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 2,741 $ 3,433 $ 9,306 $ 9,511
Securities 1,016 1,032 3,029 3,411
Federal funds sold and securities purchased
under agreements to resell 954 316 2,123 562
Interest-bearing deposits in other financial 11 20 27 56
institutions
------------- ------------ ------------- -------------
TOTAL INTEREST INCOME 4,722 4,801 14,485 13,540
------------- ------------ ------------- -------------
INTEREST EXPENSE
Deposits 798 859 2,643 2,320
Convertible notes 12 5 37 34
Federal funds purchased and securities
sold under agreements to repurchase - - - 109
------------- ------------ ------------- -------------
TOTAL INTEREST EXPENSE 810 864 2,680 2,463
------------- ------------ ------------- -------------
NET INTEREST INCOME 3,912 3,937 11,805 11,077
Provision for loan losses 2,804 4,426 4,547 5,598
------------- ------------ ------------- -------------
NET INTEREST INCOME (LOSS) AFTER PROVISION
FOR LOAN LOSSES 1,108 (489) 7,258 5,479
------------- ------------ ------------- -------------
OTHER OPERATING INCOME
Net gain (loss) on sale of securities - - - 40
available-for-sale
Merchant discount 67 81 210 221
Mortgage brokering fees 2 12 11 75
Service charges on deposits 267 230 749 687
Life insurance benefits 3,714 - 3,714 -
Other income 400 135 692 399
------------- ------------ ------------- -------------
TOTAL OTHER OPERATING INCOME 4,450 458 5,376 1,422
------------- ------------ ------------- -------------
OTHER OPERATING EXPENSES
Salaries and employee benefits 1,828 1,668 5,619 5,159
Occupancy 373 399 1,106 1,137
Furniture and equipment 178 196 549 620
Meetings and business development 9 46 39 167
Donations 9 26 44 116
Other promotion 51 54 172 197
Legal fees 269 392 696 710
Audit, accounting and examinations 111 49 267 222
Professional services 175 335 731 977
Strategic planning and other consulting 258 18 297 41
Office supplies 77 61 208 188
Telephone 50 92 242 215
Postage 37 39 106 108
Messenger service 34 22 79 36
FDIC assessment 163 21 222 34
Other assessments 14 43 98 134
Other expense 555 121 827 419
------------- ------------ ------------- -------------
TOTAL OTHER OPERATING EXPENSES 4,191 3,582 11,302 10,480
------------- ------------ ------------- -------------
Earnings before taxes 1,367 (3,613) 1,332 (3,579)
Provision (benefit) for income taxes - (1,250) - (1,292)
------------- ------------ ------------- -------------
NET EARNINGS (LOSS) $ 1,367 $ (2,363) $ 1,332 $ (2,287)
============= ============ ============= =============
EARNINGS (LOSS) PER SHARE
Basic $ 0.67 $ (1.17) $ 0.66 $ (1.14)
Diluted $ (a) $ (a) $ (a) $ (a)
<FN>
(a) Effect is anti-dilutive
</FN>
</TABLE>
See accompanying notes to consolidated financial statements
4
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<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -- -------------- ------------- --- -------------
2000 1999 2000 1999
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Net earnings (loss) $ 1,367 $ (2,363) $ 1,332 $ (2,287)
-------------- -------------- ------------- -------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising
During the period 642 222 785 (825)
Reclassification adjustment - - - 19
-------------- -------------- ------------- -------------
Other comprehensive income 642 222 785 (806)
-------------- -------------- ------------- -------------
Comprehensive income (Loss) $ 2,009 $ (2,141) $ 2,117 $ (3,093)
================ =============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTH PERIOD ENDING SEPTEMBER 30, 2000
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON STOCK PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE
(Dollars 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 - - - -
Cash Dividends - - - - - -
Change in net unrealized holding
loss on securities
available-for-sale - - 785 785
Net earnings (loss) - - - 1,332 1,332
-----------------------------------------------------------------------------------------------
Balance, September 30, 2000 2,030,754 $ 17 $ 21,271 $ (1,889) $ (537) $ (1,877) $ 16,985
===============================================================================================
NINE MONTH PERIOD ENDING SEPTEMBER 30, 1999
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON STOCK PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE
(Dollars 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 28,977 - 334 - - - 334
Cash Dividends - - - (101) (101)
Change in net unrealized holding
loss
on securities
available-for-sale - - (806) (806)
Net earnings (loss) - - - (2,287) (2,287)
-----------------------------------------------------------------------------------------------
Balance, September 30, 1999 2,025,321 $ 17 $ 21,208 $ 2,851 (537) $ (1,077) $ 22,462
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 1,332 $ (2,287)
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation and amortization 340 443
Provision for loan losses 4,547 5,598
(Gain) loss on sales of securities available-for-sale - (40)
Amortization of convertible note expense 9 13
Increase in deferred tax asset - (1,034)
Decrease (increase) in accrued interest receivable and other assets (2,286) 94
Increase (decrease) in accrued interest payable and other liabilities 619 (892)
Net amortization of premiums and discounts
On securities held-to-maturity 111 174
Net amortization of premiums and discounts
On securities available-for-sale 81 184
---------------- ----------------
Net cash provided by operating activities 4,753 2,253
---------------- ----------------
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 2,968 4,225
Mortgage-backed securities available-for-sale 2,689 6,772
Purchases of securities available-for-sale (5,870) (2,426)
Net (increase) decrease in loans 41,429 (32,820)
Purchase of bank premises and equipment, net (88) (316)
---------------- ----------------
Net cash provided by investing activities 42,433 2,872
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 32,421 6,537
Net increase (decrease) in time deposits (21,629) 7,356
Cash dividends - (100)
---------------- ----------------
Net cash provided by (used in) in financing activities 10,792 13,793
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 57,978 18,918
---------------- ----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,419 31,965
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 101,397 $ 50,883
================= =================
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 2,600 $ 2,474
Income taxes $ - $ 1,120
Supplemental disclosure of noncash items:
Pretax change in unrealized losses on securities available for sale $ 785 $ 1,902
securities
Conversion of notes $ - $ 334
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have
been prepared by Professional Bancorp, Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for the periods covered
have been made. Certain information and note disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Management believes that the disclosures are adequate to make the
information presented not misleading.
