-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFuO3AsMkt4qkX8IU03l1eNIXXVJe8UPyCBvzLynqG4dbcEWIqMLxuUKDyLt15I3 oerRk0UuDLathv/6G9lLXQ== 0000909012-00-000382.txt : 20000516 0000909012-00-000382.hdr.sgml : 20000516 ACCESSION NUMBER: 0000909012-00-000382 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFESSIONAL BANCORP INC CENTRAL INDEX KEY: 0000700914 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953701137 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10937 FILM NUMBER: 636115 BUSINESS ADDRESS: STREET 1: 606 BROADWAY CITY: SANTA MONICA STATE: CA ZIP: 90401 BUSINESS PHONE: 3104581521 MAIL ADDRESS: STREET 1: 606 BROADWAY STREET 2: 606 BROADWAY CITY: SANTA MONICA STATE: CA ZIP: 90401 FORMER COMPANY: FORMER CONFORMED NAME: PROFESSIONAL BANCORP /CA/ DATE OF NAME CHANGE: 19890904 10-Q 1 QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NUMBER: 0-11223 PROFESSIONAL BANCORP, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 95-3701137 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 606 BROADWAY SANTA MONICA, CALIFORNIA 90401 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 458-1521 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO As of May 1, 2000, 2,030,754 shares of the Registrant's $0.008 par value common stock were outstanding. ================================================================================ PROFESSIONAL BANCORP, INC. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Independent Accountants Report 3 Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 4 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 5 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2000 and 1999 6 Consolidated Statements of Changes in Shareholders Equity for the three months ended March 31, 2000 and 1999 7 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Changes in Securities 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters To A Vote of Security Holders 28 Item 5. Other Information 28 Item 6 Exhibits and Reports on Form 8-K 29 SIGNATURES 32
2 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS Independent Accountant's Report To the Board of Directors and Shareholders Professional Bancorp, Inc. and Subsidiary We have reviewed the accompanying condensed consolidated balance sheet of Professional Bancorp, Inc. and Subsidiary as of March 31, 2000 and the related condensed consolidated statements of operations and comprehensive loss, changes in shareholder's equity, and cash flows for the three months ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our review was conducted in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Professional Bancorp, Inc. and Subsidiary as of December 31, 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the year then ended not presented herein; and in our report dated January 28, 2000 (except for Note 8 and Note 11 as to which the dates are February 1, 2000 and March 22, 2000, respectively) we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly presented, in all material respects, in relation to the balance sheet from which it has been derived. Moss Adams LLP Los Angeles, California May 11, 2000 3
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands) MARCH 31, DECEMBER 31, 2000 1999 ---- ---- (UNAUDITED) (AUDITED) ASSETS Cash and due from banks: Noninterest-bearing $ 26,817 $ 15,721 Interest-bearing 797 697 Federal funds sold 38,500 27,000 ----------- ------------- Cash and cash equivalents 66,114 43,418 Securities available-for-sale (cost of $48,803 and $48,187 in 2000 and 1999, respectively) 45,949 45,525 Securities held-to-maturity (fair value of $17,232 and $17,901 in 2000 and 1999, respectively) 17,519 18,200 Loans (net of allowance for loan losses of $6,984 and $5,873 in 2000 and 1999, respectively) 48,339 156,484 Premises and equipment, net 1,084 1,152 Deferred tax asset 2,844 2,844 Accrued interest receivable and other assets 5,922 5,867 ----------- ------------- TOTAL ASSETS $ 287,771 $ 273,490 =========== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits: Demand, noninterest-bearing $ 115,130 $ 109,561 Demand, interest-bearing 15,787 16,033 Savings and money market 94,044 84,783 Time deposits 45,583 45,651 ----------- ------------- Total deposits 270,544 256,028 Convertible notes 679 679 Accrued interest payable and other liabilities 1,864 1,915 ----------- ------------- Total liabilities 273,087 258,622 ----------- ------------- Commitments and contingent liabilities Shareholders' equity: Common stock, $.008 par value; 12,500,000 shares Authorized; 2,100,221 issued and 2,030,754 outstanding in both 2000 and 17 17 Additional paid-in-capital 21,271 21,271 Accumulated deficit (3,210) (3,221) Treasury stock, at cost (69,467 shares in both 1999 (537) (537) Unrealized loss on securities available-for-sale, net of taxes (2,857) (2,662) ----------- ------------- Total shareholders' equity 14,684 14,868 ----------- ------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ $ 287,771 273,490 =========== =============
See accompanying notes to consolidated financial statements. 4
PROFESSIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31, (In thousands) -------------------------- 2000 1999 ------------ ------------ INTEREST INCOME Loans $ 3,575 $ 2,884 Securities 1,007 1,322 Federal funds sold and securities purchased under agreements to resell 472 83 Interest-bearing deposits in other banks 5 32 ------------ ------------ TOTAL INTEREST INCOME 5,059 4,321 ------------ ------------ INTEREST EXPENSE Deposits 998 724 Convertible notes 11 16 Federal funds purchased and securities sold under agreements to repurchase - 109 ------------ ------------ TOTAL INTEREST EXPENSE 1,009 849 ------------ ------------ NET INTEREST INCOME 4,050 3,472 Provision for loan losses 1,093 125 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,957 3,347 ------------ ------------ OTHER OPERATING INCOME Net gain (loss) on sale securities - 35 available-for-sale Merchant discount 72 62 Mortgage brokering fees 5 55 Service charges on deposits 235 229 Other income 138 135 ------------ ------------ TOTAL OTHER OPERATING INCOME 450 516 ------------ ------------ OTHER OPERATING EXPENSES Salaries and employee benefits 1,847 1,705 Occupancy 367 387 Furniture and equipment 174 209 Meetings and business development 15 73 Donations 11 24 Other promotion 64 70 Legal fees 130 92 Audit, accounting and examinations 52 43 Professional services 313 308 Strategic planning and other outside 28 6 consulting Office supplies 52 63 Telephone 98 62 Postage 33 36 Messenger service 16 6 FDIC assessment 29 6 Other assessments 40 44 Other expense 127 160 ------------ ------------ TOTAL OTHER OPERATING EXPENSES 3,396 3,294 ------------ ------------ Earnings before taxes 11 569 Provision for income taxes - 233 ============ ============ NET EARNINGS $ 11 $ 336 ============ ============ EARNINGS PER SHARE Basic $ 0 $ $0.17 Diluted $ 0 $ $0.16
5
PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended March 31, -------------------------------- 2000 1999 -------------- -------------- (In thousands) Net earnings $ 11 $ 336 Other comprehensive income, net of tax - - Unrealized holding gains (losses) arising during the period (195) (179) Reclassification adjustment - - -------------- -------------- Other comprehensive income (195) (179) -------------- -------------- Comprehensive income (Loss) $ (184) $ 157 ============== ==============
See accompanying notes to consolidated financial statements. 6
PROFESSIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY THREE MONTH PERIOD ENDING MARCH 31, 2000 RETAINED ACCUMULATED ADDITIONAL EARNINGS OTHER COMMON STOCK PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE (in thousands) SHARES AMOUNT CAPITAL DEFICIT) STOCK INCOME (LOSS) TOTAL ------ ------ ------- -------- ----- ------------- ----- Balance, December 31, 1999 2,030,754 $ 17 $ 21,271 $ (3,221) $ (537) $ (2,662) $ 14,868 Conversion of Notes (Note 12) Cash Dividends - - - - - - - Change in net unrealized holding loss on securities available-for-sale - - - - - (195) (195) Net earnings (loss) - - - 11 - - 11 ----------------------------------------------------------------------------------------------- Balance, March 31, 2000 2,030,754 $ 17 $ 21,271 $ (3,210) $ (537) $ (2,857) $ 14,684 =============================================================================================== See accompanying notes to consolidated financial statements. THREE MONTH PERIOD ENDING MARCH 31, 1999 RETAINED ACCUMULATED ADDITIONAL EARNINGS OTHER COMMON STOCK PAID-IN (ACCUMULATED TREASURY COMPREHENSIVE (in thousands) SHARES AMOUNT CAPITAL DEFICIT) STOCK INCOME (LOSS) TOTAL ------ ------ ------- -------- ----- ------------- ----- Balance, December 31, 1999 1,996,344 $ 17 $ 20,874 $ 5,239 $ (537) $ (271) $ 25,321 Conversion of Notes (Note 12) 18,663 215 - - - 215 Cash Dividends - - - - - - - Change in net unrealized holding loss on securities available-for-sale - - - - - (179) (179) Net earnings (loss) - - - 336 - - 336 ----------------------------------------------------------------------------------------------- Balance, March 31, 2000 2,015,007 $ 17 $ 21,089 $ 5,575 $ (537) $ (450) $ 25,693 ===============================================================================================
See accompanying notes to consolidated financial statements. 7 PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) T THREE MONTHS ENDED MARCH 31, 2000 1999 ----- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 11 $ 336 Adjustments to reconcile net earnings to net Cash provided by operating activities: Depreciation and amortization 96 113 Provision for loan losses 1.094 125 (Gain) loss on sales of securities available-for-sale - (35) Amortization of convertible note expense 11 5 Increase in deferred tax asset - (137) Decrease (increase) in accrued interest receivable and other assets (56) 366 Increase (decrease) in accrued interest payable and other (62) (175) liabilities Net amortization of premiums and discounts on securities held-to-maturity 34 65 Net amortization of premiums and discounts on securities available-for-sale 36 90 -------------- ------------ Net cash provided by operating activities 1,164 753 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from: Maturities of securities held-to-maturity - 250 Maturities of securities available-for-sale - - Sales of securities available-for-sale - 25,592 Principal payments and maturities of: Mortgage-backed securities held-to-maturity 647 1,746 Mortgage-backed securities available-for-sale 643 3,871 Purchases of securities available-for-sale (1,305) (499) Net (increase) decrease in loans 7,052 (15,852) Purchase of bank premises and equipment, net (28) (113) -------------- ------------ Net cash provided by investing activities 7,016 14,995 -------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits and savings accounts 14,584 (14,257) Net increase (decrease) in time deposits (68) 3,827 Cash dividends - - ---------------- ---------------- Net cash provided by (used in) in financing activities 14,516 (10,430) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,696 5,318 ---------------- ---------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,419 31,965 ---------------- ---------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66,114 37,283 ================ ================ Supplemental disclosure of cash flow information Cash paid during the period for: Interest 865 697 Income taxes - 145 Supplemental disclosure of noncash items: Pretax change in unrealized losses on securities available for sale (195) (179) securities Conversion of notes - 215
