-----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, LcvcdWFXFIpZWD/M2Zt5VQjGC83hCCTamJbcgcZcEC7KKmw/IAp1/u+AzTQWySlV gG6h/i0Gz0Auxy9LNsC3BA== 0000944209-99-001373.txt : 19990817 0000944209-99-001373.hdr.sgml : 19990817 ACCESSION NUMBER: 0000944209-99-001373 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692154 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 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1999 Commission File Number: 0-11223 PROFESSIONAL BANCORP, INC. (Exact name of registrant as specified in its charter) Pennsylvania 95-3701137 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 606 Broadway Santa Monica, California 90401 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 458-1521 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of July 31, 1999, 2,015,873 shares of the Registrant's $0.008 par value common stock were outstanding. 1 PROFESSIONAL BANCORP, INC. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Statements of Financial Condition as of June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three and six months ended June 30, 1999 and 1998 4 Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 1999 and 1998 5 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 Quantitative and Qualitative Disclosures About Market Risk 22 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 24 SIGNATURES 25
2 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS PROFESSIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 ---- ---- (Unaudited) Assets Cash and due from banks: Noninterest-bearing $ 28,975,000 $ 20,992,183 Interest-bearing 1,154,256 572,519 Federal funds sold 4,400,000 10,400,000 ------------ ------------ Cash and cash equivalents 34,529,256 31,964,702 Securities available-for-sale (cost of $50,284,000 and $81,369,000 in 1999 and 1998, respectively) 47,989,575 80,891,072 Securities held-to-maturity (fair value of $20,559,000 and $24,135,000 in 1999 and 1998, respectively) 20,755,274 24,080,592 Loans (net of allowance for loan losses of $2,313,000 and $2,200,000 in 1999 and 1998, respectively) 142,905,623 115,518,693 Premises and equipment, net 1,387,555 1,390,128 Deferred tax asset 2,030,245 1,242,748 Accrued interest receivable and other assets 4,624,352 4,613,504 ------------ ------------ $254,221,880 $259,701,439 ============ ============ Liabilities and Shareholders' Equity Liabilities Deposits: Demand, noninterest-bearing $102,328,229 $109,421,629 Demand, interest-bearing 12,763,382 16,710,541 Savings and money market 78,486,356 75,500,642 Time deposits 32,753,589 28,947,934 ------------ ------------ Total deposits 226,331,556 230,580,746 Convertible notes 868,000 1,116,000 Accrued interest payable and other liabilities 1,977,692 2,683,582 ------------ ------------ Total liabilities 229,177,248 234,380,328 ------------ ------------ Commitments and contingent liabilities Shareholders' equity: Common stock, $.008 par value; 12,500,000 shares authorized; 2,064,710 and 2,064,710 issued and 2,015,873 and 1,996,344 outstanding in 1999 and 1998, 16,683 16,526 respectively Additional paid-in-capital 21,098,088 20,873,603 Retained earnings 5,766,336 5,239,275 Treasury stock, at cost (69,467 shares in both 1999 and 1998) (537,251) (537,251) Unrealized loss on securities available-for-sale, net of taxes (1,299,224) (271,042) ------------ ------------ Total shareholders' equity 25,044,632 25,321,111 ------------ ------------ $254,221,880 $259,701,439 ============ ============
See accompanying notes to consolidated financial statements. 3 PROFESSIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------------------------------- 1999 1998 1999 1998 ----------------------------------------------------- Interest income Loans $3,193,826 $2,502,264 $6,078,172 $4,978,008 Securities 1,057,459 1,071,114 2,379,203 2,356,289 Federal funds sold and securities purchased under agreements to resell 162,913 544,736 246,299 791,656 Interest-bearing deposits in other banks 4,595 1,589 36,062 3,135 ----------------------------------------------------- Total interest income 4,418,793 4,119,703 8,739,736 8,129,088 ----------------------------------------------------- Interest expense Deposits 737,257 814,435 1,461,101 1,604,529 Convertible notes 13,242 81,559 29,789 189,748 Federal funds purchased and securities sold under agreements to repurchase - - 108,737 3,055 ----------------------------------------------------- Total interest expense 750,499 895,994 1,599,627 1,797,332 ----------------------------------------------------- Net interest income 3,668,294 3,223,709 7,140,109 6,331,756 Provision for loan losses 47,000 - 172,000 - ----------------------------------------------------- Net interest income after provision for loan losses 3,621,294 3,223,709 6,968,109 6,331,756 ----------------------------------------------------- Other operating income Net gain (loss) on sale securities available-for-sale 4,266 (8,735) 39,610 (8,735) Merchant discount 78,980 50,593 140,492 109,277 Mortgage brokering fees 8,308 69,577 63,094 83,523 Service charges on deposits 228,541 222,842 457,608 479,789 Other income 127,459 125,795 262,894 263,153 ----------------------------------------------------- Total other operating income 447,554 460,072 963,698 927,007 ----------------------------------------------------- Other operating expenses Salaries and employee benefits 1,785,603 1,653,224 3,491,048 3,191,079 Occupancy 350,966 352,892 737,957 701,463 Furniture and equipment 214,247 199,793 423,206 390,265 Meetings and business development 47,764 61,875 120,755 93,950 Donations 66,365 25,816 90,146 62,752 Other promotion 72,774 84,324 142,546 152,262 Legal fees 226,477 159,551 318,112 251,897 Audit, accounting and examinations 129,615 40,495 172,605 84,035 Professional services 334,163 282,215 642,605 639,229 Strategic planning and other outside consulting 16,399 37,473 22,629 91,388 Office supplies 63,458 55,481 126,657 121,494 Telephone 61,381 71,845 123,731 140,512 Postage 33,147 40,392 68,732 81,394 Messenger service 8,087 8,280 14,128 17,498 FDIC assessment 6,290 6,609 12,693 12,762 Other assessments 47,961 44,648 91,633 87,829 Other expense 139,742 170,637 299,368 308,388 ----------------------------------------------------- Total other operating expenses 3,604,439 3,295,550 6,898,551 6,428,197 ----------------------------------------------------- Earnings before taxes 464,409 388,231 1,033,256 830,566 Provision for income taxes 172,141 164,000 405,445 302,000 ----------------------------------------------------- Net earnings $ 292,268 $ 224,231 $ 627,811 $ 528,566 ===================================================== Earnings per share Basic $ 0.14 $ 0.13 $ 0.31 $ 0.34 Diluted $ 0.14 $ 0.13 $ 0.30 $ 0.30