The financial position at September 30, 2000, and the results of
operations for the nine months ended September 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.
The accounting and reporting policies of the Company are in accordance
with generally accepted accounting principles and conform to general practices
within the banking industry. The preparation of these financial statements
requires management to make estimates and assumptions that effect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. The allowance for loan losses
and the deferred tax asset are material estimates subject to change.
RECLASSIFICATION
Certain amounts in the accompanying financial statements have been
classified to conform with the 2000 presentation of the item.
8
<PAGE>
NOTE 2 - EARNINGS PER SHARE
The actual number of shares outstanding at September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Net Income (Loss)
used in basic earnings per share computation $ 1,367 $ (2,363) $ 1,332 $ (2,287)
Adjustments to net income per
assumed effect of dilutive securities:
Interest on convertible notes, net of tax effect 7 - 22 -
-------------- ------------ ------------- ------------
Adjusted earnings used in diluted earnings per
share computation $ 1,374 $ (2,363) $ 1,354 $ (2,287)
-------------- ------------ ------------- ------------
Weighted average number of shares
outstanding for computation basic earnings
per share 2,030,754 2,017,718 2,030,754 2,013,389
Effect of dilutive securities:
Options and warrants (a) (a) (a) (a)
Convertible notes (a) (a) (a) (a)
-------------- ------------ ------------- ------------
Weighted average number of shares 2,030,754 2,017,718 2,030,754 2,013,389
outstanding for calculation of diluted
earnings per share
Basic earnings per share $ 0.67 $ (1.17) $ 0.66 $ (1.14)
Diluted earnings per share $ (b) $ (a) $ (b) $ (a)
<FN>
(a) Effect is anti-dilutive.
(a) Effect is anti-dilutive due to the strike price of outstanding stock options
and warrants being higher than the average market price for the period.
</FN>
</TABLE>
9
<PAGE>
NOTE 3 - MERGER ACTIVITY
The Company announced on August 7, 2000 that it had signed a definitive
agreement to merge with First Community Bancorp ("FCB"). Under the terms of the
agreement, shareholders of Professional Bancorp will receive either $8.00 in
cash or 0.55 shares of FCB common stock (within a range of FCB stock prices) for
each share of Professional common stock. Professional shareholders will have the
option to choose either cash or stock consideration. In the event that more than
50% of Professional shareholders choose common stock or cash, the consideration
will be prorated to the Professional shareholders so that half the shares will
receive cash and half will receive FCB common stock. The transaction is expected
to close in the first quarter of 2001. Both companies have completed their due
diligence.
As of September 30, 2000, the Company had recorded charges of $256,000
related primarily to legal and accounting expense for the merger.
On August 10, 2000, First Community Bancorp filed a Registration
Statement on Form S-4 to register the securities to be exchanged for the
Company's stock pursuant to the terms of the merger agreement. The Form S-4 also
contains a proxy statement for a special meeting of the Company's shareholders
to be held on December 12, 2000, at which shareholders will be asked to approve
the merger agreement and related matters.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
On July 1, 2000 the Financial Accounting Standards Board issued
Financial Interpretation No. 44 which clarifies certain definitions, criteria
and accounting treatment of stock based compensation (which is addressed by
Standard No.123 of the Financial Accounting Standards Board and Opinion No. 25
of the Accounting Principles Board).
On September 28, 2000, the Financial Accounting Standards Board issued
Statement 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The new Statement replaces Statement 125 issued
in June 1996 as to certain securitizations of financial assets.
During 1998, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting For
Derivative Instruments and Hedging Activities" (SFAS 133) which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. During 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of SFAS 133 and Amendment to SFAS 133", which amends certain
provisions of SFAS 133 and extends the initial effective date.
These standards require that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, and unrecognized firm commitment, an available-for-sale security, or
a foreign-currency-denominated forecasted transaction.
Under these statements, an entity that elects to apply hedge accounting
is required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. These statements are
effective for the Company on July 1, 2001. Management is in the process of
determining what effect, if any, adoption of this statement will have on the
financial position or results of operations of the Company.
In October 1998, FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." Under SFAS 134, after the securitization of a mortgage loan held for
sale, retained mortgage-backed securities shall be classified in accordance with
the provisions of Statement 115. However, a mortgage banking enterprise must
classify as trading any retained mortgage-backed securities that it commits to
sell before or during the securitization process. SFAS 134 is effective for the
first quarter beginning after December 15, 1998 and enterprises may reclassify
mortgage-backed securities and other beneficial interests retained after the
scuritization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place when the Statement is initially
applied. The adoption of this statement did not have a significant impact on the
financial position or results of operations of the Company.
During 1999, the FASB issued SFAS No. 135, Rescission of SFAS No. 75
and Technical Corrections, SFAS No. 136, "Transfer of Assets to a
Not-For-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others." Management does not believe either of these
statements will have a significant impact on the financial position or results
of operations of the Company.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Professional Bancorp, Inc. (the "Company") is the holding company for
First Professional Bank, N.A. (the "Bank"). Since the Bank constitutes
substantially all the business of the Company, references to the Company in this
Item 2 reflect the consolidated activities of the Company and the Bank. For a
more complete understanding of the Company 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 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.
MERGER
The Company announced on August 7, 2000 that it had signed a definitive
agreement to merge with First Community Bancorp ("FCB"). Under the terms of the
agreement, shareholders of Professional Bancorp will receive either $8.00 in
cash or 0.55 shares of FCB common stock (within a range of FCB stock prices) for
each share of Professional common stock. Professional shareholders will have the
option to choose either cash or stock consideration. In the event that more than
50% of Professional shareholders choose common stock or cash, the consideration
will be prorated to the Professional shareholders so that half the shares will
receive cash and half will receive FCB common stock. The transaction is expected
to close in the first quarter of 2001. Both companies have completed their due
diligence.
The completion of the merger is contingent upon the satisfaction of
several conditions, including 1) approval of the merger agreement by the
shareholders of Professional Bancorp; 2) receipt of all necessary governmental
consents and approvals; 3) satisfaction by Professional Bancorp of certain
capitalization and asset quality requirements, and 4) satisfaction of other
conditions customary for a merger of this type.
