SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

Quarter Ended  June 30, 2003

 

Commission File Number   0-10232

 

FIRST REGIONAL BANCORP

(Exact name of registrant as specified in its charter)

 

 

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   ý     No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding in each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

FIRST REGIONAL BANCORP

INDEX

 

Part I - Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Financial Condition (unaudited)
		Consolidated Statements of Earnings (unaudited)
		Consolidated Statements of Cash Flows (unaudited)
		Notes to Consolidated Financial Statements (unaudited)
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
Part II - Other Information
	Item 1.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits and Reports on Form 8-K
Signatures

 

2

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(unaudited)

 

		June 30, 2003			December 31, 2002
ASSETS
Cash and due from banks		$	30,573		$	28,014
Federal funds sold		10,425			21,960
Cash and cash equivalents		40,998			49,974
Investment securities, available for sale, at fair value		5,839			2,739
Interest-bearing deposits in financial institutions		3,000			0
Loans, net of allowance for losses of $6,250 at June 30, 2003 and $5,500 at December 31, 2002		510,812			399,853
Premises and equipment, net of accumulated depreciation		1,620			1,558
Accrued interest receivable and other assets		14,682			13,130
Total Assets		$	576,951		$	467,254
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing		$	196,268		$	173,192
Interest Bearing:
Savings deposits		27,200			24,207
Money market deposits		207,820			178,563
Time deposits		93,872			46,168
Total deposits		525,160			422,130
Note payable		788			862
Accrued interest payable and other liabilities		6,308			3,932
Trust Securities		12,500			12,500
Total Liabilities		544,756			439,424
Shareholders’ Equity:
Common Stock, no par value, 50,000,000 shares authorized; 2,926,000 and 2,725,000 shares issued at June 30, 2003 and December 31, 2002, respectively		16,443			13,725
Less: Unearned ESOP shares; 83,000 and 91,000 outstanding at June 30, 2003 and December 31, 2002, respectively		(746		)	(817		)
Total common stock, no par value; Outstanding 2,843,000 at June 30, 2003 and 2,634,000 at December 31, 2002 shares		15,697			12,908
Retained earnings		16,497			14,921
Accumulated other comprehensive income, Net of tax		1			1
Total Shareholders’ Equity		32,195			27,830
Total Liabilities and Shareholders’ Equity		$	576,951		$	467,254

 

The accompanying notes are an integral part of these statements.

 

3

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Per Share Amounts)
(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
INTEREST INCOME:
Interest and fees on loans		$	7,406		$	5,279		$	13,948		$	10,025
Interest on investment securities		20			14			34			32
Interest on federal funds sold		61			61			122			154
Total interest income		7,487			5,354			14,104			10,211
INTEREST EXPENSE:
Interest on deposits		648			622			1,162			1,213
Interest on trust securities		156			72			308			142
Interest on other borrowings		40			2			42			4
Total interest expense		844			696			1,512			1,359
Net interest income		6,643			4,658			12,592			8,852
PROVISION FOR LOAN LOSSES		450			150			750			200
Net interest income after provision for loan losses		6,193			4,508			11,842			8,652
OTHER OPERATING INCOME:
Customer service fees		944			672			1,821			1,389
Other, net		182			142			313			268
Total other operating income		1,126			814			2,134			1,657
OPERATING EXPENSES:
Salaries and related benefits		3,343			2,625			6,666			5,053
Occupancy expense		345			325			690			655
Equipment expense		174			150			352			290
Promotion expense		82			62			148			109
Professional service expense		383			324			720			675
Customer service expense		132			81			269			170
Supply/communication expense		198			186			386			327
Other expenses		867			463			1,401			973
Total operating expenses		5,524			4,216			10,632			8,252
Income before provision for income taxes		1,795			1,106			3,344			2,057
PROVISION FOR INCOME TAXES		745			457			1,381			849
NET INCOME		$	1,050		$	649		$	1,963		$	1,208
EARNINGS PER SHARE (Note 2)
Basic		$	0.37		$	0.25		$	0.72		$	0.46
Diluted		$	0.36		$	0.24		$	0.69		$	0.45

 

The accompanying notes are an integral part of these statements.

