Attached files
file | filename |
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EX-32 - EX-32 - FIRST REGIONAL BANCORP | a09-31124_1ex32.htm |
EX-31.2 - EX-31.2 - FIRST REGIONAL BANCORP | a09-31124_1ex31d2.htm |
EX-31.3 - EX-31.3 - FIRST REGIONAL BANCORP | a09-31124_1ex31d3.htm |
EX-31.1 - EX-31.1 - FIRST REGIONAL BANCORP | a09-31124_1ex31d1.htm |
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
Quarter Ended September 30, 2009
Commission File Number 0-10232
FIRST REGIONAL BANCORP
(Exact name of registrant as specified in its charter)
California |
|
95-3582843 |
State or other jurisdiction of |
|
IRS Employer Identification Number |
incorporation or organization |
|
|
|
|
|
1801 Century Park East, Los Angeles, California |
|
90067 |
Address of principal executive offices |
|
Zip Code |
(310) 552-1776
Registrants telephone number, including area code
Not applicable
Former name, former address, and former fiscal year, if changed since last report
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act). (Check one):
Large Accelerated filer o |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company x |
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding in each of the issuers classes of common stock, as of the latest practicable date.
Common Stock, No Par Value |
|
11,836,016 |
Class |
|
Outstanding on November 23, 2009 |
FIRST REGIONAL BANCORP
2
PART I - FINANCIAL INFORMATION
FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands Except Share Data)
(Unaudited)
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
||
Assets: |
|
|
|
|
|
||
Cash and cash equivalents: |
|
|
|
|
|
||
Cash and due from banks |
|
$ |
27,124 |
|
$ |
19,192 |
|
Federal funds sold |
|
20,695 |
|
42,340 |
|
||
Total cash and cash equivalents |
|
47,819 |
|
61,532 |
|
||
|
|
|
|
|
|
||
Investment securities, available for sale - at fair value - amortized cost of $25,834 (2009) and $24,204 (2008) |
|
27,188 |
|
24,727 |
|
||
Interest-bearing deposits in financial institutions |
|
14,313 |
|
2,008 |
|
||
Federal Home Loan Bank stock at cost |
|
7,990 |
|
6,557 |
|
||
Loans - net of allowance for losses of $70,798 (2009) and $61,336 (2008) |
|
1,916,812 |
|
2,257,479 |
|
||
Premises and equipment - net of depreciation and amortization of $7,331 (2009) and $6,265 (2008) |
|
4,281 |
|
4,812 |
|
||
Other real estate owned |
|
73,156 |
|
9,611 |
|
||
Accrued interest receivable and other assets |
|
83,460 |
|
98,415 |
|
||
Total Assets |
|
$ |
2,175,019 |
|
$ |
2,465,141 |
|
|
|
|
|
|
|
||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
||
Deposits: |
|
|
|
|
|
||
Non-interest bearing |
|
$ |
387,862 |
|
$ |
368,517 |
|
Interest bearing: |
|
|
|
|
|
||
Time deposits |
|
926,128 |
|
1,101,319 |
|
||
Other deposits |
|
52,300 |
|
50,011 |
|
||
Money market deposits |
|
491,797 |
|
610,125 |
|
||
Total deposits |
|
1,858,087 |
|
2,129,972 |
|
||
|
|
|
|
|
|
||
Federal Home Loan Bank advances |
|
170,000 |
|
60,000 |
|
||
Accrued interest payable and other liabilities |
|
23,924 |
|
24,505 |
|
||
Subordinated debentures |
|
100,517 |
|
100,517 |
|
||
Total Liabilities |
|
2,152,528 |
|
2,314,994 |
|
||
|
|
|
|
|
|
||
Commitments and contingencies (Note 9) |
|
|
|
|
|
||
Shareholders Equity: |
|
|
|
|
|
||
Common Stock no par value; authorized 150,000,000 shares; Outstanding 11,836,000 (2009) and 11,834,000 (2008) |
|
45,467 |
|
45,005 |
|
||
Retained earnings(deficit) |
|
(23,761 |
) |
104,839 |
|
||
Accumulated other comprehensive income - net of tax |
|
785 |
|
303 |
|
||
Total Shareholders Equity |
|
22,491 |
|
150,147 |
|
||
|
|
|
|
|
|
||
Total Liabilities and Shareholders Equity |
|