The merger agreement requires that Professional Bancorp remain
capitalized so that the sum of its common stock (excluding option shares issued
after the date of the merger agreement), additional paid-in capital, accumulated
deficit and treasury stock is not less than the sum of $17,250,000 and an amount
equal to $200,000 times the number of months elapsed between April 1, 2000 and
the day the merger is completed (for purposes of this provision only,
allocations to the loan loss reserves, expenses related to the discontinuance of
First Professional's data processing operation and certain charges related to
the merger transaction, such as legal and accounting fees, broker and consultant
fees, and severance payments are not treated as expenses or charges against
monthly earnings). As of September 30, 2000, Professional Bancorp met this
requirement.
The merger agreement also requires that Professional Bancorp meet a
test of asset quality so that the total of (i) the product of Watch loans and
1.4%; (ii) the product of Special Mention loans and 5%; (iii) the product of
Substandard loans and 15%; (iv) the product of Doubtful loans and 50%; and (v)
Loss loans (in each instance of (i) through (v) the loan classification will be
determined by mutual Agreement or by a mutually agreed upon third party); and
(vi) net charge-offs since May 31, 2000 shall not be greater than $19,000,000.
As of September 30, 2000, Professional Bancorp met this requirement.
RESULTS OF OPERATIONS
The Company recorded a net gain of $1.4 million, or $.67 per basic
share, for the third quarter of 2000, compared to a net loss of $2.4 million, or
$(1.14) per basic share for the third quarter of 1999. The net gain for the
first nine months of 2000 was $1.4 million, or $.66 per basic share compared to
a net loss of $2.3 million, or $(1.14) per basic share for the same period in
1999. The increase in earnings resulted primarily from the net effect of a lower
provision for loan losses, life insurance benefits recognized upon the death of
a former executive, increase in net interest income, a one-time charge for
outsourcing data processing and expenses related to merger activities. The
Company had total assets of $287.0 million at September 30, 2000, compared to
$270.0 million at September 30, 1999.
11
<PAGE>
Return on average shareholders' equity for the third quarter and first
nine months of 2000 were 8.76% and 8.78%, respectively, compared to (37.04%) and
(11.92%) for the third quarter and first nine months of 1999, respectively.
Additionally, return on average assets for the third quarter and first nine
months of 2000 was 0.48% and 0.46%, respectively, compared to (3.48%) and
(1.17%) for the third quarter and first nine months of 1999, respectively.
Total cash and cash equivalents increased $58.0 million, or 133.6%, to
$101.4 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 $500,000, or 7.8% to $63.2
million at September 30, 2000 compared to $63.7 million at December 31, 1999.
Gross loans decreased $46.5 million, or 28.6%, to $116.1 million at
September 30, 2000 compared to $162.6 million at December 31, 1999. Commercial
loans decreased $36.8 million, or 29.6%, to $87.6 million from $124.4 million at
December 31, 1999. Real estate secured loans decreased $5.6 million, or 20.4%,
to $21.9 million at September 30, 2000 compared to $27.5 million at December 31,
1999. These decreases were the result of loans being paid off in full, including
a single cash secured loan of $12.8 million, instead of being renewed, as part
of management's efforts to reduce the concentration and risk of large loans.
Concurrently, management has been adjusting its underwriting to address industry
concentration risk. Both of these efforts contributed to the decrease in loans.
At September 30, 2000, non-performing loans totaled $12.5 million, or
10.8%, 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 43.7% at September 30, 2000 compared to 69.8% at December 31, 1999.
Total deposits increased $10.8 million, or 4.2%, to $266.8 million at
September 30, 2000 from $256.0 million at December 31, 1999.
Non-interest-bearing demand deposit increased $10.3 million or 9.4% to $119.8
million at September 30, 2000 from $109.6 million at December 31, 1999. Time
deposits decreased $21.7 million, or 47.5% to $24.0 million at September 30,
2000 from $45.7 million at December 31, 1999. The decrease in time deposits was
primarily due to the use of a $12.8 million time deposit to pay off a loan in
April, 2000.
Other operating expense increased $609,000, or 17.0%, to $4.2 million
for the third quarter of 2000 compared to $3.6 million for the same period in
1999. The increase was due primarily to $256,000 of merger-related expenses and
a one-time charge of $400,000 for outsourcing the information systems.
12
<PAGE>
NET INTEREST INCOME
The Company's earnings depend primarily on net interest income, which
is the difference between the interest and fees earned on loans and investments
less the interest paid on deposits, borrowings and convertible notes. For the
quarter ended September 30, 2000, net interest income was $3.9 million, which
was the same amount for the quarter ended September 30, 1999. For the nine
months ended September 30, 2000, net interest income increased 6.6% to $11.8
million from $11.1 million for the same period in 1999. The increase in net
interest income for the third 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 for the third quarter and the
first nine months of 2000 were 6.32% and 6.31%, respectively, compared to 6.52%
and 6.40% for the third quarter and first nine months of 1999, respectively.
Average yield on interest earning assets decreased 32 basis points to
7.63% for the three months ended September 30, 2000 from 7.95% 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 third quarter of 2000
reduced the yield. Average cost on interest bearing liabilities decreased 14
basis points to 2.36% for the three months ended September 30, 2000 from 2.50%
for the same period in 1999. Average noninterest-bearing demand deposits for the
third quarter of 2000 increased $10.9 million, or 10.5%, to $114.9 million from
$104.0 million for the same period in 1999. Average yield on interest-earning
assets decreased nine basis points to 7.74% for the nine months ended September
30, 2000 from 7.83% 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 decreased two basis points to 2.46% for the nine months
ended September 30, 2000 from 2.48% for the same period in 1999. Average
noninterest-bearing demand deposits for the first nine months of 2000 increased
$14.5 million, or 14.5%, to $114.5 million from $100.0 million for the same
period in 1999.