 

4

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

 

		Six Months Ended June 30,
		2003			2002
OPERATING ACTIVITIES
Net Income		$	1,963		$	1,208
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		750			200
Depreciation and amortization		563			226
Accretion of investment security discounts		(33		)	(2		)
Increase in accrued interest receivable		(161		)	(29		)
Increase (decrease) in accrued interest payable		33			(14		)
Increase in taxes payable		359			619
Net increase in other liabilities		1,984			1,011
Net increase in other assets		(1,774		)	(928		)
Net cash provided by operating activities		3,684			2,291
INVESTING ACTIVITIES
Increase in investments in time deposits, with other financial institutions		$	(3,000	)	$	0
(Increase) decrease in investment securities		(3,067		)	5
Decrease in guaranteed loans		3,412			4,475
Net increase in other loans		(115,121		)	(63,297		)
Increase in premises and equipment		(242		)	(207		)
Net cash used in investing activities		(118,018		)	(59,024		)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits, money market deposits, and other deposits		55,326			66,447
Net increase in time deposits		47,704			19,169
Decrease in note payable		(74		)	(76		)
Decrease in securities sold under agreement to repurchase		0			(451		)
Increase (decrease) in shareholders’ equity		2,402			(169		)
Net cash provided by financing activities		105,358			84,920
(Decrease) increase in cash and cash equivalents		(8,976		)	28,187
Cash and cash equivalents, beginning of period		49,974			51,615
Cash and cash equivalents, end of period		$	40,998		$	79,802
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	1,479		$	1,378
Income taxes paid		$	1,650		$	686

 

The accompanying notes are an integral part of these statements.

 

5

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)

 

NOTE 1                  First Regional Bancorp, a bank holding company (the Company), and one of its wholly-owned subsidiaries, First Regional Bank primarily serve Southern California through their branches.  The Company’s primary source of revenue is providing loans to customers, which are predominantly small and midsize businesses. First Regional Bancorp has two other subsidiaries, First Regional Statutory Trust I and First Regional Statutory Trust II, that exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in junior subordinated deferrable debentures issued by the Company and engaging in certain other limited activities.  Certain amounts in the 2002 financial statements have been reclassified to be comparable with the classifications used in the 2003 financial statements.

 

In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2003 and December 31, 2002 and the results of operations for the three and six month periods ended June 30, 2003 and 2002.  Interim results may not be indicative of annual operations.

 

While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company’s 2002 annual report on Form 10K.

 

Stock Compensation Plans

 

At June 30, 2003, the company had two stock-based employee incentive plans, which are described more fully in Note 10 in the 2002 Annual Report on Form 10-K. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.  The Company did not grant any stock options in the first six months of 2003 or 2002.  The following table illustrates the pro forma net income and pro forma earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

6

 

		Six Months Ended
		June 30, 2003			June 30, 2002
Net income to common shareholders:
As Reported		$	1,963,000		$	1,208,000
Pro forma		$	1,892,000		$	1,191,000
Basic earnings per share:
As reported		$	0.72		$	0.46
Pro forma		$	0.69		$	0.45

 

Recent Accounting Pronouncements

 

SFAS No. 148–Accounting for Stock-Based Compensation–Transition and Disclosure–an Amendment of FASB Statement No. 123, amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.  The adoption of such interpretation did not have a material impact on its results of operations, financial position or cash flows.

 

FIN No. 45–Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others, in November 2002.  FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of such interpretation did not have a material impact on its results of operations, financial position or cash flows.

7

 

 

SFAS No. 149-Amendment of Statement 133 on Derivative Instruments and Hedging Activities, in April 2003 which is effective for contracts entered into or modified and hedging relationships designated after June 30, 2003.  This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Implementation of this standard is not expected to have a material effect on our results of operations, financial position or cash flows.

 

SFAS No. 150-Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, in May 2003 which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  Implementation of this standard is not expected to have a material effect on our results of operations, financial position or cash flows.

 

NOTE 2                                                      Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each period.  The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options.  A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is:

 

		Three Months Ended June 30, 2003
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,050,000		2,840,842		$	0.37
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					96,207		(0.01		)
Diluted EPS
Income available to common shareholders		$	1,050,000		2,937,049		$	0.36

 

8

 

 

		Three Months Ended June 30, 2002
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	649,000		2,629,102		$	0.25
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					45,748		(0.01		)
Diluted EPS
Income available to common shareholders		$	649,000		2,674,850		$	0.24

 

 

		Six Months Ended June 30, 2003
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,963,000		2,742,588		$	0.72
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					90,326		(0.03		)
Diluted EPS
Income available to common shareholders		$	1,963,000		2,832,914		$	0.69

 

9

 

		Six Months Ended June 30, 2002
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,208,000		2,629,981		$	0.46
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					44,237		(0.01		)
Diluted EPS
Income available to common shareholders		$	1,208,000		2,674,218		$	0.45

 

 

NOTE 3                                                      As of June 30, 2003 the Bank had a total of $5,497,000 in standby letters of credit outstanding.  No losses are anticipated as a result of these transactions.