See accompanying notes to consolidated financial statements. 8 PROFESSIONAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The unaudited consolidated financial statements included herein have been prepared by Professional Bancorp, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the periods covered have been made. Certain information and note disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures are adequate to make the information presented not misleading. The financial position at March 31, 2000, and the results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2000. These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles on a basis consistent with the Company's audited financial statements, and these interim financial statements should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1999. 9 NOTE 2 - EARNINGS PER SHARE The actual number of shares outstanding at March 31, 2000 was 2,030,754. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings.
THREE MONTHS ENDED MARCH 31, ---------------------------------- ----------------- ---------------- 2000 1999 (In thousands) Net Income used in basic earnings per share computation $ 11 $ 336 Adjustments to net income per assumed effect of dilutive securities: Interest on convertible notes, net of tax effect - 16 ---------- ------------- Adjusted earnings used in diluted earnings per share computation $ 11 $ 352 ---------- ------------- Weighted average number of shares outstanding for computation basic earnings per share 2,030,754 2,007,127 Effect of dilutive securities: Options and warrants (a) 65,018 Convertible notes (a) 77,101 ---------- ------------- Weighted average number of shares outstanding for calculation of diluted earnings per share 2,030,754 2,149,246 Basic earnings per share $ 0.00 $ 0.17 Diluted earnings per share $ 0.00 $ 0.16 (a) No effect has been given to dilutive securities because the impact is anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Professional Bancorp, Inc. (the "Company") is the holding company for First Professional Bank, N.A. (the "Bank"). Since the Bank constitutes substantially all the business of the Company, references to the Company in this Item 2 reflect the consolidated activities of the Company and the Bank. For a more complete understanding of Professional Bancorp and its operations, reference should be made to the financial statements in this report and in the Company's 1999 Annual Report on Form 10K. Certain statements in this report on Form 10Q constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which the Company conducts operations, fluctuations in interest rates, credit quality, year 2000 data systems compliance, and government regulations. For additional information concerning these factors, see "Item 1. Business - Factors That May Affect Results" contained in the Company's Annual Report on Form 10K for the year ended December 31, 1999. 10 RESULTS OF OPERATIONS The Company recorded net earnings of $11,000 for the first quarter of 2000, compared with net earnings of $336,000 or $0.17 per basic share for the first quarter of 1999. The Company had total assets of $287.8 million at March 31, 2000, compared to $249.2 million at March 31, 1999. Return on average shareholders' equity for the first quarter of 2000 and 1999, were 0.29% and 5.19%, respectively. Additionally, return on average assets for the first quarter of 2000 and 1999 were 0.02% and 0.53%, respectively. Total assets increased $14.3 million, or 5.2%, to $287.8 million at March 31, 2000 from $273.5 million at December 31, 1999. Total cash and cash equivalents increased $22.7 million, or 52.3% to $66.1 million from $43.4 million at December 31, 1999. Total investment securities decreased $257,000, or 0.4% to $63.5 million at March 31, 2000 compared to $63.7 million at December 31, 1999. Net loans decreased $8.1 million, or 5.2%, to $148.3 million at March 31, 2000 compared to $156.5 million at December 31, 1999. Commercial loans decreased $5.3 million, or 4.3% to $119.1 million from $124.4 million at December 31, 1999. At March 31, 2000 and December 31, 1999, there was a single cash secured loan of $12.8 million which was paid off in April 2000. Real estate secured loans increased $820,000, or 3.0%, to $28.4 million at March 31, 2000 compared to $27.5 million at December 31, 1999. At March 31, 2000, nonperforming loans totaled $9.9 million, or 6.4%, of gross loans compared with $8.4 million or 5.2% of gross loans at December 31, 1999. The allowance for loan losses as a percent of nonperforming loans was 70.7% at March 31, 2000 compared to 69.8% at December 31, 1999. Total deposits increased $14.5 million, or 5.7%, to $270.5 million at March 31, 2000 from $256.0 million at December 31, 1999. Other operating expense increased $102,000, or 3.1%, to $3.4 million for the first quarter of 2000 compared to $3.3 million for the same period in 1999. The increase was due primarily to higher staffing levels and increased legal fees associated with loan workout activities. The decrease of net earnings in the first quarter of 2000 is primarily due to increased provisions for loan losses. The Company recorded provisions for loan losses of $1.1 million for the three-month period ended March 31, 2000. This compares to a $125,000 provision recorded for the same period in 1999. The additional provision is primarily due to the deterioration of two large loans and a general increase in the allowance for loan losses during the quarter. NET INTEREST INCOME The Company's earnings depend primarily on net interest income, which is the difference between the interest and fees earned on loans and investments less the interest paid on deposits, borrowings and convertible notes. For the quarter ended March 31, 2000, net interest income increased 17.1% to $5.1 million from $4.3 million for the quarter ended March 31, 1999. The increase in net interest income for the first quarter of 2000 as compared to the same period in 1999 is primarily the result of a $30.6 million, or 13.4 %, increase in average interest earning assets. 11 Net interest income, when expressed as a percentage of average total interest earning assets, is referred to as the net interest margin. The Company's net interest income is affected by the change in the amount and mix of interest-earning assets and interest-bearing liabilities. It is also affected by changes in yields earned on interest-earning assets and rates paid on deposits and other borrowed funds. The net interest margin was 6.27%, for the first quarter of 2000 compared to 6.18% for the same period in 1999. Average yield on interest earning assets increased 14 basis points to 7.83% for the three months ended March 31, 2000 from 7.69% for the same period in 1999. Average cost on interest bearing liabilities decreased 5 basis points to 2.55% for the three months ended March 31, 2000 from 2.60% for the same period in 1999. Average noninterest bearing demand deposits for the first quarter of 2000 increased $18.0 million, or 18.9%, to $113.6 million from $95.6 million for the same period in 1999. Average federal funds sold increased $25.7 million, or 363.5%, to $32.8 million for the three months ended March 31, 2000 from $7.1 million for the same period in 1999. The average yield on federal funds increased 99 basis points to 5.77% for the first quarter of 2000 from 4.78% for the same period in 1999. The result was an increase in interest on federal funds sold to $472,000 for the first quarter of 2000 compared to $83,000 for the same period. Average total investment securities decreased $28.5 million, or 31.0%, to $63.3 million for the three months ended March 31, 2000 from $91.8 million during the same period in 1999. The average yield on securities increased 52 basis points to 6.36% for the first quarter of 2000 from 5.84% for the same period in 1999. The net result was a decrease in interest on securities of $315,000 to $1.0 million for the first quarter of 2000 compared to $1.3 million for the same period in 1999. Average loans increased $34.4 million, or 27.0%, to $162.0 million for the three months ended March 31, 2000 from $127.6 million during the same period in 1999. While the volume of loans increased substantially, the benefit was partially offset by a decline in the yield on loans of 34 basis points to 8.83% for the first quarter of 2000 from 9.17% for the same period in 1999. The net result was an increase in interest on loans of $691,000 to $3.6 million for the first quarter of 2000 compared to $2.9 million for the same period in 1999. Average convertible notes decreased $279,000, or 29.1%, to $679,000 for the three months ended March 31, 2000 from $958,000 during the same period in 1999. Average securities sold under agreements to repurchase decreased to zero for the three months ended March 31, 2000 from $8.8 million during the same period in 1999. These borrowings were used primarily in the first quarter of 1999 to temporarily fund asset growth. The result of not borrowing in the first quarter of 2000 was a decrease in interest expense of $109,000 compared to the same period in 1999. 12 The following tables present the distribution of average assets, liabilities and shareholders' equity as well as the total dollar amount of interest income from average interest-earning assets and resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and rates for the three months ended March 31, 2000 and 1999.