Average federal funds sold increased $33.3 million, or 136.5%, to $57.7
million for the three months ended September 30, 2000 from $24.4 million for the
same period in 1999. Consistent with the overall increase in market interest
rates, the average yield on federal funds increased 143 basis points to 6.56%
for the third quarter of 2000 from 5.13% for the same period in 1999. The result
was an increase in interest on federal funds sold of $639,000 to $955,000 for
the third quarter of 2000 compared to $316,000 for the same period in 1999.
Average federal funds sold increased $29.6 million, or 196.0%, to $44.7 million
for the nine months ended September 30, 2000 from $15.1 million for the same
period in 1999. The average yield on federal funds increased 138 basis points to
6.35% for the first nine months of 2000 from 4.97% for the same period in 1999.
The result was an increase in interest on federal funds sold of $1.6 million to
$2.1 million for the first nine months of 2000 compared to $562,000 for the same
period in 1999. The increased volume was primarily due to the decrease in the
Bank's gross loan portfolio and the increase in deposits.
Average total investment securities decreased $4.5 million, or 6.6%, to
$63.2 million for the three months ended September 30, 2000 from $67.7 million
during the same period in 1999. The average yield on securities increased 33
basis points to 6.38% for the third quarter of 2000 from 6.05% for the same
period in 1999. The net result was a decrease in interest on securities of
$16,000 to $1.0 million for the third quarter of 2000. Average total investment
securities decreased $14.2 million, or 18.4%, to $63.0 million for the nine
months ended September 30, 2000 from $77.2 million during the same period in
1999. The average yield on securities increased 51 basis points to 6.42% for the
nine months ending September 30, 2000 from 5.91% for the same period in 1999.
The net result was a decrease in interest on securities of $382,000 to $3.0
million for the nine months ended September 30, 2000 compared to $3.4 million
for the same period in 1999.
13
<PAGE>
Average loans decreased $22.6 million, or 15.4%, to $124.1 million for
the three months ended September 30, 2000 compared to $146.7 million during the
same period in 1999. The yield on loans decreased 52 basis points to 8.76% for
the third quarter of 2000 from 9.28% 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 $659,000 to $2.8 million for the third quarter of 2000 compared to
$3.4 million for the same period in 1999. Average loans increased $3.8 million,
or 2.8%, to $141.7 million for the nine months ended September 30, 2000 compared
to $137.8 million during the same period in 1999. The yield on loans decreased
46 basis points to 8.77% for the first nine months ended September 30, 2000 from
9.23% for the same period in 1999. The net result was a decrease in interest on
loans of $172,000 to $9.3 million for the first nine months of 2000 compared to
$9.5 million for the same period in 1999.
Average interest-bearing liabilities decreased $1.3 million, or 0.9%,
to $136.0 million for the three months ended September 30, 2000
compared to $137.3 million during the same period in 1999. The cost of interest-
bearing liabilities decreased 14 basis points to 2.36% for the third quarter of
2000 compared to 2.50% for the third quarter of 1999. The decrease was due
primarily to the change in deposit composition from higher costing time
certificate of deposits to savings and money market deposits. Average
interest-bearing liabilities increased $12.7 million, or 9.6%, to $145.3 million
for the nine months ended September 30, 2000 compared to $132.6 million during
the same period in 1999. The cost of interest-bearing liabilities decreased two
basis points to 2.46% for the nine months ended September 30, 2000 compared to
2.48% during the same period in 1999.
Average convertible notes decreased $149,000, or 18.0%, to $679,000
for the three months ended September 30, 2000 from $828,000 during the same
period in 1999. Average convertible notes decreased $209,000, or 23.5%, to
$679,000 for the nine months ended September 30, 2000 from $888,000 during the
same period in 1999. Decreases in convertible notes are a result of conversions
to Company common stock in 1999.
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 three months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
---------------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ---- -------- ------- ---- --------
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Securities $ 63,174 6.38 % $ 1,016 $ 67,673 6.05 % $ 1,032
Loans(1) 124,064 8.76 2,740 146,698 9.28
3,433
Federal funds sold 57,743 6.56 955 24,424 5.13 316
Interest-earning deposits - banks 521 8.15 11 642 12.39 20
------------- ---------- ------------- ----------
Total interest-earning assets 245,502 7.63 4,722 239,437 7.95 4,801
---------- ----------
Deferred loan fees (150) (224)
Allowance for loan losses (7,378) (2,365)
Noninterest-earning assets:
Cash and due from banks 22,420 24,371
Premises and equipment 978 1,349
Other assets 7,275 6,580
------------- -------------
Total assets $ 268,647 $ 269,148
============== ============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 16,058 0.70 % $ 28 $ 14,007 0.71 % $ 25
Savings and money market deposits 94,067 2.12 504 86,590 2.07 452
Time deposits under $100,000 6,971 4.06 71 8,324 4.14 87
Time deposits of $100,000 and over 18,240 4.23 195 27,564 4.24 295
Convertible notes 679 7.06 12 828 2.39 5
Repurchase agreements - - - - -
------------- ---------- ------------- ----------
Total interest-bearing 136,015 2.36 810 137,313 2.50 864
liabilities ---------- ----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 114,916 104,018
Other liabilities 2,115 2,506
Shareholders' equity 15,601 25,311
------------- -------------
Total liabilities and $ 268,647 $ 269,148
shareholders' equity ======= =======
Interest income as a percentage of
average
Earning assets 7.63 % 7.95 %
Interest expense as a percentage of
average
Interest-bearing liabilities 2.36 2.50
Net interest margin and income 6.32 $ 3,912 6.52 3,937
========== =====
Net interest spread 5.27 5.45
<FN>
(1) Nonaccrual loans are included in average balances and rate calculations.