$ |
2,175,019 |
|
$ |
2,465,141 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
||||
Interest on loans |
|
$ |
22,954 |
|
$ |
37,136 |
|
$ |
75,250 |
|
$ |
113,389 |
|
Interest on investment securities |
|
327 |
|
329 |
|
968 |
|
1,005 |
|
||||
Interest on deposits in financial institutions |
|
13 |
|
13 |
|
39 |
|
136 |
|
||||
Interest on federal funds sold |
|
18 |
|
105 |
|
78 |
|
278 |
|
||||
Total interest income |
|
23,312 |
|
37,583 |
|
76,335 |
|
114,808 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
||||
Interest on deposits |
|
8,117 |
|
11,884 |
|
28,930 |
|
32,388 |
|
||||
Interest on subordinated debentures |
|
639 |
|
1,210 |
|
2,416 |
|
4,050 |
|
||||
Interest on FHLB advances |
|
83 |
|
750 |
|
165 |
|
4,086 |
|
||||
Interest on other borrowings |
|
|
|
1 |
|
|
|
33 |
|
||||
Total interest expense |
|
8,839 |
|
13,845 |
|
31,511 |
|
40,557 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
14,473 |
|
23,738 |
|
44,824 |
|
74,251 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
PROVISION FOR LOAN LOSSES |
|
13,462 |
|
10,418 |
|
121,967 |
|
65,951 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income (loss) after provision for loan losses |
|
1,011 |
|
13,320 |
|
(77,143 |
) |
8,300 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
OTHER OPERATING INCOME: |
|
|
|
|
|
|
|
|
|
||||
Customer service fees |
|
2,165 |
|
1,756 |
|
5,820 |
|
5,611 |
|
||||
Other net |
|
251 |
|
637 |
|
875 |
|
4,434 |
|
||||
Total other operating income |
|
2,416 |
|
2,393 |
|
6,695 |
|
10,045 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
OTHER OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
||||
Salaries and related benefits |
|
7,994 |
|
7,815 |
|
25,046 |
|
25,788 |
|
||||
Occupancy expense |
|
1,016 |
|
993 |
|
3,038 |
|
2,916 |
|
||||
Equipment expense |
|
491 |
|
536 |
|
1,385 |
|
1,440 |
|
||||
Promotion expense |
|
124 |
|
161 |
|
323 |
|
487 |
|
||||
Professional service expense |
|
1,335 |
|
1,357 |
|
4,111 |
|
3,112 |
|
||||
Customer service expense |
|
277 |
|
371 |
|
875 |
|
1,404 |
|
||||
Supplies and communication expense |
|
334 |
|
329 |
|
997 |
|
1,045 |
|
||||
FDIC Assessment |
|
1,922 |
|
512 |
|
8,229 |
|
1,481 |
|
||||
Reserve for VISA litigation (reversal) |
|
|
|
|
|
|
|
(2,232 |
) |
||||
Other |
|
4,515 |
|
1,868 |
|
9,537 |
|
5,900 |
|
||||
Total other operating expenses |
|
18,008 |
|
13,942 |
|
53,541 |
|
41,341 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) before income taxes benefit |
|
(14,581 |
) |
1,771 |
|
(123,989 |
) |
(22,996 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
PROVISION FOR INCOME TAXES (BENEFIT) |
|
|
|
589 |
|
4,611 |
|
(10,400 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
NET INCOME (LOSS) |
|
$ |
(14,581 |
) |
$ |
1,182 |
|
$ |
(128,600 |
) |
$ |
(12,596 |
) |
|
|
|
|
|
|
|
|
|
|
||||
EARNINGS (LOSS) PER SHARE (Note 7) |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
(1.23 |
) |
$ |
0.10 |
|
$ |
(10.87 |
) |
$ |
(1.07 |
) |
Diluted |
|
$ |
(1.23 |
) |
$ |
0.09 |
|
$ |
(10.87 |
) |
$ |
(1.07 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
Nine Months Ended |
|
||||
|
|
2009 |
|
2008 |
|
||
OPERATING ACTIVITIES |
|
|
|
|
|
||
Net Loss |
|
$ |
(128,600 |
) |
$ |
(12,596 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
||
Provision for loan losses |
|
121,967 |
|
65,951 |
|
||
Provision for loss on other real estate owned |
|
1,583 |
|
|
|
||
Depreciation and amortization |
|
1,068 |
|
1,013 |
|
||
Amortization of investment securities premiums and discounts-net |
|
33 |
|
29 |
|
||
Stock compensation costs |
|
455 |
|
379 |
|
||
Federal Home Loan Bank stock dividends |