THREE MONTHS ENDED MARCH 31, 2000 1999 ---------------------------------------- --------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ (in thousands) BALANCE RATE INTEREST BALANCE RATE INTEREST ------- ---- -------- ------- ---- -------- Assets Interest-earning assets: Securities $ 63,308 6.36 % $ 1,007 $ 91,809 5.84 % $ 1,322 Loans(1) 162,007 8.83 3,575 127,615 9.17 2,884 Federal funds sold 32,766 5.77 472 7,069 4.78 83 Interest-earning deposits - banks 421 4.97 5 1,400 9.11 32 ------------ -------- --------- --------- Total interest-earning assets 258,502 7.83 5,059 227,893 7.69 4,321 ------------ -------- --------- --------- Deferred loan fees (193) (204) Allowance for loan losses (5,998) (1,873) Noninterest-earning assets: Cash and due from banks 26,737 23,864 Premises and equipment 1,114 1,440 Other assets 9,083 6,021 ------------ ------------ Total assets $ 289,245 $ 257,141 ============ ============ Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits $ 14,300 0.69 % $ 25 $ 13,716 0.76 % $ 26 Savings and money market deposits 98,301 2.03 499 80,617 1.99 396 Time deposits under $100,000 6,505 3.93 64 8,699 4.32 93 Time deposits of $100,000 and over 38,794 4.23 410 19,776 4.28 208 Convertible notes 679 6.71 11 958 7.10 17 Repurchase agreements - - - 8,784 5.02 109 ------------ -------- --------- --------- Total interest-bearing 158,579 2.55 1,009 132,550 2.60 849 liabilities ------------ -------- --------- --------- Noninterest-bearing liabilities: Noninterest-bearing demand deposits 113,632 95,602 Other liabilities 1,891 3,078 Shareholders' equity 15,143 25,911 ------------ ------------ Total liabilities and $ 289,245 $ 257,141 shareholders' equity ============ ============ Interest income as a percentage of average Earning assets 7.83 % 7.69 % Interest expense as a percentage of average Interest-bearing liabilities 2.55 % 2.60 % Net interest margin and income 6.27 % $ $4,050 6.18 % $ $3,472 ====== ====== (1) Nonaccrual loans are included in average balances and rate calculations.
13 The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." It is also affected by changes in yields earned on interest-earning assets and interest rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change." The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the three months ended March 31, 2000 and 1999. The changes due to both rate and volume have been allocated to rate and volume in proportion to the relationship between their absolute dollar amounts.
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2000 MARCH 31, 1999 (in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ---- ----- ------ ---- ----- Increase (decrease) in interest income: Securities $ (443) $ 129 $ (314) $ 99 $ (62) $ 37 Loans 760 (71) 689 572 (163) 409 Federal funds sold 367 22 389 (136) (27) (163) Interest-bearing deposits - banks (16) (10) (26) 24 5 29 -------- -------- ------ ------- -------- ------- $ 668 $ 70 $ 738 559 (247) 312 -------- -------- ------ ------- -------- ------- Increase (decrease) in interest expense: Interest-bearing demand deposits $ 1 $ (2) $ (1) $ - $ (6) $ (6) Savings and money market deposits 88 2 90 1 (15) (14) Time deposits under $100,000 (25) 8 (17) 13 (6) 7 Time deposits of $100,000 and over 201 - 201 (34) (19) (53) Convertible notes (5) - (5) (78) (14) (92) Repurchase agreements (54) (54) (108) 106 - 106 -------- -------- ------ ------- -------- ------- 206 (46) 160 8 (60) (52) -------- -------- ------ ------- -------- ------- Increase (decrease) in net interest $ 462 $ 116 $ 578 $ 551 $ (187) $ 364 income ======== ======== ====== ======= ======== =======
14 PROVISION FOR LOAN LOSSES The provision for loan losses is determined by management based upon the Company's loan loss experience, the performance of loans in the Company's portfolio, the quality of loans in the Company's portfolio, evaluation of collateral for such loans, the economic conditions affecting collectibility of loans, the prospects and financial condition of the respective borrowers or guarantors and such other factors which in management's judgment deserve recognition in the estimation of probable loan losses. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance or to take charge-offs (reductions in the allowance) in anticipation of losses. The Company recorded provisions for loan losses of $1.1 million and $125,000 for the three month period ended March 31, 2000 and 1999, respectively. The provision for loan loss for the first quarter of 2000 was due primarily to the deterioration of two loans and a general increase in the allowance for loan losses. Net recoveries to average outstanding loans for the first three months of 2000 and 1999 were 0.01% and 0.03%, respectively. OTHER OPERATING INCOME For the three months ended March 31, 2000, other operating income totaled $450,000 compared with $516,000 for the same period in 1999. The decrease was primarily related to a $50,000 reduction in mortgage brokering fees on a comparative basis, for the periods presented. OTHER OPERATING EXPENSE Other operating expenses for the first three months of 2000 increased to $3.4 million from $3.3 million for the same period in 1999. The increase primarily occurred in salaries and other employee benefits and legal fees. Salaries and other employee benefits increased approximately $142,000 to $1.8 million for the first three months of 2000 from $1.7 million for the same period in 1999. The increase primarily relates to an increase in staff and salaries and increased group health insurance expenses. Legal fees and audit/accounting fees increased $47,000 during the first three months of 2000 as compared to the same period in 1999, primarily due to an increase of $38,000 in legal expenses related to lending activities. Legal expenses related to the workout of problem loans may be recovered after the loan is fully paid. INCOME TAXES For the three months ended March 31, 2000, there was no provision for income taxes compared to $233,000 for the same period in 1999. 15 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES The Company reported total investment securities of $63.5 million at March 31, 2000. This represented a decrease of $257,000, or 0.4% from $63.7 million at December 31, 1999. Securities available-for-sale increased $424,000, or 0.9%, to $45.9 million at March 31, 2000. The unrealized loss on securities held-for-sale was $2.9 million at the end of the first quarter. The following table sets forth the amortized cost and fair value of securities available-for-sale as of March 31, 2000 and December 31, 1999.