</FN>
</TABLE>
15
<PAGE>
The following tables present the distribution of average assets, liabilities and
shareholders' equity as well as the total dollar amount of interest income from
average interest-earning assets and resultant yields, and the dollar amounts of
interest expense and average interest-bearing liabilities, expressed both in
dollars and rates for the nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---------------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ---- -------- ------- ---- --------
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Securities $ 63,015 6.42 % $ 3,029 $ 77,204 5.91 % $ 3,411
Loans(1) 141,690 8.77 9,306 137,843 9.23 9,511
Federal funds sold 44,681 6.35 2,123 15,111 4.97 562
Interest-earning deposits - banks 509 7.08 27 1,117 6.71 56
------------- ---------- ------------- -----------
Total interest-earning assets 249,895 7.74 14,485 231,275 7.83 13,540
----------- -----------
Deferred loan fees (172) (216)
Allowance for loan losses (6,816) (2,182)
Noninterest-earning assets:
Cash and due from banks 24,767 24,318
Premises and equipment 1,061 1,397
Other assets 8,229 6,133
--------------- --------------
Total assets $ 276,964 $ 260,725
============== =============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 15,450 0.70 % $ 81 $ 13,801 0.73 % $ 75
Savings and money market deposits 94,501 2.07 1,462 82,255 1.96 1,206
Time deposits under $100,000 7,290 4.04 220 8,603 4.21 271
Time deposits of $100,000 and over 27,347 4.30 880 24,151 4.24 767
Convertible notes 679 7.31 37 888 5.23 35
Repurchase agreements - - 2,896 5.02 109
------------- ---------- ------------- -----------
Total interest-bearing 145,267 2.46 2,680 132,594 2.48 2,463
liabilities ---------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 114,521 100,047
Other liabilities 2,009 2,410
Shareholders' equity 15,167 25,674
------------- -------------
Total liabilities and $ 276,964 260,725
shareholders' equity ============= =============
Interest income as a percentage of
average
Earning assets 7.74 % 7.83 %
Interest expense as a percentage of
average
Interest-bearing liabilities 2.46 2.48
Net interest margin and income 6.31 $ 11,805 6.40 $ 11,077
====== ======
Net interest spread 5.28 5.35
<FN>
(1) Nonaccrual loans are included in average balances and rate calculations.
</FN>
</TABLE>
16
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and interest rates paid on interest-bearing deposits and
other borrowed funds, referred to as a "rate change." The following table sets
forth changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities, and the amount of
change attributable to volume and rate changes for the three and nine months
ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 SEPTEMBER 30, 2000 AND 1999
----------------------------- ----------------------------------
(Dollars in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
Increase (decrease) in interest income:
<S> <C> <C> <C> <C> <C> <C>
Securities $ (71) $ 57 $ (14) $ (665) $ 280 $ (385)
Loans (507) (175) (682) 261 (476) (215)
Federal funds sold 530 110 640 1,368 193 1,561
Interest-bearing deposits - banks (3) (6) (9) (32) 3 (29)
----- ----- ----- ------- ----- -------
$ (51) $ (14) $ (65) $ 932 $-- $ 932
----- ----- ----- ------- ----- -------
Increase (decrease) in interest expense:
Interest-bearing demand deposits $ 3 $-- $ 3 $ 9 $ (3) $ 6
Savings and money market deposits 40 13 53 187 68 255
Time deposits under $100,000 (14) (2) (16) (40) (11) (51)
Time deposits of $100,000 and over (99) -- (99) 103 9 112
Convertible notes (1) 8 7 (10) 12 2
Repurchase agreements -- -- -- (54) (55) (109)
----- ----- ----- ------- ----- -------
(71) 19 (52) 195 20 215
----- ----- ----- ------- ----- -------
Increase (decrease) in net interest $ 20 $ (33) $ (13) 737 (20) 717
===== ===== ===== ======= ===== =======
</TABLE>
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 Company's allowance for loan losses. Such agencies may require the Company
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 $2.8 million and
$4.4 million for the three month period ended September 30, 2000 and 1999,
respectively. The Company recorded provisions for loan losses of $4.5 million
and $5.6 million for the nine months ended September 30, 2000 and 1999,
respectively. The additions to the provision for loan losses in 2000 were
primarily due to the increase in non-performing loans and the significant
deterioration of four large relationships in the third quarter. Net charge-offs
(recoveries) to average outstanding loans for the nine months ending September
30, 2000 and 1999 were 3.5% and 1.15%, respectively. See also "Allowance for
Loan Losses" below.
17
<PAGE>
OTHER OPERATING INCOME
During the third quarter of 2000, the Company recorded $3.7 million of
income based upon $6.2 million in gross proceeds from several life insurance
policies paid upon the death of a former executive, net of $2.3 million of cash
surrender value and other charges. However, the estate of the executive and a
trust established by the executive for the benefit of certain of his family
members have asserted claims for benefits to which they allege the executive was
entitled. The Bank also anticipates that the executive's estate and another
party may make certain additional claims with respect to a salary continuation
agreement between the executive and the Bank. Although the Bank believes it has
numerous meritorious defenses to these claims, the Bank may ultimately be
required to apply a portion of the insurance proceeds to any adverse judgment
with respect to such claims if the claims result in litigation, or to any
settlement with respect to such claims (which are currently undeterminable and
inestimable).
For the three months ended September 30, 2000, other operating income
totaled $736,000 compared to $458,000 for the same period in 1999. During the
third quarter of 2000, a gain on the sale of other repossessed assets of
$259,000 was recognized.
For the first nine months of 2000, excluding the life insurance
benefits of $3.7 million and the sale of repossessed assets of $259,000, other
operating income totaled $1.4 million, which was the same amount for the same
period in 1999.
.
OTHER OPERATING EXPENSE
Other operating expenses for the three months ending September 30, 2000
totaled $4.2 million compared to $3.6 million for the same period in 1999. The
increase was primarily due to a one-time $400,000 charge related to the
outsourcing of data processing and $256,000 of strategic planning expenses
related to merger activity.
Other operating expenses increased $422,000 to $11.3 million for the
first nine months of 2000 from $10.5 million for the same period in 1999.
Salaries and other employee benefits increased approximately $460,000 to $5.6
million for the first nine months of 2000 from $5.2 million for the same period
in 1999. The increase primarily relates to an increase in salaries and
increased group health insurance expenses. Strategic planning expense includes
$256,000 in merger related activity for the first nine months as compared to
$42,000 during the same period in 1999. Other expense includes a one-time
$400,000 charge related to the outsourcing of data processing. Other
fluctuations include the decrease in professional services which were offset
partially by the increase in FDIC assessments.