See accompanying notes to consolidated financial statements. 4 PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- Net earnings $ 292,268 $224,231 $ 627,811 $528,566 Other Comprehensive Income, net of tax Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period (857,157) (80,767) (1,047,417) 117,931 Reclassification adjustment (1,787) (11,434) 19,235 (11,434) --------------------------------------------------------------------- Other Comprehensive Income (858,944) (92,201) (1,028,182) 106,497 --------------------------------------------------------------------- Comprehensive Income (Loss) $(566,676) $132,030 $ (400,371) $635,063 =====================================================================
See accompanying notes to consolidated financial statements. 5 PROFESSIONAL BANCORP, INC. AND SUBSIDAIRY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 1999 1998 ---- ---- Cash flows from operating activities: Net earnings $ 627,811 $ 528,566 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 294,362 290,054 Provision for loan losses 172,000 - (Gain) loss on sales of securities available-for-sale (39,610) 8,735 Amortization of convertible note expense 8,864 52,255 Increase in deferred tax asset (787,497) (214,291) Decrease in accrued interest receivable and other assets 744,423 6,959 Increase in accrued interest payable and other liabilities (705,887) (110,971) Net amortization of premiums and discounts on securities held-to-maturity 120,954 183,362 Net amortization of premiums and discounts on securities available-for-sale 149,000 161,142 ------------ ------------ Net cash provided by operating activities 584,420 905,811 ------------ ------------ Cash flows from investing activities: Proceeds from: Maturities of securities held-to-maturity 250,000 3,056,168 Maturities of securities available-for-sale - 6,870,516 Sales of securities available-for-sale 27,187,261 10,234,664 Principal payments and maturities of: Mortgage-backed securities held-to-maturity 2,954,364 2,544,830 Mortgage-backed securities available-for-sale 5,736,476 6,348,014 Purchases of securities available-for-sale (1,947,308) (10,637,813) Net (increase) decrease in loans (27,558,930) 5,618,520 Purchase of bank premises and equipment, net (291,789) (242,079) ------------ ------------ Net cash provided by investing activities 6,330,074 23,792,820 ------------ ------------ Cash flows from financing activities: Net decrease in demand deposits and savings accounts (8,054,845) (11,749,284) Net increase (decrease) in time deposits 3,805,655 (1,081,895) Cash dividends (100,750) (83,825) Proceeds from exercise of stock options - 3,794,363 ------------ ------------ Net cash used in financing activities (4,349,940) (9,120,641) ------------ ------------ Net decrease in cash and cash equivalents 2,564,554 15,577,990 ------------ ------------ Cash and cash equivalents, beginning of period 31,964,702 54,339,670 ------------ ------------ Cash and cash equivalents, end of period $ 34,529,256 $ 69,917,660 ============ ============ Supplemental disclosure of cash flow information - Cash paid during the period for: Interest $ 1,605,992 $ 1,925,902 Income taxes $ 1,120,000 $ 122,000 Supplemental disclosure of noncash items: Decrease in unrealized losses on securities available for sale securities, net of tax $ 1,815,678 $ 170,509 Conversion of notes $ 214,988 $ 2,836,562 Tax benefit on stock options exercised - $ 560,384
See accompanying notes to consolidated financial statements. 6 PROFESSIONAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - BASIS OF PRESENTATION The unaudited consolidated financial statements included herein have been prepared by Professional Bancorp, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the periods covered have been made. Certain information and note disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures are adequate to make the information presented not misleading. The financial position at June 30, 1999, and the results of operations for the three and six months ended June 30, 1999 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 1999. These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles on a basis consistent with the Company's audited financial statements, and these interim financial statements should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1998. Note 2 - Adoption of New Accounting Standards As of December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), and has restated all prior period earnings per share data. SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings. The Company adopted, effective January 1, 1998, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 requires companies to report comprehensive income and its components in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in- capital. Comprehensive income includes all changes in equity during a period except those resulting from investments by stockholders and distributions to stockholders. For the three and six months ended June 30, 1999, net earnings totaled $292,268 and $627,811, other comprehensive income (loss) totaled $(848,944) and $(1,028,182) and total comprehensive income (loss) totaled $(556,676) and $(400,371), respectively. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Professional Bancorp, Inc. (the "Company"), holding company for First Professional Bank, N.A. (the "Bank"), recorded net earnings of $292,268 or $0.14 per share for the second quarter of 1999, compared with net earnings of $224,231 or $0.13 per share for the second quarter of 1998. For the six months ended June 30, 1999, the Company had net earnings of $627,811 or $0.31 per share, this compares to net earnings of $528,566 or $0.34 per share for the first six months of 1998. The Company had total assets of $254,221,880 at June 30, 1999, compared to $259,701,439 at December 31, 1998. Loans The following table sets forth the amount of loans outstanding by category and the percentage of each category to the total loan portfolio.
June 30, 1999 December 31, 1998 ----------------------------------------------------------------- (in thousands) Amount % of Total Amount % of Total ------------- ------------ ------------ ------------ Commercial $111,534 76.7% $ 93,952 79.7% Real estate secured commercial 23,289 16.0 11,698 9.9 -------- ----- -------- ----- 134,823 92.7 105,650 89.6 Equity lines of credit 4,407 3.0 5,931 5.0 Other lines of credit 4,687 3.2 4,817 4.1 Installment 1,545 1.1 1,482 1.3 Lease financing - - 32 - -------- ----- -------- ----- Gross loans 145,462 100.0% 117,912 100.0% Less: Allowance for loan losses 2,313 2,200 Deferred loan fees, net 243 193 -------- -------- Net loans $142,906 $115,519 ======== ========
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. 8 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.