 

NOTE 4                                                      The Company’s comprehensive income includes all items which comprise net income plus the unrealized holding gains on available-for-sale securities.  For the three and six month periods ended June 30, 2003 and 2002, the Company’s comprehensive income was as follows:

 

		Three Months Ended
		June 30, 2003			June 30, 2002
		(in thousands)
Net Income		$	1,050		$	649
Other comprehensive income		1			1
Total comprehensive income		$	1,051		$	650

 

 

		Six Months Ended
		June 30, 2003			June 30, 2002
		(in thousands)
Net Income		$	1,963		$	1,208
Other comprehensive income		1			1
Total comprehensive income		$	1,964		$	1,209

 

NOTE 5                                                      Management has evaluated the Company’s overall operation and determined that its business consists of three reportable business segments as of June 30, 2003 and 2002: core banking operations, the administrative services in relation to TASC, and Trust Services.  The following describes these three business segments:

 

10

 

 

Core Bank Operations - The principal business activities of this segment are attracting funds from the general public and originating commercial and real estate loans for small and midsize businesses in Southern California.  This segment’s primary sources of revenue are interest income from loans and investment securities and fees earned in connection with loans and deposits.  This segment’s principal expenses consist of personnel, interest paid on deposits, and other general and administrative expenses.

 

Administrative Services - The principal business activity of this segment, which is operated by First Regional Bank's wholly owned subsidiary, Trust Administration Services Corp. ("TASC"), is providing administrative services for self-directed retirement plans.  The primary source of revenue for this segment is fee income from self-directed accounts.  The segment’s principal expenses consist of personnel, rent, and other general and administrative expenses.

 

Trust Services - The principal business activity of this segment is providing trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters. The primary source of revenue for this segment is fee income.  The segment’s principal expenses consist of personnel, data processing, professional service expenses, and other general and administrative expenses.

 

Total assets of Administrative Services at June 30, 2003 and December 31, 2002 were $323,000 and $804,000, respectively. The decrease in total assets in 2003 relates primarily to the write-off of the intangible asset originally booked in connection with the Company’s acquisition of TASC, by $383,000 after review for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  The write-off was deemed appropriate during a periodic review of the customers of TASC where it was determined that a substantial portion of the customers obtained at the time of the acquisition no longer were current customers of TASC due to various reasons including the imposition of higher fees.  Total assets of Trust Services at June 30, 2003 and December 31, 2002 were $71,000 and $78,000, respectively.  The remaining assets reflected on the balance sheets of the Company are associated with the core banking operations.

 

The following table shows the net income (loss) (in thousands) for the core banking operations, the administration and custodial services, and the trust services for the six month periods ended June 30, 2003 and 2002.

 

11

 

		Six Month Period Ended June 30, 2003
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	12,592								$	12,592
Provision for Loan Losses		750									750
Other operating income		1,208			$	619		$	307		2,134
Other operating expenses		9,488			744			400			10,632
Provision for income taxes		1,381									1,381
Net income		$	2,181		$	(125	)	$	(93	)	$	1,963

 

		Six Month Period Ended June 30, 2002
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	8,852								$	8,852
Provision for Loan Losses		200									200
Other operating income		1,075			$	365		$	217		1,657
Other operating expenses		7,344			554			354			8,252
Provision for income taxes		849									849
Net income		$	1,534		$	(189	)	$	(137	)	$	1,208

 

The operations of the administrative services positively affect the results of core banking operations by providing a low-cost source of deposits.  Other operating expenses of Administrative Services for the six months ended June 30, 2003 and 2002 include $383,000 and $64,000, respectively of amortization of intangible assets.  The increased amortization of $319,000 during 2003 relates primarily to the write-off of the intangible assets after a review for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

 

12

 

ITEM 2.                   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SUMMARY

 

First Regional Bancorp did not conduct any significant business activities independent of First Regional Bank.  The following discussion and analysis relates primarily to the Bank.

 

For a more complete understanding of the Company and its operations reference should be made to the financial statements included in this report and in the Company’s 2002 Annual Report on Form 10-K.  Certain statements in this report on Form 10-Q 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, and government regulations.  For additional information concerning these factors, see “Item 1. Business” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company’s financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its condensed consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management’s estimate of the allowance to increase or decrease and result in adjustments to the Company’s provision for loan losses.