INCOME TAXES
For the three and nine months ended September 30, 2000, no provision
for income tax was recorded due to the Company's net operating loss
carryforwards that are available. For the three and nine months ended September
30, 1999, the Company recorded a tax benefit of $1.2 million and $1.3 million,
respectively.
18
<PAGE>
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
The Company reported total investment securities of $63.2 million at
September 30, 2000. This represented a decrease of $500,000, or 0.8%, from $63.7
million at December 31, 1999.
Securities available-for-sale increased $2.6 million, or 5.8%, to $47.7
million at September 30, 2000 compared to $45.1 million at December 31, 1999.
The unrealized loss on securities held-for-sale decreased $785,000, or 29.5%, to
$1.9 million as of September 30, 2000 compared to $2.7 million at December 31,
1999. The following table sets forth the amortized cost and fair value of
securities available-for-sale as of September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(Dollars in thousands) COST GAIN LOSS VALUE
---------------------- ---- ---- ---- -----
U.S. Government agency and
<S> <C> <C> <C> <C>
Mortgage-backed securities 42,047 $ 7 $ 1,609 $ 40,445
Small Business Administration securities 601 10 - 611
Municipal securities 2,550 - 100 2,450
Collateralized mortgage obligations 4,344 - 185 4,159
-------------- ----------- -------------- -----------
Total $ 49,542 $ 17 $ 1,894 $ 47,665
============== =========== ============== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(Dollars in thousands) COST GAIN LOSS VALUE
U.S. Government agency and
<S> <C> <C> <C> <C>
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 September 30, 2000, no securities
available-for-sale were sold and $2.5 million of securities were purchased and
classified as available for sale.
20
<PAGE>
Securities held-to-maturity decreased $3.0 million, or 16.1%, to $15.6
million at September 30, 2000, from $18.6 million at December 31, 1999. The
amortized cost and fair value of securities held-to-maturity as of September 30,
2000, and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(Dollars in thousands) COST GAIN LOSS VALUE
---- ---- ---- -----
<S> <C> <C> <C> <C>
FRB Stock $ 405 $ - $ - $ 405
U.S. Government securities 3,022 6 6 3,022
U.S. Government agency securities 1,425 - 25 1,400
U.S. Government agency - - - -
mortgage-backed securities 10,708 2 133 10,577
------ - --- ------
Total $ 15,560 $ 8 $ 164 $ 15,404
================ ========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(Dollars in thousands) COST GAIN LOSS VALUE
---- ---- ---- -----
<S> <C> <C> <C> <C>
FRB Stock $ 439 $ - $ - $ 439
U.S. Government securities 3,032
10 25 3,017
U.S. Government agency securities 31
1,750 - 1,719
U.S. Government agency - - - -
mortgage-backed securities 13,418 253 13,165
------- ------------ ---- -------
Total $ 18,639 $ 10 $ 309 $ 18,340
============== ========= =========== =============
</TABLE>
21
<PAGE>
LOANS
The following table sets forth the amount of loans outstanding by
category and the percentage of each category to the total loan portfolio.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- -------------------
(Dollars in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Commercial $ 87,646 75.49 % $ 124,403 76.52 %
Real estate secured 21,926 18.89 27,538 16.94
------ ----- -----
109,572 94.38 151,941 93.46
Equity lines of credit 2,953 2.54 4,330 2.66
Other lines of credit 1,579 1.36 4,689 2.88
Installment 1,992 1.72 1,608 1.00
----- ---- ----- ----
Gross loans 116,096 100.00 % 162,568 100.00 %
Less:
Allowance for loan losses (5,458) (5,873)
Deferred loan fees, net (130) (211)
------------ ------------
Net loans $ 110,508 $ 156,484
============ ============
</TABLE>
Gross loans outstanding decreased by $46.5 million, or 28.6%, to $116.1
million at September 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 cash secured loan. In addition, $8 million in loan payoffs from five
borrowers were received at the Company's request. The request for payoffs were
made as part of the Company's effort to reduce its concentration in large loans.
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 75% and 77% of gross
loans at September 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.
22
<PAGE>
LARGE LOANS
As of September 30, 2000, the Company had 26 client relationships where
the total amount of loans outstanding and available credit from loan commitments
exceeded $2.0 million for any single borrower/relationship. As of September 30,
2000, the Company had $52.6 million in loans outstanding, representing 45.3% of
gross loans and $17.3 million of credit available to these relationships. As of
September 30, 2000, two relationships had $5.5 million in loans outstanding that
were on non-accrual status. In addition to the 26 client relationships discussed
above, there were two other large loan relationships with approximately $3.9
million charged-off during the year and $1.9 million on non-accrual status as of
September 30, 2000.
As of September 30, 2000, there was one client relationship, with
loans outstanding totaling $3.3 million, that had loan amounts outstanding and
available loan commitments that were in excess of the Company's current legal
lending limit and were 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 these borrowers are "grandfathered"
until any of the borrower's credit facilities mature at which time the Company
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. In connection with management's effort to reduce the concentration in
large loans, $8.0 million of these loans were paid off at the Bank's request
during 2000.
As of December 31, 1999, the Company 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.
As of December 31, 1999, there were four client relationships, with loans
outstanding totaling $14.9 million, that had loan amounts outstanding and
available loan commitments that were in excess of the current legal lending
limit and were 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 these borrowers 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 and has been focusing its efforts on reducing the
concentration and risk of large loans. These efforts may include selling an
entire loan, selling a portion of a loan to other lending institutions and
restructuring loans when appropriate. Additionally, the management adopted a
house limit, which is lower than the legal lending limit, for evaluating any
future lending commitments.
DELINQUENCIES
Loans 30-89 days past due decreased $2.0 million, or 36.4%, to $3.5
million as of September 30, 2000 from $5.5 million at December 31, 1999.
Approximately $500,000 of this decrease resulted from a single loan that was
paid in full and $1.5 million of loans that were put on non-accrual status.
Loans over 90 days past due and still accruing decreased $2.5 million,
or 86.2%, to $437,000 for September 30, 2000 from $2.9 million at December 31,
1999. The decrease was comprised of $1.8 million of loans that were put on
non-accrual status and one loan in the amount of $655,000 that was paid in full.