MARCH 31, 2000 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR (in thousands) COST GAIN LOSS VALUE - -------------- ---- ---- ---- ----- U.S. Government securities $ 1,291 $ - $ 1 $ 1,290 U.S. Government agency and mortgage-backed securities 36,737 - 2,122 34,615 Small Business Administration securities 636 - 10 626 Municipal securities 2,551 - 175 2,375 Federal Reserve Bank Stock 439 - 18 421 Collateralized mortgage obligations 7,152 - 531 6,622 -------------- ------------- --------------- -------------- Total $ 48,806 $ - $ 2,857 $ 45,949 ============== =============== ============= =============== DECEMBER 31, 1999 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR (in thousands) COST GAIN LOSS VALUE - -------------- ---- ---- ---- ----- U.S. Government securities $ - $ - $ - $ - U.S. Government agency and mortgage-backed securities 37,393 - 1,924 35,469 Small Business Administration securities 647 - 16 631 Municipal securities 2,551 - 173 2,378 Federal Reserve Bank Stock 439 - - 439 7,157 - 549 6,608 ------------- -------------- -------------- -------------- Total $ 48,187 $ - $ 2,662 $ 45,525 ============= ============== ============== ==============
During the three months ended March 31, 2000, no securities available-for-sale were sold. Also, during the first quarter, $1.3 million in U. S. treasury bills were purchased with a maturity date of June 6, 2000 and a yield of 5.77%. 16 Securities held-to-maturity decreased $681,000, or 3.7%, to $17.5 million at March 31, 2000, from $18.2 million at December 31, 1999. The amortized cost and fair value of securities held-to-maturity as of March 31, 2000, and December 31, 1999 are as follows:
MARCH 31, 2000 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR (in thousands) COST GAIN LOSS VALUE - -------------- ---- ---- ---- ----- U.S. Government securities $ 3,029 $ - $ 29 $ 3,000 U.S. Government agency securities 1,750 - 30 1,720 U.S. Government agency mortgage-backed securities 12,740 26 255 12,511 ------------- ------------- ------------ --------------- Total $ 17,519 $ 26 $ 314 $ 17,231 ============= ============= ============ =============== DECEMBER 31, 1999 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR (in thousands) COST GAIN LOSS VALUE - -------------- ---- ---- ---- ----- U.S. Government securities $ 3,032 $ 10 $ 25 $ 3,017 U.S. Government agency securities 1,750 - 31 1,719 U.S. Government agency - - - - mortgage-backed securities 13,418 253 13,165 ------------- ------------ ------------ ------------- Total $ 18,200 $ 10 $ 309 $ 17,901 ============= ============ ============ =============
17 LOANS The following table sets forth the amount of loans outstanding by category and the percentage of each category to the total loan portfolio.
MARCH 31, 2000 DECEMBER 31, 1999 --------------- ------------------- (in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL ------ ---------- ------ ---------- Commercial $ 119,115 76.60 % $ 124,403 76.52% Real estate secured 28,358 18.24 27,538 16.94 ---------- ------- ------------ ------ 147,473 94.84 151,941 93.46 Equity lines of credit 3,614 2.32 4,330 2.66 Other lines of credit 2,920 1.88 4,689 2.88 Installment 1,502 .96 1,608 1.00 ---------- ------- ------------ ------ Gross loans 155,509 100.00 % 162,568 100.00 % Less: Allowance for loan losses (6,984) (5,873) Deferred loan fees, net ---------- ------- ------------ ------ (186) (211) ----------- ------------ Net loans $ 148,339 156,484 =========== ============
Gross loans outstanding decreased by $7.0 million, or 4.34 %, to $155.5 million at March 31, 2000 compared to $162.6 at December 31, 1999. The table above indicates that the loan portfolio mix at March 31, 2000 was substantially the same as December 31, 1999. Commercial loans consist primarily of short to medium term financing for small to medium sized health care-related companies and professionals located in Southern California. The commercial loans are primarily concentrated in the same sectors of the medical community from which the Company's deposit base is drawn and consists of medical practitioners, small groups practices, large single-specialty groups, multi-specialty medical groups and other outpatient health care service companies. Approximately 77% of gross loans at March 31, 2000 and December 31, 1999 were commercial loans which were unsecured or collateralized by various business and personal property assets, including equipment and accounts receivable, contracts, and the proceeds thereof, including capitation payments. As a matter of policy, the Company's commercial loan borrowers are required to submit financial statements and other financial data (for example, accounts receivable agings and enrollment summaries) on a periodic basis, in conformity with loan policies and procedures and regulatory guidelines, to loan officers for their review in monitoring the financial position and cash flow trends of borrowers. Under this policy, management generally gives a higher level of attention to borrowers failing to submit the required financial information. Senior lending officers review delinquency reports, overdrafts, borrowers' payment histories and periodic financial data to monitor creditworthiness and identify potential problem loans. In accordance with management's credit administration and regulatory policy, loans are placed on nonaccrual status when the collection of principal or interest is questionable. Generally, this means that loans are placed on nonaccrual status when interest is 90 days or more past due, unless the loan is well secured and in the process of collection or in the process of renewal. Nonperforming loans and nonperforming assets do not include accruing loans 90 days or more past due where loan quality is not impaired, but rather the renewal in process is pending receipt of the borrower's updated financial information. Credit administrative policies discourage the use of "short-term" extensions while awaiting receipt of updated financial packages from borrowers. The policy is aimed at facilitating timely credit renewals. However, as a result of this policy, aggregate "past due" volumes will not necessarily be correlative to absolute asset quality measurement. 18 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.
MARCH 31, DECEMBER 31, (in thousands) 2000 1999 ---- ---- Nonperforming loans $ 9,884 $ 8,412 Other real estate owned (OREO) - - Other repossessed assets - - ------------- ------------- Total nonperforming assets $ 9,884 $ 8,412 ============== ============= Accruing loans 90 days or more past due $ 7,372 2,891 ============= ============= Allowance for loan losses as a percent of nonperforming loans 70.66 % 69.82 % Nonperforming loans to gross loans(1) 6.36 % 5.17 % Nonperforming assets(1) to gross loans 6.36 % 5.17 % to gross loans, OREO and repossessed assets 6.36 % 5.17 % to total assets 3.43 % 3.08 % (1) Nonperforming loans and nonperforming assets do not include accruing loans 90 days or more past due.
Nonperforming loans increased to $9.9 million at March 31, 2000 from $8.4 million at December 31, 1999. This increase was primarily due to a single borrower being placed on nonaccrual status during the first quarter of 2000. The $7.4 million in accruing loans over 90 days or more past due and still accruing as of March 31, 2000 were all in the process of being collected, renewed, paid off or the credit quality was not impaired. Of the $2.9 million in accrual loans over 90 days or more past due at December 31, 1999 one loan for $1.5 million remained in the category at March 31, 2000. Two additional large loans totaling $5.1 million were included in this category at March 31, 2000. Subsequent to March 31, 2000 one loan for $2.3 million was renewed and is current. The two other loans totaling $4.3 million have been placed on nonaccrual status. It is the Company's practice to discourage "short-term" extensions, these loans are carried as "past due" to ensure proper underwriting and administrative controls. ALLOWANCE FOR LOAN LOSSES Management's determination of the allowance for loan losses requires the use of estimates and assumptions related to the actual and inherent risks in the loan portfolio. Actual results may, however, differ significantly from such estimates. In connection with the determination of the allowance for loan losses where real estate secures the loan, management generally obtains independent appraisals for all properties. Management believes its current appraisal policy conforms to regulatory guidelines. An evaluation of the overall quality of the portfolio is performed at least quarterly to determine the level of the allowance for loan losses. This evaluation takes into consideration the classification of loans and the application of loss estimates attributable to these classifications. The Company classifies loans as pass, watch, special mention, substandard, doubtful, or loss based on classification criteria believed by management to be consistent with the criteria applied by regulatory agencies and consistent with sound banking practices. 19 These classifications and loss estimates take into consideration all sources of repayment, underlying collateral, the value of the collateral, current and anticipated economic conditions, trends and uncertainties and the historical accuracy of specific reserves attached to loans with serious perceived weakness. Additionally, the Company utilizes "migration analysis" as another means to assist management in estimating the level of the allowance for loan losses. Migration analysis is a statistical method that examines historic charge-off and classification trends prior to charge-off to estimate potential losses inherent in the loan portfolio. In addition, the Company utilizes a comprehensive program that considers numerous variables, of which migrations is one, to determine the adequacy of the allowance for loan losses for reserves nonspecific to certain credits. This program is consistent with the methodologies in Banking Circular 201. Amongst others, considerations is given to historical and current trends in past due loans, charged-off loans, nonaccruals, and the nature and mix of the loan portfolio; local, regional, industry, and national economic trends in determining loan loss adequacy. Finally, credit administration, corresponding loan polices and procedures, and timely problem loan identification are integral to the sound determination of the allowance for loan losses. Based on information available at March 31, 2000, management believes that a $7.0 million allowance for loan losses, which constitutes 4.49% of gross loans, was adequate as an allowance against probable and estimable losses. While the Company's policy is to charge-off in the current period those loans for which a loss is considered probable, there also exists the risk of future losses which cannot be precisely quantified or attributed to particular loans. As this risk continually changes in response to factors beyond the control of the Company, such as the state of the economy, management's judgement as to the adequacy of the allowance for loan losses in future periods, while approximate, is in part based on a reasonable methodology. In addition, various regulatory agencies, as an integral part of their examination process, review the Company's allowance for loan losses. Such agencies may require the Bank to record additions or deletions to the allowance based on their judgements of information available to them at the time of their examination. 20 The following table provides a summary of the Company's allowance for loan losses and charge-off and recovery activity during the three months ended March 31, 2000, and the three months ended March 31, 1999:
PERIOD ENDED ------------ MARCH 31, MARCH 31, (in thousands) 2000 1999 ---- ---- Balance at beginning of period $ 5,873 $ 2,200 Provision for loan losses 1,093 125 -------------- -------------- 6,966 2,325 -------------- -------------- Loan charge-offs 276 15 Recoveries on loans previously charged-off (294) (50) -------------- -------------- Net charge-offs (recoveries) (18) (35) -------------- -------------- Balance at end of period $ 6,984 2,360 ============== ============== Gross loans outstanding at end of period $ 155,509 $ 133,818 Average gross loans outstanding during period 162,007 127,615 Net charge-offs (recoveries) to average gross loans outstanding - % -0.30 % Allowance for loan losses: to gross loans 4.49 % 1.76 % to nonperforming loans(1) 70.66 % 97.40 % to nonperforming assets(1) 70.66 % 87.57 % (1) Nonperforming loans and nonperforming assets do not include accruing loans 90 days or more past due.