June 30, December 31, (in thousands) 1999 1998 ---- ---- Nonperforming loans $2,301 $1,359 Other real estate owned (OREO) - - Other repossessed assets 272 272 ------ ------ Total nonperforming assets $2,573 $1,631 ====== ====== Accruing loans 90 days or more past due $1,579 $ 100 ====== ====== Nonperforming loans to total loans(1) 1.58% 1.15% Nonperforming assets(1) to total loans 1.77% 1.38% to total loans, OREO and repossessed assets 1.77% 1.38% to total assets 1.01% 0.63%
(1) Nonperforming loans and nonperforming assets do not include accruing loans 90 days or more past due. The total accrued interest on loans 90 days or more past due and still accruing was approximately $4,855 at June 30, 1999, and the Company had no accrued interest due on loans 90 days past due at December 31, 1998. The $1,579,000 in accruing loans over 90 days or more past due and still accruing as of June 30, 1999 were all in the process of being renewed, paid off or the credit quality was not impaired. As a result of the Company's practice to discourage "short-term" extensions, these loans are carried as "past due" to ensure proper underwriting and administrative controls. The Company maintains the allowance for loan losses at a level considered adequate by management to provide for potential loan losses. While the Company's policy is to charge-off in the current period those loans for which a loss is considered probable, there also exists the risk of future losses which cannot be precisely quantified or attributed to particular loans. Reasonable estimates of these future amounts are included in the allowance for loan losses. 9 The following table provides a summary of the Company's allowance for loan losses and charge-off and recovery activity during the six months ended June 30, 1999, the year ended December 31, 1998, and the six months ended June 30, 1998:
Period Ended ------------ June 30, December 31, June 30, (in thousands) 1999 1998 1998 ---- ---- ---- Balance at beginning of period $ 2,200 $ 1,802 $ 1,802 Provision for loan losses 172 406 - -------- -------- -------- 2,372 2,208 1,802 -------- -------- -------- Loan charge-offs 136 269 60 Recoveries on loans previously charged-off (77) (261) (109) -------- -------- -------- Net charge-offs (recoveries) 59 8 (49) -------- -------- -------- Balance at end of period $ 2,313 $ 2,200 $ 1,851 ======== ======== ======== Loans outstanding at end of period $145,462 $117,912 $100,213 Average loans outstanding during period 133,369 103,548 101,342 Net charge-offs (recoveries) to average loans outstanding 0.04% 0.01% -0.10% Allowance for loan losses: to total loans 1.59 1.87 1.85 to nonperforming loans/(1)/ 100.52 161.88 351.23 to nonperforming assets/(1)/ 89.90 134.89 231.66
/(1)/ Nonperforming loans and nonperforming assets do not include accruing loans 90 days or more past due. Management considers a loan to be impaired when, based upon available information and current events, it believes that it is probable the Company will be unable to collect all amounts due on a timely basis in accordance with the contractual terms of the loan agreement. Impairment of a loan is measured by the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Impairment is recognized by the establishment of a valuation allowance equal to the excess of the Company's recorded investment in the loan over its measured value. The Company had $2,535,000 in impaired loans as of June 30,1999. The carrying value of impaired loans for which there is a related allowance for loan losses was $280,000, with the amount of specific allowance for loan losses allocated to these loans of $56,000. There was $2,255,000 in impaired loans for which there were a general allowance allocated consistent with the Company's allowance for loan loss methodology. The average recorded investment in impaired loans during the first six months of 1999 was approximately $2,371,000 and income recorded utilizing the cash basis and accrual basis method of accounting was $11,000. Impaired loans at June 30, 1999, included $1,230,000 of nonaccrual loans. Included in impaired loans as of June 30, 1999 were $1,213,000 of troubled debt restructured loans, $808,000 of which were on nonaccrual and the remaining $404,000 were in compliance with the modified terms. 10 The Company had approximately $1,836,000 in impaired loans as of December 31, 1998. The carrying value of impaired loans for which there is a related allowance for loan losses was $153,000, with the amount of specific allowance for loan losses allocated to these loans of $41,000. There were $1,683,000 in impaired loans for which there was no related specific allowance for loan losses. However, general allowance consistent with the level of allowance for similar loans with similar risk characteristics were maintained for impaired loans without specific allowance. The average recorded investment in impaired loans during 1998 was $1,131,000. Impaired loans at December 31, 1998 included $1,359,000 of nonaccrual loans. Included in impaired loans as of December 31, 1998 were $614,000 of troubled debt restructured loans, $341,000 of which were on nonaccrual and the remaining $273,000 were in compliance with the modified terms. The Company had $839,000 in impaired loans as of June 30, 1998. The carrying value of impaired loans for which there is a related allowance for loan losses was $193,000, with the amount of specific allowance for loan losses allocated to these loans of $59,000. There were $646,000 in impaired loans for which there was a general allowance allocated consistent with the Company's allowance for loan loss methodology. The average recorded investment in impaired loans during the first six months of 1998 was approximately $981,000 and income recorded utilizing the cash basis and accrual basis method of accounting was $33,000. Included in impaired loans as of June 30, 1998 were $374,000 of troubled debt restructured loans, $62,000 of which were on nonaccrual and the remaining $312,000 were in compliance with the modified terms. Investment Securities The following table sets forth the amortized cost and fair value of securities available-for-sale as of June 30, 1999 and December 31, 1998:
June 30, 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 39,358 - 1,675 37,683 Small Business Administration securities 767 - 24 743 Municipal securities 2,551 - 124 2,427 Federal Reserve Bank Stock 439 - 25 414 Collateralized mortgage obligations 7,169 - 446 6,723 ------- ----------- -------- ------- Total $50,284 $ - $ 2,294 $47,990 ======= =========== ======== ======= December 31, 1998 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gain Loss Value ---- ---- ---- ----- U.S. Government securities $ - $ - $ - $ - U.S. Government agency and mortgage-backed securities 68,487 153 514 68,126 Small Business Administration securities 858 1 7 852 Municipal securities 2,551 3 8 2,546 Federal Reserve Bank Stock 439 - - 439 Collateralized mortgage obligations 9,034 - 106 8,928 ------- ----------- --------- ------- Total $81,369 $ 157 $ 635 $80,891 ======= ========== ======== =======
11 The amortized cost and fair value of securities held-to-maturity as of June 30, 1999, and December 31, 1998 are as follows:
June 30, 1999 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gain Loss Value ---- ---- ---- ----- U.S. Government securities $ 3,038 $ 22 $ 4 $ 3,056 U.S. Government agency securities 2,000 - 20 1,980 U.S. Government agency mortgage-backed securities 15,717 5 199 15,523 ------- ---- ---- ------- Total $20,755 $ 27 $223 $20,559 ======= ==== ==== ======= December 31, 1998 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gain Loss Value ---- ---- ---- ----- U.S. Government securities $ 3,043 $151 $ - $ 3,194 U.S. Government agency securities 2,250 21 - 2,271 U.S. Government agency - - - - mortgage-backed securities 18,788 1 119 18,670 ------- ---- ---- ------- Total $24,081 $173 $119 $24,135 ======= ==== ==== =======
During the six months ended June 30, 1999 and the twelve months ended December 31, 1998, securities available-for-sale were sold for aggregate proceeds of $27,148,000 and $15,337,000, respectively. These sales resulted in gross realized gains and losses of $97,000 and ($57,000) for the six months ended June 30, 1999 and $12,000 and ($18,000) for the twelve months period ended December 31, 1998. Deposits Total deposits at June 30, 1999 were $226,332,000, a decrease of $4,249,000 or 1.84% from $230,581,000 at December 31, 1998. The Company attracts deposits primarily from individuals and businesses related to the health care services industry, as well as other professionals and professional services firms. The Company has no brokered deposits and the Company's practice is to not purchase brokered deposits. The following table sets forth the amount of deposits by category and the percentage of each category to total deposits as of June 30, 1999 and December 31, 1998:
June 30, 1999 December 31, 1998 (in thousands) Amount % of Total Amount % of Total ------ ---------- ------ ---------- Demand, noninterest-bearing $102,329 45.21% $109,422 47.46% Demand, interest-bearing 12,764 5.64 16,710 7.25 Savings deposits 12,782 5.65 12,553 5.44 Money market deposits 65,704 29.03 62,948 27.30 Time deposits under $100,000 8,335 3.68 8,625 3.74 Time deposits of $100,000 and over 24,418 10.79 20,323 .81 -------- ------ -------- ------ $226,332 100.00% $230,581 100.00% ======== ====== ======== ======
12 Historically, deposit levels increase substantially at year-end as clients increase cash reserves required for first and second quarter tax payments and bonuses. In addition, increasing competition for operating cash deposits comes from broker dealer products and accounts. In order to minimize the effects of such "disintermediation" from the Company to such accounts, the Company is currently offering to clientele such accounts through its CNET products. The CNET product is a money market mutual fund. The goal of the fund is to provide as high a level of current income as is consistent with preservation of principal and liquidity. The fund is managed by The Cadre Network Health Financial Services Liquid Asset Fund, and is not insured by the FDIC and is not an obligation of, or guaranteed by the Company or its subsidiaries and is subject to investment risk, including possible loss of principal invested. Capital The Office of the Comptroller of the Currency (the "OCC"), the Bank's primary regulator, has established minimum leverage ratio guidelines for national banks. These guidelines provide for a minimum Tier 1 capital leverage ratio (Tier 1 capital to adjusted average total assets) of 3.0% for national banks that meet certain specified criteria, including having the highest regulatory rating. All other national banks will generally be required to maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an additional cushion of 100 to 200 basis points. The OCC has not advised the Bank of any specific minimum Tier 1 capital leverage ratio applicable to it. The Federal Reserve Bank, as Bancorp's primary regulator, has similarly established minimum leverage ratio guidelines for bank holding companies. These guidelines also provide for a minimum Tier 1 leverage ratio of 3.0% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a minimum Tier 1 capital leverage ratio of 3.0% plus an additional cushion of 100 to 200 basis points. The Federal Reserve Bank has not advised the Bancorp of any specific minimum Tier 1 capital leverage ratio applicable to it. Risk-based capital standards were implemented on December 31, 1992. Since December 31, 1992, banking organizations have been expected to meet a minimum ratio for qualifying total capital to risk-weighted assets of 8.0%, 4.0% of which must be Tier 1 capital. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and risk-weighted off-balance sheet items. The Federal Deposit Insurance Act of 1991 contains "prompt correction action" provisions pursuant to which insured depository institutions are to be classified into one of five categories based primarily upon capital adequacy, ranging from "well-capitalized" to "critically undercapitalized" and which require, subject to certain exceptions, the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "undercapitalized" and to take additional actions if the institution becomes "significantly undercapitalized" or "critically undercapitalized." 13 The following table presents the capital ratios for the Company and the Bank, compared with the standards for "well-capitalized" depository institutions (which standards do not apply to bank holding companies) and the minimum required capital ratios to be deemed "adequately capitalized" under applicable federal regulations, as of June 30, 1999.