23
<PAGE>
The following table sets forth information about nonperforming assets
(which include nonaccrual loans, other real estate owned and other repossessed
assets), accruing loans 90 days or more past due, and certain ratios.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 2000 1999
---- ----
<S> <C> <C>
Nonperforming loans $ 12,481 $ 8,412
Other repossessed assets
- -
Total nonperforming assets $ 12,481 $ 8,412
============= =============
Accruing loans 90 days or more past due $ 437 $ 2,891
============= =============
Allowance for loan losses as a percent of nonperforming
loans 43.73 % 69.82 %
Nonperforming loans to gross loans(1) 10.75 % 5.17 %
Nonperforming assets(1)
to gross loans 10.75 % 5.17 %
to gross loans, OREO and repossessed assets 10.75 % 5.17 %
to total assets 4.35 % 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 $12.5 million at September 30, 2000
from $8.4 million at December 31, 1999. This increase was primarily due to nine
borrowers with loans totaling $11.1 million being placed on nonaccrual status
partially offset by $4.6 million of these loans that were charged-off during the
nine months ended September 30, 2000.
The $437,000 of loans over 90 days or more past due and still accruing
as of September 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 loans
over 90 days or more past due and still accruing as of December 31, 1999, loans
totaling $1.8 million were placed on non-accrual status and one loan in the
amount of $655,000 was paid in full during the nine months ended September 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.
24
<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. Among other things, 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 September 30, 2000, management believes a $5.5 million
allowance for loan losses, which constitutes 4.9% 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. 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 Company to record additions or deletions to the
allowance based on their assessment of information available to them at the time
of their examination.
24
<PAGE>
The following table provides a summary of the Company's allowance for
loan losses and charge-off and recovery activity during the nine months ended
September 30, 2000, and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, SEPTEMBER 30,
(dollars in thousands) 2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $ 5,873 $ 2,200
Provision for loan losses 4,547 5,598
---------------- -----------------
10,420 7,798
---------------- -----------------
Loans charged-off 5,433 1,690
Recoveries on loans previously charged-off (471) (105)
---------------- -----------------
Net charge-off (recoveries) 4,962 1,585
--
---------------- -----------------
Balance at end of period $ 5,458 $ 6,213
================== ===============
Gross loans outstanding at end of period $ 110,508 $ 149,170
Average gross loans outstanding during period 141,690 137,675
Net charge-offs (recoveries) to average loans outstanding 3.50 % 1.15 %
Allowance for loan losses:
to gross loans 4.94 % 4.17 %
to nonperforming loans(1) 43.73 % 143.65 %
to nonperforming assets(1) 43.73 % 135.15 %
<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 $5.5 million at September 30,
2000 compared to $6.2 million at September 30, 1999.
Loans charged-off for the nine months ended September 30, 2000
increased to $5.4 million compared to $1.7 million for the same period in 1999.
The increase was primarily due to four large loan relationships totaling $4.6
million that were charged-off in the third quarter of 2000. Loans charged-off
during the first nine months of 1999 included a single loan of $1.5 million.
Recoveries for the nine months ended September 30, 2000 increased to
$471,000, compared to $105,000 for the same period in 1999. The increase was
primarily due to the recovery on one loan totaling $210,000.
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 $12.7 million in impaired loans as of September 30,
2000. The carrying value of impaired loans for which there is a related
allowance for loan losses was $5.7 million, with the amount of specific
allowance for loan losses allocated to these loans of $1.9 million. There was
$7.0 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 third quarter of 2000 was
approximately $14.2 million and there was no income recorded utilizing either
the cash basis or accrual basis method of accounting. Impaired loans at
September 30, 2000 included $12.5 million of nonaccrual loans.
26
<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 September 30, 2000 were $266.8 million, an increase
of $10.8 million, or 4.2%, 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 September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
(Dollars in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $ 119,816 44.90 % $ 109,561 42.79 %
Demand, interest-bearing 14,244 5.34 6.26
16,033
Savings deposits 16,048 6.01 4.92
12,606
Money market deposits 92,690 34.74 28.19
72,177
Time deposits under $100,000 6,972 2.61 7,222 2.82
Time deposits of $100,000 and over 17,051 6.40 38,429 15.02
------ ---- ------- -----
$ 266,821 100.00 % $ 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 the Company'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.
27
<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 September 30, 2000.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- -------------------------- --------------------------------
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
COMPANY
<S> <C> <C> <C> <C> <C> <C>
Leverage (1) $ 16,304 6.13 % $ 10,635 4.00 % $ 13,294 5.00 %
Tier 1 Risk-Based 16,304 10.50 % 6,209 4.00 % 9,313 6.00 %
Total Risk-Based 18,967 12.22 % 12,417 8.00 % 15,522 10.00 %
BANK
Leverage 15,417 5.84 % 10,566 4.00 % 13,208 5.00 %
Tier 1 Risk-Based 15,417 10.00 % 6,166 4.00 % 9,249 6.00 %
Total Risk-Based 17,387 11.28 % 12,333 8.00 % 15,416 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. 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
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
28
<PAGE>
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 addition, the Bank has prepared additional organizational and policy
revisions, and revised and expanded the Bank's loan portfolio management
program. The Bank also developed and implemented a three-year strategic plan as
well as profit and capital plans.
The Formal Agreement requires the Bank to achieve, by September 30,
2000, and to maintain, (i) a Tier 1 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 Bank met and
exceeded these requirements as of September 30, 2000.
The following table sets forth the actual and required capital ratios
for the Bank as of September 30, 2000:
<TABLE>
<CAPTION>
REQUIRED BY THE
FORMAL EXCESS
ACTUAL AGREEMENT (DEFICIENCY)
------------ --------- ----------- ---------- ------------ ----------
(Dollars in AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
thousands)
------------ --------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $ 15,417 5.84 $ 13,208 5.00 $ 2,209 0.84 %
Tier 1 Risk Based 15,417 10.00 9,249 6.00 6,168 4.00
Total Risk Based 17,387 11.28 15,416 10.00 1,971 1.28
</TABLE>
As of September 30, 2000, the Bank met the "well-capitalized" criteria.