|
(15 |
) |
(548 |
) |
||
Net loss on sale of other real estate owned |
|
575 |
|
0 |
|
||
Realized gain on sale of VISA stock investments |
|
|
|
(2,758 |
) |
||
Net gains on sale/disposal of premises and equipment |
|
|
|
(3 |
) |
||
Impairment write down of investment securities |
|
|
|
162 |
|
||
Tax benefit from stock options exercised |
|
|
|
(44 |
) |
||
Deferred compensation expense |
|
714 |
|
757 |
|
||
Deferred income tax (benefit) |
|
13,280 |
|
(1,909 |
) |
||
Changes in assets and liabilities: |
|
|
|
|
|
||
Increase (decrease) in accrued interest receivable and other assets |
|
1,859 |
|
(21,618 |
) |
||
Decrease in accrued interest payable and other liabilities |
|
(1,295 |
) |
(756 |
) |
||
Net cash provided by operating activities |
|
11,624 |
|
28,059 |
|
||
|
|
|
|
|
|
||
INVESTING ACTIVITIES |
|
|
|
|
|
||
Net (increase) decrease in interest-bearing deposits in financial institutions |
|
(12,305 |
) |
5,038 |
|
||
Purchases of investment securities available for sale |
|
(5,491 |
) |
(1,486 |
) |
||
Proceeds from maturities of investment securities available for sale |
|
3,826 |
|
4,562 |
|
||
Purchases of Federal Home Loan Bank stock |
|
(1,418 |
) |
(9,819 |
) |
||
Redemption of Federal Home Loan Bank stock |
|
|
|
7,073 |
|
||
Net decrease (increase) in loans |
|
142,977 |
|
(298,273 |
) |
||
Purchase of CRA investments included in other assets |
|
(531 |
) |
(3,573 |
) |
||
Proceeds from sale of other real estate owned |
|
10,020 |
|
0 |
|
||
Proceeds from sale of premises and equipment |
|
|
|
8 |
|
||
Purchases of premises and equipment |
|
(537 |
) |
(632 |
) |
||
Net cash provided by (used in) used in investing activities |
|
136,541 |
|
(297,102 |
) |
||
|
|
|
|
|
|
||
FINANCING ACTIVITIES |
|
|
|
|
|
||
Decrease in non-interest bearing deposits and and other interest bearing deposits |
|
(96,694 |
) |
(299,371 |
) |
||
Net (decrease) increase in time deposits |
|
(175,191 |
) |
622,983 |
|
||
Decrease in note payable |
|
|
|
(100 |
) |
||
Increase (decrease) in Federal Home Loan Bank advances |
|
110,000 |
|
(45,000 |
) |
||
Decrease in federal funds purchased |
|
|
|
(20,955 |
) |
||
Stock options exercised |
|
7 |
|
67 |
|
||
Tax benefit from stock options exercised |
|
|
|
44 |
|
||
Common stock repurchased and retired |
|
|
|
(1,978 |
) |
||
Common stock issued |
|
|
|
378 |
|
||
Net cash (used in) provided by financing activities |
|
(161,878 |
) |
256,068 |
|
||
|
|
|
|
|
|
||
Decrease in cash and cash equivalents |
|
(13,713 |
) |
(12,975 |
) |
||
Cash and cash equivalents, beginning of period |
|
61,532 |
|
46,676 |
|
||
Cash and cash equivalents, end of period |
|
$ |
47,819 |
|
$ |
33,701 |
|
|
|
|
|
|
|
||
Supplemental Disclosures of Cash Flow Information cash paid during the period for: |
|
|
|
|
|
||
Interest paid |
|
$ |
33,010 |
|
$ |
36,342 |
|
Income taxes paid |
|
$ |
2,600 |
|
$ |
13,500 |
|
Supplemental Disclosures of non-cash investing and financing activities: |
|
|
|
|
|
||
Other real estate owned acquired through foreclosure |
|
$ |
75,723 |
|
$ |
4,605 |
|
Loan to facilitate sale of other real estate owned |
|
$ |
2,600 |
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FIRST REGIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
NOTE 1: Basis of Presentation
First Regional Bancorp, a bank holding company (the Company), and one of its wholly-owned subsidiaries, First Regional Bank, a California state-chartered bank (the Bank), primarily serve Southern California through their branches. The Companys primary source of revenue is providing loans to customers, which are predominantly small and midsize businesses.