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)/ $26,344 10.29% $10,238 4.00% $12,797 5.00% Tier 1 Risk-Based 26,344 15.31% 6,884 4.00% 10,326 6.00% Total Risk-Based 29,365 17.06% 13,768 8.00% 17,210 10.00% Bank Leverage $23,342 9.16% $10,190 4.00% $12,737 5.00% Tier 1 Risk-Based 23,342 13.69% 6,821 4.00% 10,231 6.00% Total Risk-Based 25,476 14.94% 13,641 8.00% 17,051 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. The Company and the Bank, at June 30,1999, were considered "well- capitalized" and exceeded all applicable minimum capital requirements. Capital requirements of the federal banking regulators, however, could limit the Company's future growth if the Company were to rely solely on the retention of earnings to generate additional capital or rapid growth. On May 29, 1998, the Company gave notice of its' intent to call for partial redemption of $2,625,000 principal amount of the Professional Bancorp, Inc., 8.50% Convertible Subordinated Reset Notes due March 1, 2004. As a result of this call, approximately $2,552,000 of the notes converted to 200,955 shares of common stock and $73,000 in notes were redeemed by the June 30, 1998 redemption date. For the six months ended June 30, 1999, approximately $248,000 of notes were converted to 19,529 shares of common stock. Liquidity The Company's primary source of liquidity is dividends from the Bank. Dividends from the Bank to the Company are subject to certain regulatory restrictions. Under federal banking law, dividends declared by the Bank in any calendar year may not, without the approval of the OCC, exceed its net earnings, as defined, for that year combined with its retained net earnings for the proceeding two years. The Bank's primary sources of liquidity are federal funds sold to other banks and the investment securities portfolio. For the six months ended June 30, 1999, federal funds sold averaged $10,413,000 and compared to $29,395,000 for the same period in 1998. In addition, securities in the available-for-sale portfolio can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. Securities held-to-maturity are available for liquidity needs primarily as collateral for reverse repurchase agreements. The fair value of securities available-for-sale and securities held-to-maturity at June 30, 1999, were $47,990,000 and $20,559,000, respectively. The Bank sells securities under agreements to repurchase. Securities sold under repurchase agreements are recorded as short-term obligations. During the first six months of 1999, the highest daily outstanding balance and the average balance of securities sold under agreements to repurchase were $25,000,000 and $4,368,000, respectively; the average rate paid was 4.95%. At June 30, 1999, there were no securities sold under agreements to repurchase. 14 Year 2000 The Year 2000 issue presents a very real and significant challenge to the Company, along with the entire financial services industry. This problem has the potential to affect a wide range of systems and equipment, including software and hardware, utilities, communications platforms and devices, and facilities. The Year 2000 issue is the result of computer programs being written using two digits rather than four to represent the calendar year. Software so developed and not corrected could produce inaccurate or unpredictable results when dates change in the year 2000. Such occurrences may have a material adverse effect on the Company's financial condition, results of operations, or business as the Company, like most financial organizations, is significantly subject to the potential Year 2000 issues due to the nature of financial information. While no one can accurately predict what will happen with the date change to the Year 2000, the Company's management and Board of Directors take the potential risks seriously, and have been working since early in 1997, and will continue to work hard, to be prepared for the Year 2000 transition. There are a number of broad concerns that may affect the Company, our customers, and business partners. In the event of a Year 2000 failure, the Company could be adversely impacted in a number of ways. Internal operations problems and problems resulting from primary vendors and suppliers inability to perform could cause increased costs in determining correct results and lost customers resulting in lost revenue. Large customers negatively effected by Year 2000 problems could lead to deposit outflows or increased risk of collecting loans. As part of our efforts to ensure compliance with government regulatory standards and establish prudent business practices for Year 2000 issues, the Board of Directors and senior management have previously developed and approved a Year 2000 preparedness plan, which is currently being implemented. The Company's Year 2000 risk mitigation program is a dynamic process of reassessment, evaluation and testing. As a result, responses may change especially as vendors and manufacturers find and report Year 2000 product and services issues. The following outlines major areas within the plan and provides the status of our efforts: Awareness: Our plan provides for a Year 2000 task force which reports at least quarterly reporting to the Audit Committee and Board of Directors of the Company. The task force, which meets monthly, consists of members of senior management representatives from key areas within the Company. The task force, among other roles, monitors and report progress, and provides direction toward preparation for the Year 2000 date change. Assessment: The task force has developed an overall strategy which identifies and categorizes internal information and operating systems, and external vendors, customers, auditors and business partners, according to risk of business disruption. Each operating system, process, vendor, or other business partner is risk assessed based upon the impact on the Company's business. High risk processes and systems have been categorized as "mission critical" and have been prioritized in our Year 2000 risk mitigation process. Testing plans have been developed, and we have completed testing all mission critical and many other identified systems. The testing of substantially all systems was completed by June 30, 1999. We have identified contingency plans and alternatives, including replacement or elimination, for mission critical systems and other systems in the event that such actions become necessary. Also, we have integrated the Year 2000 business risks into our overall bankwide business resumption plans. 