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, appointing 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 nine months ended September 30, 2000, no notes were converted into
shares of common stock. The principal balance of notes outstanding at September
30, 2000 was $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
September 30, 2000, federal funds sold averaged $57.7 million, compared to $24.4
million for the same period in 1999. In addition, securities in the
29
<PAGE>
available-for-sale portfolio can be sold in response to liquidity needs or used
as collateral under reverse repurchase agreements. Securities held-to-maturity
are available for liquidity needs primarily as collateral for reverse repurchase
agreements. The fair value of securities available-for-sale and securities
held-to-maturity at September 30, 2000, were $47.7 million and $15.4 million,
respectively.
The Bank sells securities under agreements to repurchase. Securities
sold under repurchase agreements are recorded as short-term obligations. During
the nine months ended September 30, 2000, there were no securities sold under
agreements to repurchase.
Under federal banking law, dividends declared by the Bank in any
calendar year may not, without the approval of the OCC, exceed its net earnings,
as defined, for that year combined with its retained net earnings for the
proceeding two years. The Company's primary source of liquidity is dividends
from the Bank. Dividends by the Bank to the Company are subject to regulatory
restrictions. At September 30, 2000, the Company had cash of $101.4 million.
Under applicable law, the Bank cannot currently, and for the next several years
will probably not be able to, pay dividends to the Company without 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 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.
30
<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
---- ---- ---- ---- ---- ----- ----- -----
(DOLLARS IN THOUSANDS)
ASSETS (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES
U.S. government securities
Fixed $ $ 1,007 $ - $ 2,016 $ - $ - $ 3,023 $ 3,022
-
Weighted average - 6.81 % - 5.89 % - - 6.20 %
interest rate
U.S. government agency and
mortgage-backed securities
Fixed - - 1,361 4,626 185 35,318 41,490 39,990
Weighted average - - 7.18 % 6.91 % 7.01 % 6.44 % 6.52 %
interest rate
Variable - - - - - 12,688 12,688 12,432
Weighted average - - - - - 6.47 % 6.47 %
interest rate
Municipal securities
Fixed - - - - - 2,550 2,550 2,450
Weighted average - - - - - 4.27 % 4.27 %
interest rate
Small Business Administration
securities
Variable - - - - - 601 601 611
Weighted average - - - - - 6.48 % 6.48 %
interest rate
Collateralized mortgage
securities
Fixed - - - - - 4,346 4,346 4,159
Weighted average - - - - - 6.54 % 6.54 %
interest rate
Federal Reserve Bank Stock
Fixed - - - - - 405 405 405
Weighted average - - - - - 6.08 % 6.08 %
interest rate
LOANS
Fixed 4,909 2,680 4,382 1,450 8,896 4,360 26,677 26,263
Weighted average
interest rate 8.21 % 7.20 % 8.10 % 8.32 % 8.16 % 8.49 % 8.13 %
Variable 28,575 19,973 7,907 8,703 15,955 8,307 89,420 89,420
Weighted average
interest rate 10.19 % 10.47 % 10.58 % 10.66 % 10.70 % 10.49 % 10.45 %
</TABLE>
31
<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
---- ---- ---- ---- ---- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES (1)
DEPOSITS
Noninterest-bearing transaction 119,815 $ - $ - $ - $ - $ - $ 119,815 $ 119,815
accounts
Weighted average 0.00 % - - - - - 0.00 %
interest rate
Interest-bearing transaction 14,244 - - - - - 14,244 14,244
accounts
Weighted average 0.73 % - - - - - 0.73 %
interest rate
Savings and money market accounts 108,738 - - - - - 108,738 108,738
Weighted average 2.14 % - - - - - 2.14 %
interest rate
Certificates of deposit and
other time deposits
Fixed 18,744 5,265 14 - - - 24,023 24,117
Weighted average 4.18 % 4.51 4.40 - - - 4.25 % %
interest rate
CONVERTIBLE NOTES - - - - 679 - 679 679
Weighted average - - - - 8.09 % - 8.09 %
interest rate
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.
32
<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
--------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
----------------------------
On August 10, 2000, First Community Bancorp filed a Registration Statement
on Form S-4 to register the securities to be exchanged for the Company's
stock pursuant to the terms of the merger agreement. The Form S-4 also
contains a proxy statement for a special meeting of the Company's
shareholders to be held on December 12, 2000, at which shareholders will be
asked to approve the merger agreement and related matters.
33
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO.
-----------
3.1 Articles of Incorporation (filed as Exhibit 3.3 to 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).
34
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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, 1999 (filed as Exhibit
10.24 in the Company's 1999 10-K Report and incorporated
herein by this reference).
35
<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 between Robert Dyck
and the Bank (filed as Exhibit 10.26 in the Company's June 30,
2000 10-Q Report and incorporated herein by this reference).
10.27* Employee agreement dated March 6, 2000 between Athar Khan and
the Bank (filed as Exhibit 10.27 in the Company's June 30,
2000 10-Q Report and incorporated herein by this reference).
10.28* Employee agreement dated April 4, 2000 between Patti Derry and
the Bank (filed as Exhibit 10.28 in the Company's June 30,
2000 10-Q Report and incorporated herein by this reference).
10.29* Employee agreement dated May 11, 2000 between Jae Souverielle
and the Bank (filed as Exhibit 10.29 in the Company's June 30,
2000 10-Q Report and incorporated herein by this reference).
21 Subsidiaries of the Registrant (filed as Exhibit 21 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 June 30, 2000 10-Q Report and
incorporated herein by this reference)
27 Financial Data Schedule
*Identified as a management contract or compensatory agreement.
36
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(b) REPORTS ON FORM 8-K
A Form 8-K was filed on August 11, 2000 announcing the excecution of a
definitive merger agreement between Professional Bancorp and First Community
Bancorp.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
PROFESSIONAL BANCORP, INC.
--------------------------
(Registrant)
Date: November 14, 2000 /S/GENE F. GAINES
---------------------
Gene F. Gaines
Chief Executive Officer and President
Date: November 14, 2000 /S/ LARRY PATAPOFF
---------------------
Larry Patapoff
Chief Financial Officer
37