In the opinion of the Company, the interim condensed consolidated financial statements contain all adjustments of a normal recurring nature necessary to present fairly the financial position and the results of operations for the interim periods. Interim results may not be indicative of annual operations.
The accompanying financial information has been prepared assuming that First Regional Bancorp will continue as a going concern. The ability of the Company to continue as a going concern is dependent on many factors. The Company has suffered recurring operating losses from operations, and at September 30, 2009 its capital ratios had declined below the level considered adequately capitalized by its regulators. Continued operating losses or further declines in capital levels could raise uncertainty about the ability of the Company to continue as a going concern. The financial information does not include any adjustments that might result from the eventual outcome of this uncertainty.
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 Companys 2008 annual report on Form 10-K.
NOTE 2: Regulatory Capital
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatoryand possibly additional discretionaryactions by the regulators that, if undertaken, could have a direct, material effect on the Companys consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2008, that the Company and the Bank met all capital adequacy requirements to which they are subject. Management believes that based on their respective capital ratios as of September 30, 2009, and currently, the Company is considered significantly undercapitalized while the Bank is considered undercapitalized.
The Bank is also subject to a regulatory order with the FDIC and the DFI that calls for the Bank to increase its Tier 1 leverage ratio to 10% by September 30, 2009 and maintain at least that level thereafter. For the quarter ended September 30, 2009 the Banks Tier 1 leverage ratio was 5.35%, so the Bank is not in compliance with this requirement of the regulatory order. A Capital Restoration Plan has been developed to address this deficiency, which contemplates several approaches to increasing capital to acceptable levels, including the possibilities of a rights offering to existing Company shareholders or the issuance of new Company shares to interested investors. There can be no assurance that these approaches will be successful. Should the Company or the Bank be unable to increase capital to acceptable levels, or
6
should capital levels deteriorate further, the Company and/or the Bank could be subject to additional regulatory action.
To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.
A table showing the minimum capital ratios required for the Company and the Bank and the Companys and the Banks actual capital ratios and actual capital amounts at September 30, 2009 and December 31, 2008, is as follows (in thousands):
|
|
Actual |
|
For Capital |
|
To be well Capitalized |
|
|||||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||
As of September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
57,844 |
|
2.8 |
% |
$ |
167,664 |
|
>8.0 |
% |
$ |
209,580 |
|
>10.0 |
% |
Bank |
|
$ |
144,146 |
|
6.9 |
% |
$ |
167,368 |
|
8.0 |
% |
$ |
209,210 |
|
10.0 |
% |
Tier I capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
28,922 |
|
1.4 |
% |
$ |
83,832 |
|
4.0 |
% |
$ |
125,748 |
|
6.0 |
% |
Bank |
|
$ |
117,420 |
|
5.6 |
% |
$ |
83,722 |
|
4.0 |
% |
$ |
125,583 |
|
6.0 |
% |
Tier I capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
28,922 |
|
1.3 |
% |
$ |
89,681 |
|
4.0 |
% |
$ |
112,101 |
|
5.0 |
% |
Bank |
|
$ |
117,420 |
|
5.4 |
% |
$ |
87,791 |
|
4.0 |
% |
$ |
109,738 |
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
278,578 |
|
11.3 |
% |
$ |
197,573 |
|
>8.0 |
% |
$ |
246,966 |
|
>10.0 |
% |
Bank |
|
$ |
255,178 |
|
10.3 |
% |
$ |
197,430 |
|
8.0 |
% |
$ |
246,787 |
|
10.0 |
% |
Tier I capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
199,775 |
|
8.1 |
% |
$ |
98,776 |
|
4.0 |
% |
$ |
148,164 |
|
6.0 |
% |
Bank |
|
$ |
223,946 |
|
9.1 |
% |
$ |
98,655 |
|
4.0 |
% |
$ |
147,982 |
|
6.0 |
% |
Tier I capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
199,775 |
|
8.2 |
% |
$ |
97,570 |
|
4.0 |
% |
$ |
121,963 |
|
5.0 |
% |
Bank |
|
$ |
223,946 |
|
9.2 |
% |
$ |
97,470 |
|
4.0 |
% |
$ |
121,842 |
|
5.0 |
% |
The Federal Reserve Board adopted a final rule that allows the continued inclusion of trust-preferred securities in the Tier I capital of bank holding companies until March 31, 2011. However, under the final rule, the aggregate amount of trust-preferred securities and certain other capital elements would be limited to 25% of Tier I capital elements, net of goodwill.