The allowance for losses on loans was $7.0 million at March 31, 2000, an increase of $1.1 million from at December 31, 1999. The increase was primarily due to the deterioration of two loans and an increase in the provision for loan losses relating to identified weaknesses in a small number of loans, of substantial dollar amounts, which may take an extended period of time to resolve. Net loan recoveries for the three months ended March 31, 2000 amounted to $18,000, as compared to $35,000 for the same period in 1999. Management considers a loan to be impaired when, based upon available information and current events, it believes that it is probable the Company will be unable to collect all amounts due on a timely basis in accordance with the contractual terms of the loan agreement. Impairment of a loan is measured by the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Impairment is recognized by the establishment of a valuation allowance equal to the excess of the Company's recorded investment in the loan over its measured value. The Company had $10.9 million in impaired loans as of March 31, 2000. The carrying value of impaired loans for which there is a related allowance for loan losses was $4.5 million, with the amount of specific allowance for loan losses allocated to these loans of $2.2 million. There was $6.4 million in impaired loans for which there were a general allowance allocated consistent with the Company's allowance for loan loss methodology. The average recorded investment in impaired loans during the first three months of 2000 was approximately $9.8 million and there was no income recorded utilizing either the cash basis and accrual basis method of accounting. Impaired loans at March 31, 2000 included $9.8 million of nonaccrual loans. 21 The Company had approximately $8.7 million in impaired loans as of December 31, 1999. The carrying value of impaired loans for which there is a related allowance for loan losses was $414,000, with the amount of specific allowance for loan losses allocated to these loans of $134,000. There were $8.3 million in impaired loans for which there was no related specific allowance for loan losses. The average recorded investment in impaired loans during 1999 was $4.4 million and there was no income recorded utilizing either the cash basis or accrual basis method of accounting. Impaired loans at December 31, 1999, included $8.4 million of nonaccrual loans. DEPOSITS Total deposits at March 31, 2000 were $270.5 million, an increase of $14.5 million or 5.7% from $256.0 at December 31, 1999. The Company attracts deposits primarily from individuals and businesses related to the health care services industry, as well as other professionals and professional services firms. The Company has no brokered deposits and the Company's practice is to not purchase brokered deposits. The following table sets forth the amount of deposits by category and the percentage of each category to total deposits as of March 31, 2000 and December 31, 1999:
MARCH 31, 2000 DECEMBER 31, 1999 (in thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL ------ ---------- ------ ---------- Demand, noninterest-bearing $ 115,130 42.55 % $ 109,561 42.79 % Demand, interest-bearing 15,787 583 16,033 6.26 Savings deposits 14,811 5.47 12,606 4.92 Money market deposits 79,233 29.29 72,177 28.19 Time deposits under $100,000 7,400 2.74 7,222 2.82 Time deposits of $100,000 and over 38,183 14.12 38,429 15.02 ------------ ----------- ------------ ----------- $ 270,544 100.00 % $ 256,028 100.00 % ============= =========== ============= ===========
At March 31, 2000 and December 31, 1999, there was a $12.8 million time deposit which was collateral for a loan of the same amount. The loan was paid off with this deposit in April, 2000. CAPITAL The Office of the Comptroller of the Currency (the "OCC"), the Bank's primary regulator, has established minimum leverage ratio guidelines for national banks. These guidelines provide for a minimum Tier 1 capital leverage ratio (Tier 1 capital to adjusted average total assets) of 3.0% for national banks that meet certain specified criteria, including having the highest regulatory rating. All other national banks will generally be required to maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an additional cushion of 100 to 200 basis points. The Federal Reserve Bank, as Bancorp's primary regulator, has similarly established minimum leverage ratio guidelines for bank holding companies. These guidelines also provide for a minimum Tier 1 leverage ratio of 3.0% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an additional cushion of 100 to 200 basis points. Federal banking agencies risk-based capital standards were implemented on December 31, 1992. Since December 31, 1992, banking organizations have been expected to meet a minimum ratio for qualifying total capital to risk-weighted assets of 8.0%, 4.0% of which must be Tier 1 capital. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and risk-weighted off-balance sheet items. 22 The Federal Deposit Insurance Act of 1991 contains "prompt corrective action" provisions pursuant to which insured depository institutions are to be classified into one of five categories based primarily upon capital adequacy, ranging from "well-capitalized" to "critically undercapitalized" and which require, subject to certain exceptions, the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "undercapitalized" and to take additional actions if the institution becomes "significantly undercapitalized" or "critically undercapitalized." The following table presents the capital ratios for the Company and the Bank, compared with the standards for "well-capitalized" depository institutions (which standards do not apply to bank holding companies) and the minimum required capital ratios to be deemed "adequately capitalized" under applicable federal regulations, as of March 31, 2000.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------------ -------------------------- --------------------------------- (in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- COMPANY Leverage (1) $ 14,983 5.23 % $ 11,449 4.00 % $ 14,311 5.00 % Tier 1 Risk-Based 14,983 9.25 % 6,479 4.00 % 9,718 6.00 % Total Risk-Based 17,748 10.96 % 12,958 8.00 % 16,197 10.00 % BANK Leverage 13,822 4.85 % 11,407 4.00 % 14,259 5.00 % Tier 1 Risk-Based 13,822 8.55 % 6,466 4.00 % 9,698 6.00 % Total Risk-Based 15,889 9.83 % 12,931 8.00 % 16,164 10.00 % (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.