 

 

13

 

                As of June 30, 2003 total assets were $576,951,000 compared to $467,254,000 at December 31, 2002, an increase of $109,697,000 or 23.5% and the June 30, 2003 asset level represents an $142,150,000 (32.7%) increase over the $434,801,000 that existed on the same date in 2002.  The 2003 asset growth reflects a corresponding increase in total deposits of $103,030,000 or 24.4%, from $422,130,000 at the end of 2002 to $525,160,000 at June 30, 2003.  While overall deposits increased, the deposit growth was centered primarily in time deposits, money market deposits, and noninterest bearing deposits, while savings deposits also experienced an increase. There were several changes in the composition of the Bank’s assets during the first six months of 2003.  The Bank’s core loan portfolio grew significantly by $110,959,000 during the six month period, bringing the Bank’s total loans to $510,812,000 at June 30, 2003 from the December 31, 2002 total of $399,853,000.  The combined effect of the increase in loans and the growth in deposits was a decrease in the level of total liquid assets.  While investment securities increased by $3.1 million and interest-bearing deposits in financial institutions increased by $3 million, cash and cash equivalents, including cash and due from banks and Federal funds sold, decreased by $8.9 million in order to accommodate the changes that took place in the rest of the balance sheet.

 

The Company earned net income of $1,050,000 in the three months ended June 30, 2003, compared to earnings of $649,000 in the second quarter of 2002. The results for the six months ended June 30, 2003 was earnings of $1,963,000 compared to net income of $1,208,000 for the corresponding period of 2002, an increase of 62.5%.

 

NET INTEREST INCOME

 

Total interest income increased by $2,133,000 (40%) for the second quarter of 2003 compared to the same period in 2002, and increased by $3,893,000 (38%) for the six month period ended June 30, 2003 compared to the prior year as total earning assets were substantially higher (55%) in 2003 than in 2002.  The majority of the increase in interest income arises from a substantial increase of $2,127,000 (40%) in interest on loans from $5,279,000 for the three months ended June 30, 2002 compared to $7,406,000 for the same period in 2003.  Although there was an increase in the loan portfolio of $171,807,000 (51%) from June 30, 2002 to June 30, 2003, the interest income increase was tempered by the Federal Reserve’s series of interest rate reductions throughout the period.  For the three months ended June 30, 2003 interest expense on deposits increased slightly by $26,000 (4%) to $648,000 from the 2002 level of $622,000 and for the six months ended June 30, 2003 interest expense on deposits decreased by $51,000 (4%) to $1,162,000 from the 2002 level of $1,213,000 due to the aforementioned interest rate reductions even though total deposits increased $126,964,000 (32%) from June 30, 2002 to June 30, 2003. The increases in deposits were primarily in noninterest bearing demand deposit accounts, money market deposits and time deposits, while savings deposits decreased.  For the three months ended June 30, 2003 interest expense on trust securities increased by $84,000 (116%), to $156,000 from the 2002 level of $72,000 due to an increase of $7,500,000 in trust securities at June 30, 2003 compared to June 30, 2002. For the six months ended June 30, 2003 interest expense on trust securities increased by $166,000 (116%), to $308,000 from the 2002

 

14

 

level of $142,000 due to the increase in trust securities compared to the prior year. The net result was an increase in net interest income of $1,985,000 (43%), from $4,658,000 in the second quarter of 2002 to $6,643,000 for the second quarter of 2003 and an increase in net interest income of $3,740,000 (42%), from $8,852,000 for the six months ended June 30, 2002 to $12,592,000 for the first six months of 2003.

 

Interest Rates and Interest Differential

 

The following table sets forth the average balances outstanding for major categories of interest earning assets and interest bearing liabili­ties and the average interest rates earned and paid thereon:

 

		For Period Ended June 30,
		2003								2002
		Average Balance			Interest Income (2)			Average Yield/ Rate %		Average Balance			Interest Income (2)			Average Yield/ Rate %
		(Dollars in Thousands)
Interest Earning Assets:
Loans (1)		$	455,385		$	13,948		6.1	%	$	311,914		$	10,025		6.4	%
Investment Securities		5,404			34			1.3	%	2,751			32			2.3	%
Funds Sold		20,927			122			1.2	%	18,336			154			1.7	%
Total Interest Earning Assets		$	481,716		$	14,104		5.9	%	$	333,001		$	10,211		6.1	%

 

 

 

 