15 In addition, as a lending institution, the Company is exposed to potential risk if it's customers suffer Year 2000 related difficulties. Therefore, we have developed, and implemented, a process to assess the potential risks to the Company of both our lending and deposit customer's preparedness for the Year 2000 date change. Also, potential borrower's readiness for Year 2000 is assessed and included within the credit underwriting and approval process. Remediation: The remediation phase includes upgrading or replacing information or operating systems, vendor certifications, and other associated changes. We have begun renovation of systems, including non-information technology systems, that have been identified as non-compliant to Year 2000, including replacing some personal computers, or upgrading software and other operating systems. The renovation of mission critical systems where indicated is complete. The extent of our identified renovation needs have been budgeted within our corporate budgeting process. Additionally, we have received vendor responses or certification for all of our mission critical systems, along with most of our other information and operating systems. These responses are monitored continually to determine the vendors' progress toward preparedness. Validation/Implementation: As operating systems are validated, upgraded, and successfully tested the systems are integrated into ongoing operations. As with any new system, or system change, internal/external users are provided training, connectivity with other systems is determined and integration into current processes occurs. Validation and implementation of mission critical systems was completed by December 31, 1998. In addition, we have instituted an independent third party review of our Year 2000 efforts for all mission critical systems. Significant progress has been accomplished in our efforts to prepare for the Year 2000-century date change. All of our mission critical systems have been tested and none have failed. Additionally, we are 95% complete assessing, renovating, testing and implementing Year 2000 preparedness for all other identified systems. Management currently estimates the overall cost of Year 2000 risk mitigation not to exceed $100,000 in operating expenses and $300,000 in fixed asset purchases for fiscal 1999 of which approximately 85% has been incurred. These costs are included within our ongoing budget and planning process. We continue with the execution of our Year 2000 Preparedness Plan and remain on schedule to meet our internal timeline and regulatory expectations. Also, we have developed and presented internal and external awareness programs, which reinforce the awareness and the need for preparedness to the Year 2000 problem for the Company's Board of Directors, employees, and our customers. Based upon the information we have developed through our Year 2000 Preparedness Plan, we have not identified risks associated with the date change to Year 2000 that will have a material financial impact on the Company. Results of Operations The Company reported consolidated net earnings of $292,268 for the second quarter of 1999, compared with net earnings of $224,231 for the second quarter of 1998. Basic and diluted earnings per share for the second quarter of 1999 were $0.14, compared to $0.13 basic and diluted earnings per share for the same period in 1998. Return on average shareholders' equity for the second quarter of 1999 and 1998, were 4.54% and 4.14%, respectively. Additionally, return on average assets for the second quarter of 1999 and 1998, were 0.46% and 0.36%, respectively. 16 For the first six months of 1999, the Company reported net earnings of $627,811 compared to $528,566 for the same period in 1998. Basic and diluted earnings per share for the six months ended June 30, 1999 were, $0.31 and $0.30, respectively. Comparatively, basic and diluted earnings per share for the six months ended June 30, 1998, were $0.34 and $0.30, respectively. Return on average shareholders' equity for the six months ended June 30, 1999 and 1998, were 4.90% and 5.48%, respectively. Additionally, return on average assets for the six months ended June 30, 1999 and 1998, were 0.49% and 0.44%, respectively. The comparative improvement in net earnings for the second quarter and first six months of 1999, as compared to the same periods in 1998, resulted from increased interest income from loans and reduced interest expense for deposits and other borrowings. In addition, net earnings for the second quarter and first six months of 1999, were adversely impacted by higher than anticipated levels of professional service expenses, primarily due to expenses related to completing the 1998 audit and increased legal fees for corporate and lending activities. Net Interest Income The Company's earnings depend primarily on net interest income, which is the difference between the interest and fees earned on loans and investments less the interest paid on deposits, borrowings and convertible notes. For the quarter ended June 30, 1999, net interest income increased 13.8% to $3,668,000 from $3,224,000 for the quarter ended June 30, 1998. For the six months ended June 30, 1999 and 1998 net interest income was $7,140,000 and $6,332,000, respectively. The increase in net interest income for the second quarter June 30, 1999 as compared to the same period in 1998, is primarily the result of a 39% or $39,027,000 increase in average loans outstanding during the quarter. For the six months ended June 30, 1999 average loans outstanding grew 31.6% to $133,369,000 as compared to $101,342,000 for the same period in 1998. For the three and six months ended June 30, 1999, the net interest margin was 6.50% and 6.34%, respectively, compared to 5.96% and 6.03% for the same respective periods in 1998. 17 The following tables present the distribution of average assets, liabilities and shareholders' equity as well as the total dollar amount of interest income from average interest-earning assets and resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and rates for the three months ended June 30, 1999 and 1998.
Three Months Ended June 30, --------------------------- 1999 1998 ---- ---- Average Yield/ Average Yield/ (in thousands) Balance Rate Interest Balance Rate Interest ---------- ------- -------- ---------- ------- -------- Assets Interest-earning assets: Securities $ 72,389 5.86% $1,057 $ 76,045 5.65% $1,071 Loans/(1)/ 139,089 9.21 3,194 100,062 10.03 2,502 Federal funds sold 13,751 4.75 163 40,328 5.42 545 Interest-earning deposits - banks 1,317 1.40 5 614 1.31 2 -------- ------ -------- ------ Total interest-earning assets 226,546 7.82 4,419 217,049 7.61 4,120 -------- ------ -------- ------ Deferred loan fees (219) (92) Allowance for loan losses (2,303) (1,843) Noninterest-earning assets: Cash and due from banks 24,700 23,619 Premises and equipment 1,404 1,557 Other assets 5,986 5,897 -------- -------- Total assets $256,114 $246,187 ======== ======== Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits $ 13,688 0.70% $ 24 $ 12,927 0.94% $ 30 Savings and money market deposits 79,559 1.81 359 81,094 2.06 417 Time deposits under $100,000 8,716 4.19 91 7,881 4.68 92 Time deposits of $100,000 and over 25,107 4.20 263 24,012 4.61 275 Convertible notes 879 6.04 13 4,224 7.76 82 Repurchase agreements - - - - - - -------- ------ -------- ------ Total interest-bearing liabilities 127,949 2.35 750 130,137 2.76 896 -------- ------ -------- ------ Noninterest-bearing liabilities: Noninterest-bearing demand deposits 99,951 92,091 Other liabilities 2,405 2,253 Shareholders' equity 25,809 21,706 -------- -------- Total liabilities and shareholders' $256,114 $246,187 equity ======== ======== Interest income as a percentage of average earning assets 7.82% 7.61% Interest expense as a percentage of average interest-bearing liabilities 2.35% 2.76% Net interest margin and income 6.50% $3,669 5.96% $3,224 ====== ======
/(1)/ Nonaccrual loans are included in average balances and rate calculations. 18 The following tables present the distribution of average assets, liabilities and shareholders' equity as well as the total dollar amount of interest income from average interest-earning assets and resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and rates for the six months ended June 30, 1999 and 1998.