As the Bank's principal regulator, the OCC examines and evaluates the financial condition, operations and policies and procedures of nationally chartered banks on a regular basis as part of its legally prescribed oversight responsibilities. The OCC conducted an examination of the Bank in 1999 and determined that the Bank required special supervisory attention. To implement this corrective action, the OCC and the Bank entered into a formal agreement ("Formal Agreement") on March 22, 2000. Pursuant to the Formal Agreement, the Bank is required to: maintain certain regulatory capital levels; appoint a full time president and a full time senior lending officer; establish a loan workout department; implement an overdraft policy; improve the management of the loan portfolio; establish an independent loan review system; immediately take action to protect the Bank's interest in criticized assets; establish an organizational structure with clear lines of authority for the CEO and President; develop a conflict of interest policy which includes relationships with officers, directors and consultants; develop a three year strategic plan; develop a profit plan to improve and sustain earnings and a capital plan to meet and maintain a well capitalized regulatory requirements. The agreement also establishes a schedule for compliance and requires additional regulatory reporting by the Bank. In early November, the Board hired Gene Gaines as Chief Executive Officer of the Bank; and effective February 1, 2000, Mr. Gaines was also appointed as the full time President and Chairman of the Board of the Bank and the Chairman of the Board and the Chief Executive Officer of the Company. Following that hiring, current management and the Boards of the Company and the Bank have implemented significant changes to the policies and organization of the Bank and the Company. In early December 1999, the Bank established a loan workout department and hired a senior vice president to review, develop and implement loan workout policies. In February, 2000, The Bank hired a full time Senior Lending Officer. 23 On February 15, 2000, the credit administration department revised and implemented certain policies regarding extensions of credit. On March 1, 2000, the Board revised the Bank's organizational structure to clarify the roles and responsibilities of the Bank's CEO and its President. On March 6, 2000, the Board authorized the 30-day notification for termination of the consulting agreement with Network Health Financial Services, Inc. In connection with the Formal Agreement, the Bank is preparing additional organizational and policy revisions, is hiring a permanent senior lending officer and is revising and expanding the Bank's loan portfolio management program. As a further commitment in its Formal Agreement, the Bank is developing and implementing a three-year strategic plan as well as profit and capital plans. These efforts are intended to meet the OCC's requirement that the Bank achieve the "well-capitalized" standard by September 30, 2000. The Formal Agreement requires the Bank to achieve by September 30, 2000 and to maintain (i) a capital leverage ratio equal to at least 5%, (ii) Tier 1 capital to risk weighted assets ratio equal to at least 6%, and (iii) a total capital to risk weighted assets of at least 10%. The following table sets forth the capital ratio for the Bank as of March 31, 2000 and the required ratios by September 30, 2000:
REQUIRED BY THE FORMAL EXCESS ACTUAL AGREEMENT (DEFICIENCY) ------------ --------- ----------- ---------- ------------ ---------- (In thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------ --------- ----------- ---------- ------------ ---------- Leverage $ 13,822 4.85 $ 14,259 5.00 $ (437) -0.15 Tier 1 Risk Based 13,822 8.55 9,698 6.00 4,124 2.55 Total Risk Based 15,889 9.83 16,164 10.00 (275) -0.17
The Company and the Bank, at March 31, 2000, were considered "adequately-capitalized". Capital requirements of the federal banking regulators, however, could limit the Company's future growth if the Company were to rely solely on the retention of earnings to generate additional capital or rapid growth. As the Company's principal regulator, the Federal Reserve Bank of San Francisco ("FRB") examines and evaluates the financial condition, operations and policies and procedures of bank holding companies on a regular basis as part of its legally prescribed oversight responsibilities. The FRB conducted an examination of the Company in 2000 and determined that the Company required special supervisory attention. To implement this corrective action, the FRB and the Company entered into a Memorandum of Understanding ("MOU") on April 26, 2000. Pursuant to the MOU, the Company is required to: obtain prior approval for dividend declarations or payments, increasing any borrowing or incurring any debt, repurchasing any of its stock, engaging in new lending activities, engaging in any new line of business, appoint a new director, or hiring or promoting any new senior executive officer; submit an acceptable capital plan to improve and maintain required capital levels and submit an acceptable plan to enhance the board's supervision of operations and management of the consolidated organization, including the policies and procedures related to credit administration. The agreement also establishes a schedule for compliance and requires additional regulatory reporting by the Company. On May 29, 1998, the Company gave notice of its' call for partial redemption of $2,625,000 principal amount of the Professional Bancorp, Inc., 8.50% Convertible Subordinated Reset Notes due March 1, 2004. As a result of this call, approximately $2,552,000 of the notes converted to 200,955 shares of common stock and $73,000 in notes were redeemed by the June 30, 1998 redemption date. For the first three months ended March 31, 2000, no notes were converted into shares of common stock. The principal balance of notes outstanding at March 31, 2000 were $679,000. 24 LIQUIDITY The Company's primary source of liquidity is dividends from the Bank. Dividends from the Bank to the Company are subject to certain regulatory restrictions. Under federal banking law, dividends declared by the Bank in any calendar year may not, without the approval of the OCC, exceed its net earnings, as defined, for that year combined with its retained net earnings for the proceeding two years. The Bank's primary sources of liquidity are federal funds sold to other banks and the investment securities portfolio. For the three months ended March 31, 2000, federal funds sold averaged $32.8 million, compared to $7.1 million for the same period in 1999. In addition, securities in the available-for-sale portfolio can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. Securities held-to-maturity are available for liquidity needs primarily as collateral for reverse repurchase agreements. The fair value of securities available-for-sale and securities held-to-maturity at March 31, 2000, were $45.9 million and $17.2 million, respectively. The Bank sells securities under agreements to repurchase. Securities sold under repurchase agreements are recorded as short-term obligations. During the first three months of 2000, there were no securities sold under agreements to repurchase. On a stand-alone basis, the Company's primary source of liquidity is dividends from the Bank. Dividends by the Bank to the Company are subject to regulatory restrictions. At March 31, 2000, the Company had cash of $432,000. Under applicable law, the Bank cannot currently, and for the next several years will probably not be able to, pay dividends to the Company with out the prior approval of the OCC. No assurance can be given that the OCC will permit the payment of dividends and the refusal to do so may require the Company to look to other sources of liquidity such as borrowings or the issuance of various types of securities. YEAR 2000 The Year 2000 issue presented a very real and significant challenge to the Company, along with the entire financial services industry. This problem had the potential to affect a wide range of systems and equipment, including software and hardware, utilities, communications platforms and devices, and facilities. The Year 2000 issue is the result of computer programs being written using two digits rather than four to represent the calendar year. Software so developed and not corrected could have produced inaccurate or unpredictable results when dates change in the year 2000. Such occurrences could have had a material adverse effect on the Company's financial condition, results of operations, or business as the Company, like most financial organizations, was significantly subject to the potential Year 2000 issues due to the nature of financial information. Management had successfully developed and implemented a Year 2000 Preparedness Plan. There is no known impact on the Company related to the Year 2000 issue. The Company will continue to monitor and test systems for each new century date milestone, including October 1, 2000. 25 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.
THERE FAIR 2000 2001 2002 2003 2004 AFTER TOTAL VALUE ---- ---- ---- ---- ---- ----- ----- ----- (U.S. $ EQUIVALENT IN THOUSANDS) ASSETS (1) SECURITIES U.S. government securities Fixed $ 1,291 $ 1,010 $ $ 2,019 $ - $ - $ 4,320 $ 4,289 Weighted average interest rate 5.77 % 6.81 % 5.89 % 6.07 % U.S. government agency and mortgage-backed securities Fixed - - - 1,750 219 34,755 36,724 34,563 Weighted average interest rate 5.65 % 7.02 % 6.44 % 6.18 % Variable - - - - - 14,503 14,503 14,284 Weighted average interest rate 5.97 % 5.97 % Municipal securities Fixed - - - - - 2,551 2,551 2,375 Weighted average interest rate 4.27 % 4.27 % Small Business Administration securities Variable - - - - - 636 636 626 Weighted average interest rate 7.13 % 7.13 % Collateralized mortgage securities Fixed - - - - - 7,152 7,152 6,622 Weighted average interest rate 6.32 % 6.32 % Variable - - - - - - - - Weighted average interest rate Federal Reserve Bank Stock Fixed - - - - 439 439 439 Weighted average interest rate 6.08 % 6.08 % - - - - - LOANS Fixed 8,346 15,103 4,530 3,589 8,998 4,174 44,740 44,291 Weighted average interest rate 7.54 % 5.98 % 8.09 % 8.59 % 8.16 % 8.11 % 7.33 % Variable 45,999 18,915 10,116 9,796 18,292 7,651 110,769 110,769 Weighted average interest rate 9.82 % 10.00 % 10.17 % 10.18 % 10.17 % 9.87 % 9.97 %
26 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.