		For Period Ended June 30,
		2003								2002
		Average Balance			Interest Expense			Average Yield/ Rate %		Average Balance			Interest Expense			Average Yield/ Rate %
		(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits		$	4,730		$	16		0.7	%	$	4,241		$	19		0.9	%
Money Market Accounts		222,053			723			0.7	%	153,484			679			0.9	%
Time deposits		59,707			423			1.4	%	56,072			515			1.8	%
Trust securities		12,500			308			4.9	%	5,000			142			5.7	%
Other Borrowings		$	6,751		$	42		1.2	%	$	455		$	4		1.8	%
Total Interest Bearing Liabilities		$	305,741		$	1,512		1.0	%	$	219,252		$	1,359		1.2	%

 

(1)                                  This figure reflects total loans, including non-accrual loans, and is not net of the allowance for possible losses, which had an average allowance balance in the first six months of $5,781,000 in 2003 and $5,052,000 in 2002.

 

(2)                                  Includes loan fees in the first six months of $1,265,000 in 2003 and $854,000 in 2002.

 

15

 

The following table shows the net interest earnings and the net yield on average interest earning assets:

 

		For the Six Month Period Ended June 30,
		2003			2002
		(Dollars in Thousands)
Total interest income (1)		$	14,104		$	10,211
Total interest expense		1,512			1,359
Net interest earnings		$	12,592		$	8,852
Average interest earning assets		$	481,716		$	333,001
Average interest bearing liabilities		$	305,741		$	219,252
Net yield on average interest earning assets		5.2		%	5.3		%

 

(1)                                  Includes loan fees in the first six months of $1,265,000 in 2003 and $854,000 in 2002.

 

The following table sets forth changes in interest income and interest expense.  The net change as shown in the column “Net Increase (Decrease)” is segmented into the change attributable to variations in volume and the change attributable to variations in interest rates.  Non-performing loans are included in average loans.

 

		Increase (Decrease) For the Six Month Periods June 30, 2003 over 2002
		Volume			Rate			Net
		(Dollars in Thousands)
Interest Income (1)
Loans (2)		$	4,370		$	(447	)	$	3,923
Funds sold		27			(59		)	(32		)
Investment securities		4			(2		)	2
Total Interest Earning Assets		$	4,401		$	(508	)	$	3,893
Interest Expense (1)
Savings		$	3		$	(6	)	$	(3	)
Money market		108			(64		)	44
Trust Preferred		182			(16		)	166
Time deposits		36			(128		)	(92		)
Other Borrowings		39			(1		)	38
Total interest bearing liabilities		$	368		$	(215	)	$	153

 

(1)                                  The change in interest due to both rate and volume has been allocated to the change due to volume and the change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.

 

(2)                                  Includes loan fees in the first six months of $1,265,000 in 2003 and $854,000 in 2002.

 

 

OTHER OPERATING INCOME

 

Other operating income increased to $1,126,000 in the second quarter of 2003 from $814,000 in the three months ended June 30, 2002.  For the first six months of 2003 other operating income also increased to $2,134,000 for the six months ended June 30, 2003 from $1,657,000 for the first six months of 2002.  Trust Administration Services Corp. (“TASC”), a wholly owned subsidiary of the Bank that provides administrative and custodial services to self-directed retirement plans, had an increase in revenue to $318,000 for the second quarter of 2003 and $618,000 for the six months ended June 30, 2003 in contrast with $177,000 in the second quarter of 2002 and $365,000 in the first six months of 2002.  The increase in TASC revenue relates to both an increase in the structure of fees charged to customers and an increase in the number of customer accounts as a result of an aggressive marketing program.  The Bank’s merchant services operation, which provides credit card deposit and clearing services to retailers and other credit card accepting businesses, had revenue that totaled $235,000 for the second quarter of 2003 and $457,000 for the six months ended June 30, 2003 in contrast with $215,000 for the second quarter of 2002 and $487,000 for the six months ended June 30, 2002.  The Bank’s Trust Department, which provides trust services for living trusts, investment

 

16

 

agency accounts, IRA rollovers, and all forms of court-related matters, had revenue of $312,000 in the first six months of 2003 and revenue of $222,000 during the first six months of 2002.  During the first six months of 2003 $4,000 in gains and $8,000 in losses on sales of premises and equipment were realized.  No gains and $2,000 in losses were realized on sales of premises and equipment in the first six months of 2002.  No gains or losses on securities sales were realized in the first six months of 2003 or 2002.