Six Months Ended June 30, ------------------------- 1999 1998 ---- ---- Average Yield/ Average Yield/ (in thousands) Balance Rate Interest Balance Rate Interest ---------- ------- -------- --------- ------- -------- Assets Interest-earning assets: Securities $ 82,045 5.85% $2,379 $ 80,541 5.90% $2,356 Loans/(1)/ 133,369 9.19 6,078 101,342 9.91 4,978 Federal funds sold 10,413 4.77 246 29,395 5.43 792 Interest-earning deposits - banks 1,359 5.35 36 411 1.54 3 -------- ------ -------- ------ Total interest-earning assets 227,186 7.76 8,740 211,689 7.74 8,129 -------- ------ -------- ------ Deferred loan fees (212) (118) Allowance for loan losses (2,089) (1,826) Noninterest-earning assets: Cash and due from banks 24,293 24,754 Premises and equipment 1,424 1,553 Other assets 5,940 6,228 -------- -------- Total assets $256,542 $242,280 ======== ======== Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits $ 13,699 0.73% $ 50 $ 13,276 0.93% $ 61 Savings and money market deposits 80,078 1.90 755 80,723 2.07 828 Time deposits under $100,000 8,707 4.27 184 7,705 4.65 178 Time deposits of $100,000 and over 22,460 4.24 472 23,476 4.62 538 Convertible notes 919 6.54 30 4,800 7.97 190 Repurchase agreements 4,368 5.02 109 110 5.60 3 -------- ------ -------- ------ Total interest-bearing liabilities 130,231 2.48 1,600 130,090 2.79 1,797 -------- ------ -------- ------ Noninterest-bearing liabilities: Noninterest-bearing demand deposits 97,795 90,008 Other liabilities 2,656 2,741 Shareholders' equity 25,860 19,441 -------- -------- Total liabilities and shareholders' $256,542 $242,280 equity ======== ======== Interest income as a percentage of average earning assets 7.76% 7.74% Interest expense as a percentage of average interest-bearing liabilities 2.48% 2.79% Net interest margin and income 6.34% $7,140 6.03% $6,332 ====== ======
/(1)/ Nonaccrual loans are included in average balances and rate calculations. 19 The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." It is also affected by changes in yields earned on interest- earning assets and interest rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change." The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the three and six months ended June 30,1999 and 1998. The changes due to both rate and volume have been allocated to rate and volume in proportion to the relationship between their absolute dollar amounts.
Three Months Ended Six Months Ended June 30, 1999 and 1998 June 30, 1999 and 1998 (in thousands) Volume Rate Total Volume Rate Total ------- ------- ------ ------- ------ ------- Increase (decrease) in interest income: Securities $ (53) $ 39 $ (14) $ 44 $ (21) $ 23 Loans 911 (219) 692 1,480 (380) 1,100 Federal funds sold (322) (60) (382) (459) (86) (545) Interest-bearing deposits - banks 2 1 3 16 17 33 ----- ----- ----- ------ ----- ------ 538 (239) 299 1,081 (470) 611 ----- ----- ----- ------ ----- ------ Increase (decrease) in interest expense: Interest-bearing demand deposits 2 (7) (5) 2 (14) (12) Savings and money market deposits (8) (50) (58) (7) (66) (73) Time deposits under $100,000 9 (10) (1) 22 (15) 7 Time deposits of $100,000 and over 12 (25) (13) (23) (43) (66) Convertible notes (53) (15) (68) (131) (28) (159) Repurchase agreements - - - 106 - 106 ----- ----- ----- ------ ----- ------ (38) (107) (145) (31) (166) (197) ----- ----- ----- ------ ----- ------ Increase (decrease) in net interest income $ 576 $(132) $ 444 $1,112 $ 304 $ 808 ===== ===== ===== ====== ===== ======
Interest income represents interest earned on loans, investment securities and federal funds sold. Interest income increased $299,000 to $4,419,000 for the three months ended June 30, 1999 from $4,120,000 for the same period in 1998. For the six months ended June 30, 1999, interest income increase 7.5% to $8,740,000 from $8,129,000 for the same period in 1998. Interest earned on loans increased 28% and 22% for the three and six months ended June 30, 1999 and 1998, respectively. The Company continues to benefit from strong loan demand, which has been funded by the sale of investment securities and reduced level of federal funds sold during the three and six months ended June 30, 1999. Overall average interest earning assets increased $15,497,000 or 7.3% for the six months ended June 30, 1999 as compared to the same period in 1998. Interest expense represents interest paid on deposits, Company borrowings and convertible notes. Interest expense for the three months ended June 30, 1999 was $750,000 compared to $896,000 for the same period in 1998, a decrease of 16.3%. For the six months ended June 30, 1999, interest expense decreased to $1,600,000 from 1,797,000 for the same period in 1998. The decrease in interest expense is primarily related to a $69,000 and a $160,000 decrease in interest expenses on convertible notes, for the three and six months periods ended June 30, 1999 as compared to the same periods in 1998. Average convertible notes outstanding decreased to $879,000 and $919,000 for the three and six months period ended June 30, 1999, from $4,224,000 and $4,800,000 for the same periods in 1998. In addition, interest expense was further impacted by an increase in average repurchase agreements outstanding during the six month period ended June 30, 1999 as compared to the same period in 1998. Interest expense on repurchase agreements increased to $109,000 for the six months period ended June 30, 1999 from $3,000 for the same period in 1998. The increase in average repurchase agreements outstanding during the periods presented, was a result of the reduced level of federal funds sold and the growth in the loan portfolio. 