THERE FAIR 2000 2001 2002 2003 2004 AFTER TOTAL VALUE ---- ---- ---- ---- ---- ----- ----- ----- (U.S. $ EQUIVALENT IN THOUSANDS) LIABILITIES (1) DEPOSITS Noninterest-bearing transaction accounts 115,129 $ - $ - $ - $ - $ - $$ 115,129 $ 115,129 Weighted average interest rate 0.00 % - - - - - 0.00 % Interest-bearing transaction accounts 15,787 - - - - - 15,787 15,787 Weighted average interest rate 0.76 % - - - - - 0.76 % Savings and money market accounts 94,044 - - - - - 94,044 94,044 Weighted average interest rate 2.20 % - - - - - 2.20 % Certificates of deposit and other time deposits Fixed 43,873 1,710 - - - - 45,583 45,666 Weighted average interest rate 4.25 % 4.49 - - - - 4.25 % CONVERTIBLE NOTES - - - - - 6.79 679 679 Weighted average interest rate - - - - - 8.09. % 8.09 % OFF-BALANCE SHEET ASSETS - - - - - - - - ------------------------ (1) The Company used certain assumptions to estimate fair values and expected maturities. For loans, expected maturities are contractual maturities adjusted for estimated prepayments of principal based on market indicators. Investment securities are at quoted market rates and stated maturities. For loan fair value computations, the company used a discounted cashflow model with discount rates based upon prevailing market rates for similar types of loans, incorporating adjustments for credit risk. For deposit liabilities, fair values were calculated using discounted cashflow models based on market interest rates for different product types and maturity dates for which the deposits are held.
EXCHANGE RATE SENSITIVITY All of the Company's derivative financial instruments and other financial instruments are denominated in US dollars. The Company does not have, or anticipate having, any foreign currency exchange rate exposure. COMMODITY PRICE SENSITIVITY The Company does not have, or anticipate having, any derivative commodity instruments. 27 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Form 8-K filed on January 5, 2000, announcing the engagement of Moss Adams LLP as its Independent Auditors. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS EXHIBIT NO. - ----------- 3.1 Articles of Incorporation (filed as Exhibit 3.3 to the Company's 1989 10-K Report and incorporated herein by this reference). 3.2 Amendment to Articles of Incorporation, dated September 8, 1992 (filed as Exhibit 3.3 to the Company's 1995 10-K/A Report filed on June 3, 1996 and incorporated herein by this reference). 3.3 Bylaws adopted April 25, 1990, as amended July 25, 1990 (filed as Exhibit 3.2 to the Company's 1995 10-K/A Report filed on June 3, 1996 and incorporated herein by this reference). 4.1 Warrant to purchase 100,000 shares of Common Stock dated 12-31-92, issued to Robert H. Leshner (filed as Exhibit 4.1 in the Company's 1992 10-K Report and incorporated herein by this reference). 4.2 Warrant to purchase 12,500 shares of Common Stock dated 12-31-92 issued to Andrew E. Haas. (Filed as Exhibit 4.2 in the Company's 1998 Form 10-K and incorporated herein by this reference) 4.3 Warrant to purchase 12,500 shares of Common Stock dated 12-31-92, issued to Curtis Swindall. (Filed as Exhibit 4.1 in the Company's 1992 10-K Report and incorporated herein by this reference). 10.1* Indemnity Agreement entered into with directors and certain officers dated October 25, 1989 (filed as Exhibit 10.11 to the Company's 1995 10-K/A Report filed on June 3, 1996 and incorporated herein by this reference). 10.2* 1990 Stock Option Plan (filed as Exhibit 28.A in the Company's 1990 10-K Report on Form 8, Amendment No. 1 dated April 29, 1991 and incorporated herein by this reference). 10.3* 1992 Stock Option Plan (filed as Exhibit A in the Company's 1992 Proxy Statement and incorporated herein by this reference). 10.4* 1998 Stock Option Plan (filed as an Exhibit "A" to the Company's 1998 Proxy Statement and incorporated herein by this reference). 10.5* Stock repurchase agreement (filed as Exhibit 10.1 in Form 8-K, dated December 18, 1990 and incorporated herein by this reference). 10.6 Consulting Agreement dated as of August 12, 1996 between Bancorp, First Professional Bank, N.A. and Network Health Financial Services, Inc. (filed as Exhibit 10.6 to the Company's 1996 Form 10-K Report and incorporated herein by this reference). 10.7 Amendment No. 1 to Consulting Agreement dated as of August 12, 1996 between Professional Bancorp, Inc., First Professional Bank, N.A. and Network Health Financial Services, Inc. (Filed as Exhibit 10.7 in the Company's 1998 Form 10-K and Incorporated herein by reference.) 10.8* Salary Continuation Agreement entered into between the Bank and Joel W. Kovner dated May 1, 1992 (filed as Exhibit 10.25 to the Company's 1992 10-K Report and incorporated herein by this reference). 29 10.9 Settlement Agreement dated as of July 8, 1996 among Bancorp, the Bank, the Shareholders Protective Committee and certain officers and directors (filed as Exhibit 1 to the Company's Form 8-K filed July 22, 1996 and incorporated herein by this reference). 10.10 Lease for premises at 606 Broadway, Santa Monica, California (filed as Exhibit 10(a) to the Company's Registration Statement on Form S-1, File No. 2-76371 filed March 8, 1982 and incorporated herein by this reference). 10.11 Lease for premises at 520 Broadway, Santa Monica, California (filed as Exhibit 10.5 in the Company's 1983 10-K Report and incorporated herein by this reference). 10.12 Lease for premises at 8600 West 3rd Street, Suite #1, Los Angeles, California (filed as Exhibit 10.6 in the Company's 1983 10-K Report and incorporated herein by this reference. 10.13 Lease for second floor premises and extension of lease of entire premises at 606 Broadway, Santa Monica, California (filed as Exhibit 10.8 in the Company's 1984 10-K Report and incorporated herein by this reference). 10.14 Lease for premises at 9629 Brighton Way, Beverly Hills, California (filed as Exhibit 10.9 in the Company's 1984 10-K Report and incorporated herein by this reference). 10.15 Lease for premises at 5525 Etiwanda Street, Tarzana, California (filed as Exhibit 10.8 in the Company's 1986 10-K Report and incorporated herein by this reference). 10.16 Lease for premises at 55 E. California, Pasadena, California (filed as Exhibit 10.65 in the Company's 1991 10-K Report and incorporated herein by this reference). 10.17 Lease for premises at 10 North 5th Street, Redlands, California, (filed as Exhibit 10.7 in the Company's 1991 10-K Report and incorporated herein by this reference). 10.18 Lease for premises at 9900 Norwalk Boulevard, Santa Fe Springs, California, (filed as Exhibit 10.75 in the Company's 1992 10-K Report and incorporated herein by this reference). 10.19* Employment agreement dated November 1, 1999 with Larry Patapoff (filed as Exhibit 10.19 in the Company's September 30, 1999 10-Q and incorporated herein by this reference). 10.20* Employment agreement dated October 21, 1999 with Gene Gaines (filed as Exhibit 10.20 in the Company's September 30, 1999 10-Q and incorporated herein by this reference). 10.21* First amendment to Employment Agreement with Gene Gaines effective February 1, 2000 (filed as Exhibit 10.21 in the Company's 1999 10-K Report and incorporated herein by this reference). 10.22* First amendment to Employment Agreement with Larry Patapoff effective February 1, 2000 (filed as Exhibit 10.22 in the Company's 1999 10-k Report and incorporated herein by this reference.) 10.23 Regulatory Agreement with OCC dated March 22, 2000 (filed as Exhibit 10.23 in the Company's 1999 10-k Report and incorporated herein by this reference.) 10.24 Key Employee Incentive Agreement between the Bank and Nancy Ferretti-Foster dated December 21, 2000 (filed as Exhibit 10.24 in the Company's 1999 10-k Report and incorporated herein by this reference.) 30 10.25 Key Employee Incentive Agreement between the Bank and Sharon Schmidt dated December 21, 1999 (filed as Exhibit 10.25 in the Company's 1999 10-k Report and incorporated herein by this reference). 21 Subsidiaries of the Registrant (filed as Exhibit in the Company's 1986 10-K Report and incorporated herein by this reference). 23.1 Consent of Moss Adams LLP (filed as Exhibit 23.1 in the Company's 1999 10-k Report and incorporated herein by this reference). 23.2 Consent of KPMG LLP (filed as Exhibit 23.2 in the Company's 1999 10-k Report and incorporated herein by this reference). 23.3 Memorandum of Understanding between Professional Bancorp, Inc. and The Federal Reserve Bank of San Francisco 27 Financial Data Schedule *Identified as a management contract or compensatory agreement. 