 

LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES

 

The loan portfolio consisted of the following at June 30, 2003 and December 31, 2002:

 

			June 30, 2003			December 31, 2002
			(Dollars in Thousands)
Commercial loans			$	88,515		$	80,510
Real estate construction loans			88,452			72,088
Real estate loans			328,324			237,477
Government guaranteed loans			12,848			16,260
Other loans			1,866			1,299
Total loans			520,005			407,634
Less	—  Allowances for loan losses		6,250			5,500
	—  Deferred loan fees		2,943			2,281
Net loans			$	510,812		$	399,853

 

The allowance for possible loan losses is intended to reflect the known and unknown risks which are inherent in a loan portfolio.  The adequacy of the allowance for loan losses is continually evaluated in light of many factors, including loan loss experience and current economic conditions. The allowance for loan losses is increased by provisions for loan losses, and is decreased by net charge-offs.  Management believes the allowance for loan losses is adequate in relation to both existing and potential risks in the loan portfolio.

 

The Bank has historically evaluated the adequacy of its allowance for loan losses on an overall basis rather than by specific categories of loans.  In determining the adequacy of the allowance for loan losses, management considers such factors as historical loan loss experience, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions including the effect of changes in the local real extate market on collateral values and other appropriate data to identify the risks in the loan portfolio.

 

 

17

 

The first major element includes a detailed analysis of the loan portfolio in two phases. The first phase is conducted in accordance with SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan”, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures.” Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectable in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon measuring the impairment, the Bank will ensure an appropriate level of allowance is present or established.

 

Central to the first phase and the Bank’s credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel. Credits are monitored by line and credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract.  Risk ratings are adjusted as necessary.

 

Based on the risk rating system specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

 

The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics in accordance with SFAS No. 5, “Accounting for Contingencies.” In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio allowance. Additionally groups of non-homogeneous loans, such as construction loans are also reviewed to determine a portfolio allowance.  The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other-behavioral characteristics of the subject portfolios.

 

The second major element in the Bank’s methodology for assessing the appropriateness of the allowance consists of management’s considerations of all known relevant internal and external factors that may affect a loan’s collectibility. This includes management’s estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period.

 

18

 

 

When considered necessary by management, the Bank also establishes special reserves to reflect unusual conditions that could impact the repayment performance of the Bank’s borrowers.  In 2001, for example, the bank established special reserves relating to California’s energy crisis and the economic recession.  In 2002, Management concluded that these factors would no longer influence borrower performance, and the associated reserves were discontinued.

 

Reflecting the Company’s ongoing analysis of the risks presented by its loan portfolio, the allowance for losses was $6,250,000 and $5,500,000 (or 1.21% and 1.36% of gross outstanding loans) at June 30, 2003 and December 31, 2002 respectively.  Provisions for loan losses were $450,000 and $750,000 for the three and six month period ended June 30, 2003, compared to $150,000 and $200,000 for the same periods of 2002. For the three and six months ended both June 30, 2003 and 2002, the Company generated no net loan charge-offs.

 

For the quarter ended June 30, 2003 the Company identified loans having an aggregate average balance of $3,157,000 which it concluded were impaired under SFAS No. 114.  The Company’s policy is generally to discontinue the accrual of interest income on impaired loans, and to recognize income on such loans only after the loan principal has been repaid in full and to establish a loan loss reserve for each of the impaired loans.  As of June 30, 2003, loan loss reserves for the impaired loans aggregated $694,000.

 

OTHER OPERATING EXPENSES

 

Other operating expenses increased in the first six months of 2003 compared to the same period of 2002.  Other operating expenses rose to a total of $5,524,000 for the second quarter of 2003 from $4,216,000 for the three months ended June 30, 2002.  For the six months ended June 30, 2003 other operating expenses totaled $10,632,000, an increase from $8,252,000 for the corresponding period in 2002.

 

Salary and related benefits increased by $718,000, rising from a total of $2,625,000 for the second quarter of 2002 to $3,343,000 for the same period in 2003, and also rose for the six months ended June 30, to $6,666,000 from $5,053,000 for the same period in 2002.  The increase principally reflects increases in staffing which took place during 2002 and 2003 in the regional offices and also reflects employee salary adjustments.  Occupancy expense rose to $345,000 for the three months ended June 30, 2003 from $325,000 in the second quarter of 2002, the increase reflects the rent paid on the various facilities which house the Bank’s regional offices.  Total other operating expenses rose in 2003 compared to the prior year, increasing from $2,544,000 for the first six months of 2002 to $3,276,000 for the same period of 2003.  The second quarter expenses

 

19

 

increased from $1,266,000 in 2002 to $1,836,000 for the same period of 2003.