20 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 $47,000 and $172,000 for the three and six months period ended June 30, 1999, respectively. The Company had made no provision for loan losses for the same periods in 1998. The increase in the provision for loan losses in 1999 is in response to growth in the loan portfolio and increases in nonperforming loans. Net charge-offs (recoveries) to average outstanding loans for the first six months of 1999 and 1998 were (0.04%) and (0.10%), respectively. Other Operating Income For the six months ended June 30, 1999, other operating income totaled $964,000 compared with $927,000 for the same period in 1998. The increase was primarily related to a $40,000 net gain recognized on the sale of investment securities and a $31,000 increase in merchant discount income during the first six months of 1999 as compared to 1998. In addition, other operating income was adversely impacted by declines in mortgage brokering fees on a comparative basis, for the periods presented. Other Operating Expense Other operating expenses for the first six months of 1999, increased to $6,899,000 from $6,428,000 for the same period in 1998. The increase primarily occurred in salaries and other employee benefits, legal fees and audit accounting fees. Salaries and other employee benefits increased approximately $300,000 to $3,491,000 for the first six months of 1999 from $3,191,000 for the same period in 1998. The increase primarily relates to an increase number of employees as the Company became more fully staffed and increased group health insurance expenses. Legal fees and audit/accounting fees increased $155,000 during the first six months of 1999 as compared to the same period in 1998, primarily as a result of accounting fee overages related to completing the 1998 audit and additional legal fees expended for corporate and lending activities. Income Taxes For the six months ended June 30, 1999, the provision for income taxes was $405,000 compared to $302,000 for the same period in 1998. Management of the Company is not aware of any trends, events, uncertainties or recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the liquidity, capital resources or operations of the Company. 21 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 1999 2000 2001 2002 2003 After Total Value ------- ------- ------ ------- ------- ------- -------- -------- (U.S. $ equivalent in thousands) ASSETS (1) - ---------- Securities U.S. government securities Fixed $ - $ - $1,015 $ - $ 2,023 $ - $ 3,038 $ 3,056 Weighted average interest rate 6.81% 5.89% 6.20% U.S. government agency and mortgage-backed securities Fixed - - - - 2,000 38,056 40,056 38,556 Weighted average interest rate 5.65% 6.26% 5.96% Variable - - - - - 16,996 16,996 16,605 Weighted average interest rate 5.66% 5.66% Municipal securities Fixed - - - - - 2,551 2,551 2,427 Weighted average interest rate 6.47% 6.47% Small Business Administration securities Variable - - - - - 694 694 670 Weighted average interest rate 5.40% 5.40% Collateralized mortgage securities Fixed - - - - - 7,169 7,169 6,723 Weighted average interest rate 6.32% 6.32% Variable - - - - - - - - Weighted average interest rate Federal Reserve Bank Stock Fixed - - - - - 439 439 414 Weighted average interest rate - - - - - 6.08% 6.08% Loans Fixed $ 9,270 $ 4,716 $2,316 $ 4,641 $ 3,674 $ 9,506 $ 34,123 $ 33,857 Weighted average interest rate 8.97% 9.37% 9.47% 9.69% 9.85% 7.87% 9.20% Variable 37,544 20,753 7,807 10,354 15,485 17,977 109,920 109,920 Weighted average interest rate 9.35% 9.45% 9.52% 9.48% 9.44% 9.18% 9.41%
22 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 1999 2000 2001 2002 2003 After Total Value ----- ---- ----- ---- ---- ----- ------ ----- (U.S. $ equivalent in thousands) LIABILITIES (1) - --------------- Deposits Noninterest-bearing transaction accounts $102,328 $ - $ - $ - $ - $ - $102,328 $102,328 Weighted average interest rate 0.00% - - - - - 0.00% Interest-bearing transaction accounts 12,763 - - - - - 12,763 12,763 Weighted average interest rate 0.73% - - - - - 0.73% Savings and money market accounts 78,486 - - - - - 78,486 78,486 Weighted average interest rate 1.90% - - - - - 1.90% Certificates of deposit and other time deposits Fixed 30,114 2,639 - - - - 32,753 32,636 Weighted average interest rate 4.50% 4.03% - - - - 4.33% Convertible notes - - - - - 868 868 864 Weighted average interest rate - - - - - 6.54% 6.54% 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. 23 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Statement regarding computation of per share earnings (b) Reports on Form 8-K Form Type: 8-K SEC File Number: 001-10937 File Number: 99596263 Date Filed: April 16, 1999 Description: Press release, dated April 16, 1999, announcing delay in filing Form 10-K for the fiscal year-end December 31, 1998 and temporary halt in trading. Form Type: 8-K SEC File Number: 001-10937 File Number: 99655219 Date Filed: June 28, 1999 Description: On June 28, 1999, Professional Bancorp, Inc. (the "Company") announced through a press release that the Company has agreed in principle to terms of a transaction under which it and its wholly owned subsidiary First Professional Bank, N.A. are to be acquired by FirstFed Financial Corp. 24 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PROFESSIONAL BANCORP, INC. -------------------------- (Registrant) Date: August 10, 1999 /s/ Julie P. Thompson -------------------------- Julie P. Thompson Chairman of the Board Date: August 10, 1999 /s/ Eric J. Woodstrom -------------------------------- Acting - Chief Financial Officer 25 EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 - Computation of Basic and Diluted Earnings Per Share
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- ------------------------------ 1999 1998 1999 1998 ---- ----- ---- ---- Net income (used in basic EPS computation) $ 292,268 $ 224,231 $ 627,811 $ 528,566 Adjustments to net income per assumed effect of dilutive securities: Interest on convertible notes, net of tax 7,872 48,120 17,576 111,951 effect ---------- ---------- ---------- ---------- Adjusted earnings for diluted earnings per share computation $ 300,140 $ 272,351 $ 645,387 $ 640,517 ========== ========== ========== ========== Weighted average number of shares outstanding for calculating basic earnings per share 2,015,227 1,690,479 2,011,189 1,553,870 Effect of dilutive securities: Options and warrants 71,277 82,118 68,228 194,228 Convertible notes 68,375 393,757 73,039 406,097 ---------- ---------- ---------- ---------- Weighted average number of shares outstanding for calculation of diluted earnings per share 2,154,879 2,166,354 2,152,456 2,154,195 ========== ========== ========== ========== Basic earnings per share $ 0.14 $ 0.13 $ 0.31 $ 0.34 ========== ========== ========== ========== Diluted earnings per share $ 0.14 $ 0.13 $ 0.30 $ 0.30 ========== ========== ========== ==========
/(1)/ Anti-dilutive EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 0 34,529,256 0 1,154,256 0 4,400,000 0 0 0 47,989,575 0 20,755,274 0 20,559,000 0 145,219,000 0 2,313,000 0 254,221,880 0 226,331,556 0 0 0 1,977,692 0 868,000 0 0 0 0 0 16,683 0 25,027,949 0 254,221,880 3,193,827 6,078,173 1,057,459 2,379,203 167,508 282,361 4,418,793 8,739,736 737,257 1,461,101 13,242 138,526 3,668,294 7,140,109 47,000 172,000 4,266 39,610 3,604,439 6,898,551 464,409 1,033,256 464,409 1,033,256 0 0 0 0 292,268 627,811 0.14 0.31 0.14 0.30 6.50 6.34 0 2,301,000 0 1,579,000 0 1,213,000 0 0 0 2,200,000 0 136,000 0 77,000 0 2,313,000 0 172,000 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----