31 (B) REPORTS ON FORM 8-K: FORM 8K FILED ON JANUARY 6, 2000 ANNOUNCING THE ENGAGEMENT OF MOSS ADAMS LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANT. SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PROFESSIONAL BANCORP, INC. (Registrant) Date: May 15, 2000 /S/GENE F. GAINES Gene F. Gaines Chief Executive Officer and President Date: May 15, 2000 /S/ LARRY PATAPOFF Chief Financial Officer 32 EX-23.3 2 MEMORANDUM OF UNDERSTANDING MEMORANDUM OF UNDERSTANDING BETWEEN Professional Bancorp, Inc. Santa Monica, California And the Federal Reserve Bank of San Francisco Professional Bancorp, Inc., Santa Monica, California ("Bancorp"), a registered one-bank holding company and the Federal Reserve Bank of San Francisco (the "Reserve Bank"), as evidenced by the signatures of their duly appointed officers below, have hereby entered into this Memorandum of Understanding (the "Memorandum"). This Memorandum evidences the understanding of Bancorp and the Reserve Bank regarding the satisfactory resolution of issues disclosed in the December 31, 1999, Report of Inspection (the Report) prepared by the Reserve Bank. Accordingly, Bancorp agrees to adopt the following plans, policies, procedures, and courses of action: 1 . Bancorp shall not declare or pay any dividends without the prior written approval of the Reserve Bank. Requests for permission to pay a dividend shall be received in writing thirty (30) days prior to the proposed declaration date. Such requests shall contain sufficient documentation to demonstrate that the proposed dividend is in compliance with the Board of Governors' dividend and capital adequacy guidelines. 2. Within sixty (60) days of the effective date of this Memorandum Bancorp shall submit to the Reserve Bank an acceptable written plan to improve, and thereafter maintain, an adequate capital position at Bancorp and First Professional Bank, N.A. (the "Bank"). The plan shall, at a minimum, address and consider: (a) The current and future capital requirements of Bancorp, the Bank and the consolidated organization, particularly in view of the volume of adversely classified assets at the Bank and the potential for additional asset quality problems at the Bank; (b) the requirements! of Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure and Tier 1 Leverage Measure (Appendix A and D of Regulation Y of the Board of Governors, 12 C.F.R. Part 225, App.A and D); (c) formal requests by the Bank's regulator; (d) anticipated levels of earnings of the Bank, with particular attention to maintaining an adequate loan loss reserves at the Bank; (e) the source and timing of additional funds that may be necessary to achieve compliance with the capital plan developed and submitted pursuant to the provisions of this paragraph; and, (f) Bancorp's responsibility to act as a source of strength to its subsidiary bank, in connection therewith, to use its assets to provide whatever capital support to its subsidiary bank as may be required by the Reserve Bank in a manner consistent with the Board of Governor's Policy Statement on the responsibility of bank holding companies to act as a source of strength to their bank subsidiaries, dated April 24, 1987. 3. Within sixty (60) days of the effective date of this Memorandum, the board of directors of Bancorp shall submit to the Reserve Bank an acceptable written plan designed to enhance the board's supervision of the operations and management of the consolidated organization. The plan shall, at a minimum, address and consider: (a) The steps that the board of directors proposes to take to improve the condition of the Bank and the consolidated organization; (b) the responsibilities of the board of directors regarding the definition, approval, implementation, and monitoring of the proposed corrective steps and the actions required by this Memorandum, and the procedures to be used by the board of directors to ensure that its members fulfill their responsibilities; (c) a description of the detailed information that will be provided to and assessed by the members of the board of directors in their oversight of the operations and management of the consolidated organization, including information on the Bank's and the consolidated organization's adversely classified assets, loan loss reserve adequacy, capital levels, earnings, and liquidity; and, (d) the establishment of a periodic, internal review process to monitor the management and operations of the consolidated organization, and Bancorp's compliance with the requirements of this Memorandum. 4. Bancorp shall not increase its borrowings or incur any debt, including, but not limited to, the renewal of existing debt, without the prior written approval of the Reserve Bank. 5. Bancorp shall not purchase, redeem or otherwise acquire, directly or indirectly, any of its stock without the prior written approval of the Reserve Bank. 6. Bancorp shall not, directly or indirectly, enter into any agreements to acquire or divest of any interest in any entities or portfolios, or engage in any new line of business, without the prior written approval of the Reserve Bank. Requests pursuant to this paragraph shall be in received in writing, at least thirty (30) days prior to the consummation of the proposed transaction. The request shall contain a full description of the proposed transaction, its purpose(s), and such other matters that may be pertinent to the proposed acquisition to assist the Reserve Bank in its review of the proposed transaction. Should the Reserve Bank disapprove, Bancorp will not proceed with the transaction. 7. Within thirty (30) days after the end of each calendar year following the date of this Memorandum, Bancorp shall submit to the Reserve Bank its annual cash flow projections for the ensuing year. 8. Within sixty (60) days of this Memorandum, Bancorp shall develop acceptable written policies and procedures designed to strengthen and maintain its records, systems and internal controls and shall submit a written description of these policies and procedures to the Reserve Bank. These policies and procedures shall include, without limitation: (a) Corrective steps which are responsive to the criticisms of Bancorp's current policies as set forth in the Report of Inspection, including, but not limited to enhancing its policy for assessment and/or payment of dividends, intercorporate tax allocations, transactions with affiliates and loans and investments; (b) the maintenance of accurate documentation regarding transactions between the Bank and Bancorp including independent credit review for loans purchased from the bank, prior to purchase; and, (c) the requirement that the policies be reviewed, at a minimum, annually. 9. Bancorp shall not, directly or indirectly, enter into, participate, or, in any other manner, engage in any future lending activities with the bank, without the prior written approval of the Reserve Bank. 10. During the term of this Memorandum or as otherwise required by law, Bancorp shall comply with the provision of section 32 of the FDI Act with respect to the appointment of any new director or the hiring or promotion of any new senior executive officer. 11. The plans, policies and procedures required by paragraphs 2, 3 and 8 hereof, shall be submitted to the Reserve Bank for review and approval within the required time periods set forth in the Memorandum. Bancorp shall adopt the approved plans, policies and procedures and then fully comply with them. During the term of this Memorandum the approved plans, policies and procedures shall not be amended or rescinded unless agreed to in writing by the Reserve Bank. 12. Within forty-five (45) days of the end of each calendar quarter (June 30, September 30, December 31 and March 31) following the effective date of this Memorandum, Bancorp shall submit to the Reserve Bank a written progress report detailing the form and manner of all actions taken to comply with this Memorandum and the results thereof. Along with such reports, Bancorp shall submit to the Reserve Bank: (a) The consolidated balance sheet as of the end of the reporting period; (b) the consolidated income statement through that reporting period; (c) the parent company only cash flow statement; (d) a copy of all written submission filed by the Bank with its federal regulatory agency pursuant to and formal written agreement or informal supervisory agreement entered into between the Bank and such agency. 13. All correspondence regarding this Memorandum shall be sent to: (a) Mr. Harold H. Blum Director, Banking Supervision Federal Reserve Bank of San Francisco P.O. Box 7702 San Francisco, California 94120-7702 (b) Gene Gaines Chief Executive Officer Professional Bancorp, Inc. 606 Broadway Santa Monica, California 90401 14. The provisions of this Memorandum shall be binding upon Bancorp and each of its institution affiliated parties, in their capacities as such, and their successors and assigns. 15. Each provision of this Memorandum shall remain effective and enforceable until stayed, modified, terminated or suspended in writing by the Reserve Bank. IN WITNESS WHEREOF, the parties, through their authorized representatives, have caused this Memorandum to be executed as of the 26th day of April, 2000. PROFESSIONAL BANCORP, INC. FEDERAL RESERVE BANK OF SAN FRANCISCO By /s/ Gene F. Gaines By /s/ Harold Blum ------------------ --------------- The undersigned directors each acknowledge that they have read the foregoing Memorandum and approve of the consent thereto by /s/ Richard A. Berger /s/ Lynn O. Poulson - ---------------------------------- -------------------------------- Richard A. Berger Lynn 0. Poulson /s/ Ron L. Katz /s/ Robert Margolis - ---------------------------------- -------------------------------- Ronald L. Katz Robert Margolis /s/ Gene F. Gaines - --------------------------- Gene F. Gaines -----END PRIVACY-ENHANCED MESSAGE-----