 

The combined effects of the above-described factors resulted in income before provision for income taxes of $1,795,000 for the three months ended June 30, 2003 compared to $1,106,000 for the second quarter of 2002.  For the six months ended June 30, 2003 income before provision for income taxes is $3,344,000 compared to $2,057,000 for the first six months of the prior year.  In the second quarter, the Company’s provision for income taxes increased from $457,000 in 2002 to $745,000 in 2003.  For the six months ended June 30, 2003 the provisions were $1,381,000 compared to $849,000 in 2002.  This brought net income for the second quarter of 2003 to $1,050,000 compared to $649,000 for the same period in 2002.  For the six months ended June 30, net income in 2003 was $1,963,000, while 2002 net income through June 30 was $1,208,000.

 

LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES

 

The Company’s financial position remains liquid.  Total liquid assets (cash and due from banks, investment securities available for sale, and federal funds sold) stood at 8.9% of total deposits at June 30, 2003.  This level represents a decrease from the 12.5% liquidity level which existed on December 31, 2002.  However, at June 30, 2003 some $12.8 million of the Bank’s total loans consisted of government guaranteed loans, which represent a significant source of liquidity due to the active secondary markets which exist for these assets. The ratio of net loans (including government guaranteed loans) to deposits was 97.3% and 94.7% as of June 30, 2003 and December 31, 2002, respectively.

 

Total shareholders’ equity was $32,195,000 and $27,830,000 as of June 30, 2003 and December 31, 2002, respectively.  The Company completed a private placement during the first quarter of 2003 and issued 236,510 shares of common stock and thereby increased equity by $2,830,000.  The Company’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:

 

		6-30-03		12-31-02
Leverage Ratio (Tier I Capital to Assets):
Regulatory requirement		4.00	%	4.00	%
First Regional Bank		8.03	%	8.60	%

 

The “regulatory requirement” listed represents the level of capital required for Adequately Capitalized status.

 

In addition, bank regulators have issued risk-adjusted capital guidelines which assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity.  The Company’s risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows:

 

20

 

		6-30-03		12-31-02
Tier I Capital to Assets:
Regulatory requirement		4.00	%	4.00	%
First Regional Bank		9.08	%	9.80	%

 

		6-30-03		12-31-02
Tier I + Tier II Capital to Assets:
Regulatory requirement		8.00	%	8.00	%
First Regional Bank		10.33	%	11.00	%

 

At June 30, 2003, the Company exceeded the minimum risk-based capital ratio and leverage ratio required to be considered “well capitalized”.  The Company believes that it will continue to meet all applicable capital standards.

 

INFLATION

 

The impact of inflation on the Company differs significantly from other industries, since virtually all of its assets and liabilities are monetary. During periods of rising inflation, companies with net monetary assets will always experience a reduction in purchasing power.  Inflation continues to have an impact on salary, supply, and rent expenses, but the rate of inflation in general and its impact on these expenses in particular has remained moderate in recent years.

 

ITEM 3.                   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Because customer deposits are the Company’s principal funding source outside of its capital, management has attempted to match rates and maturities of its deposits with its investment and loan portfolios as part of its liquidity and asset and liability management policies.  The objective of these policies is to limit the fluctuations of net interest income resulting from interest rate changes.  The table which follows indicates the repricing or maturity characteristics of the major categories of the Bank’s assets and liabilities as of June 30, 2003, and thus the relative sensitivity of the Bank’s net interest income to changes in the overall level of interest rates.

 

21

 

(In Thousands)

 

Category		Floating Rate		Less than one month		One month but less than six months		Six months but less than one year		One year but less than five years		Five years or more		Non-interest earning or bearing		Total
Fed funds sold		10,425		0		0		0		0		0		0		10,425
Time deposits with other banks		0		0		0		0		3,000		0		0		3,000
Investment securities		0		600		5,239		0		0		0		0		5,839
Subtotal		10,425		600		5,239		0		3,000		0		0		19,264
Loans		505,629		235		3,450		122		1,376		0		0		510,812
Total earning assets		516,054		835		8,689		122		4,376		0		0		530,076
Cash and due from banks		0		0		0		0		0		0		30,573		30,573
Premises and equipment		0		0		0		0		0		0		1,620		1,620
Other real estate owned		0		0		0		0		0		0		0		0
Other assets		0		0		0		0		0		0		14,682		14,682
Total non-earning assets		0		0		0		0		0		0		46,875		46,875
Total assets		516,054		835		8,689		122		4,376		0		46,875		576,951
Funds purchased		0		0		0		0		0		0		0		0
Repurchase agreements		0		0		0		0		0		0		0		0
Subtotal		0		0		0		0		0		0		0		0
Savings deposits		27,200		0		0		0		0		0		0		27,200
Money market deposits		207,820		0		0		0		0		0		0		207,820
Time deposits		0		39,861		49,747		4,264		0		0		0		93,872
Trust Preferred		0		0		12,500		0		0		0		0		12,500
Total interest bearing liabilities		235,020		39,861		62,247		4,264		0		0		0		341,392
Demand deposits		0		0		0		0		0		0		196,268		196,268
Other liabilities		788		0		0		0		0		0		6,308		7,096
Equity capital		0		0		0		0		0		0		32,195		32,195
Total non-interest bearing liabilities and equity capital		788		0		0		0		0		0		234,771		235,559
Total liabilities and equity capital		235,808		39,861		62,247		4,264		0		0		234,771		576,951
GAP		280,246		(39,026	)	(53,558	)	(4,142	)	4,376		0		(187,896	)	0
Cumulative GAP		280,246		241,220		187,662		183,520		187,896		187,896		0		0