At the conclusion of an examination by the FDIC and DFI of the Bank in 2007, the FDIC expressed concern regarding a previously unidentified Bank Secrecy Act (BSA) concern relating to the Banks program of providing custodial services to individual retirement accounts (IRAs) administered by non-bank third parties.
In 2008, the FDIC requested that the Bank enter into a cease and desist order, principally addressing the Banks BSA duties in connection with such third party administered retirement accounts. While the Bank has questioned the need for such a cease and desist order, the Bank concluded that it was advisable for the Bank to enter into, rather than undertake a formal challenge to, the requested cease and desist order. The Bank believes it fully complied with the BSA related components of this Cease and Desist Order. The order also contains standard provisions regarding the prevention of violations of all laws and regulations. While subsequent examinations have found no further BSA violations, some violations of appraisal rules and other regulations have been noted. For this reason, the Bank has not yet achieved full compliance with all terms of this order. No assurance can be given that the FDIC will not require further action if the Bank fails to comply with the terms of the cease and desist order or otherwise fails to correct the deficiencies identified.
During February 2009, the Bank signed an order to cease and desist with the FDIC and the DFI to further strengthen the Banks operations. Under the agreement, First Regional Bank will:
7
· Retain qualified management, and continue the active involvement of its board of directors in managing the Banks activities
· Increase its capital ratios based on a pre-determined schedule that calls for the Bank to increase its Tier 1 leverage ratio to 9.5% immediately, and to further increase it to 10% by September 30,2009, and develop a comprehensive capital plan to assure compliance with that schedule. No dividends may be declared without prior regulatory approval.
· Eliminate from its books any assets classified loss and a portion of any assets classified doubtful that have not already been charged-off or collected, and develop a comprehensive plan to reduce classified assets based on a pre-determined schedule
· Create and implement a plan to increase the diversification of the Banks lending activities
· Create and implement a comprehensive profit plan to improve the Banks earnings performance
· Update or revise the Banks written policies in the areas of credit administration and liquidity management
As part of the Banks 2009 regulatory examination by the FDIC and the DFI, there were certain loan grading changes and changes in the qualitative reserves resulting from declining trends noted in the delinquent, classified and non-performing loans. As a result of these findings, we concluded that the allowance for loan losses as of June 30, 2009 should be and was increased by $69.9 million to reflect these matters, an additional $50.6 million in loan charge-offs, $1.3 million in interest reversal on impaired loans, $1.2 million in losses on foreclosed properties that were deemed to have existed as of June 30, 2009 and a $20.7 million cost of establishing a valuation allowance for deferred tax assets.
The Company utilizes a variety of funding sources in conducting its operations, including the use of brokered deposits as defined by banking regulators. Such brokered deposits totaled $760,000,000 at December 31, 2008. As a result of First Regional Banks regulatory agreement with the FDIC and the DFI, the bank is prohibited from accepting or renewing any brokered deposit, as defined, unless it receives a waiver from the FDIC. The bank has not received a brokered deposit waiver, and has no plans to seek such a waiver at this time. Instead, existing brokered deposits are being allowed to leave the bank as they mature. As of September 30, 2009 the balance of the brokered deposits had been reduced to $411,479,000; of these, $162,177,000 mature in 2009, of which $74,000,000 was paid out in October, leaving a total of $88,177,000 maturing in November and December,2009, $157,928,000 mature in 2010, and $91,374,000 mature in 2011. The bank anticipates that future brokered deposit outflows, as well as normal deposit activity by customers, will be accommodated using the proceeds of loan repayments, and other lines of credit.