 

As the table indicates, the vast majority of the Company’s assets are either floating rate or, if fixed rate, have short maturities.  Since the yields on these assets quickly adjust to reflect changes in the overall level of interest rates, there are no significant unrealized gains or losses with respect to the Company’s assets, nor is there much likelihood of large realized or unrealized gains or losses developing in the future.

 

The Bank’s investment portfolio continues to be composed of high quality, low risk securities, primarily U.S. Treasury or Agency securities. As mentioned above, no gains or losses were recorded on securities sales in the first six months of 2003.  As of both June 30, 2003 and 2002 the Company’s investment portfolio contained unrealized gains of $1,000 and no unrealized losses.  Because the Company’s holdings of securities are intended to serve as a source of liquidity should conditions warrant, the securities have been classified by the Company as “available for sale.”

 

23

 

ITEM 4.                   CONTROLS AND PROCEDURES

 

The Company maintains controls and procedures designed to ensure that information is recorded and reported in all filings of financial reports.  Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-14(c)  promulgated under the Exchange Act.  In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives.  Management also evaluated the cost-benefit relationship of possible controls and procedures.

 

As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the Company’s controls and disclosure procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company.  Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer conclude that the Company’s disclosure controls and procedures were effective.

 

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

 

24

 

PART II - OTHER INFORMATION

 

ITEM 1.                   LEGAL PROCEEDINGS

 

Litigation

 

In the normal course of business, the Company and the Bank are involved in litigation.  Management does not expect the ultimate outcome of any pending litigation to have a material effect on the Company’s financial position or results of operations.

 

 

ITEM 4.                   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The company held its annual meeting of the shareholders on May 15, 2003. Three Class 1 Directors were elected as follows (Class 1 Directors serve until 2005):

 

Class 1

Gary M. Horgan

Thomas E. McCullough

Marilyn J. Sweeney

 

At the meeting, there were 1,780,639 votes cast for, no votes cast against, and 45,595 votes withheld with respect to Gary M. Horgan.  There were 1,778,639 votes cast for, no votes cast against, and 47,595 votes withheld with respect to Thomas E. McCullough.

 

The term of all Class 2 Directors continues until the next annual meeting of shareholders, scheduled for May of 2004.  The Class 2 Directors are Fred M. Edwards, H. Anthony Gartshore, Lawrence J. Sherman and Jack A. Sweeney.

 

No other matters were submitted for shareholder vote.

 

ITEM 6.                   EXHIBITS AND REPORTS ON FORM 8-K

 

Exhibit Number		Description
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of the Chief Operating Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.3		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

25

 

32.2		Certification of the Chief Operating Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.3		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

Reports on Form 8-K

 

No reports on Form 8-K were filed during the second quarter of 2003.  However, on July 11, 2003, the Company furnished a press release pursuant to Item 12 of Form 8-K, announcing financial results for the three and six month periods ended June 30, 2003.

 

26

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	FIRST REGIONAL BANCORP
Date: August 12, 2003	/s/ Jack A. Sweeney
	Jack A. Sweeney, Chairman of the Board and Chief Executive Officer
Date: August 12, 2003	/s/ Thomas McCullough
	Thomas McCullough, Chief Operating Officer
Date: August 12, 2003	/s/ Elizabeth Thompson
	Elizabeth Thompson, Chief Financial Officer

 

27

 

Exhibit Index

 

Exhibit Number		Description
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of the Chief Operating Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.3		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2		Certification of the Chief Operating Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.3		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

28