In the interest of preserving its remaining cash reserves, First Regional Bancorp intends to defer interest payments on its trust preferred securities. First Regional has the right to defer interest payments for up to five years under the indentures governing its various trust preferred securities.
In September 2009, the Bank received a Prompt Corrective Action Notification of Capital letter from the FDIC. The letter indicated that the banks capital category was considered undercapitalized as of June 30, 2009. The letter reminded the Bank of the requirement for undercapitalized institutions to develop a Capital Restoration Plan, and of restrictions on growth, branching, and new lines of business imposed pursuant to section 38 of the Federal Deposit Insurance Act. The Bank has developed a Capital Restoration Plan to address this deficiency, which contemplates several approaches to increasing the Banks capital to acceptable levels, including the possibilities of a rights offering to existing Company shareholders or the issuance of new Company shares to interested investors. There can be no assurance that these approaches will be successful.
8
NOTE 3: Recent Accounting Pronouncements
In April 2009, the FASB issued ASC 820-10-65-4 (formerly FSP SFAS No.157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, to provide additional guidance for estimating fair value in accordance with ASC 820, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. As some constituents indicated that SFAS No. 157 and FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, did not provide sufficient guidance on how to determine whether a market for a financial asset that historically was active is no longer active and whether a transaction is not orderly. Therefore, this ASC 820-10-65-4 includes guidance on identifying circumstances that indicate a transaction is not orderly. We adopted ASC 820-10-65-4 in the second quarter of 2009 and the adoption did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued ASC 320-10 (Formerly FSP SFAS No.115-2 and SFAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), which amends the other-than-temporary impairment (OTTI) guidance in the U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This ASC 320-10 does not amend existing recognition and measurement guidance related to OTTI of equity securities. This issuance also requires increased and more timely disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. ASC 320-10 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of ASC 320-10 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued ASC Topic 825 (formerly FSP SFAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments), which amends SFAS No. 107, Disclosure about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This ASC 825 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. ASC Topic 825 is effective for interim and annual reporting periods ending after June 15, 2009. If a reporting entity elects to adopt early either FSP SFAS No. 157-4 or FSP SFAS No. 115-2 and SFAS No. 124-2, the reporting entity also is required to adopt early this ASC Topic 825. However, this does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, Topic 825 requires comparative disclosures only for periods ending after initial adoption. The adoption of ASC Topic 825 did not have a material impact on our consolidated financial statements.
In May 2009, the FASB issued new authoritative guidance under ASC Topic 855 (formerly Statement No. 165) Subsequent Events, to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855 is to be applied to the accounting for and disclosure of subsequent events, and is applied to both interim and annual financial statements. This statement does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. ASC Topic 855 is effective for interim or annual financial periods ending after June 15, 2009. Events that occurred subsequent to September 30, 2009 have been evaluated by the Companys management in accordance with ASC 855 through the time of filing this report on November 23, 2009. The adoption of ASC Topic 855 did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued new authoritative guidance under ASC Topic 860 (formerly Statement No. 166) Transfers and Servicing. This statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. ASC Topic 860 addresses (1) practices that have developed since the issuance of SFAS No. 140 that are not consistent with the original intent and key requirements of that statement, and (2) concerns of financial statement users that many of the financial assets (and related
9
obligations) that have been derecognized should continue to be reported in the financial statements of transferors. ASC Topic 860 is effective at the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual periods thereafter. Early adoption is prohibited. This statement must be applied to transfers occurring on or after the effective date. However, the disclosure provisions of this statement should be applied to transfers that occurred both before and after the effective date. Additionally, on and after the effective date, the concept of qualifying special-purpose entity (SPE) is no longer relevant for accounting purposes. Therefore, formerly qualifying SPEs, as defined under previous accounting standards, should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. We are in the process of evaluating the impact that the adoption of ASC Topic 860 will have on our consolidated financial statements.
In June 2009, the FASB issued new authoritative guidance under SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). Under FASBs Codification at ASC 105-10-65-1d, SFAS 167 will remain authoritative until integrated into the FASB Codification. SFAS 167 amends FIN 46 (Revised December 2003), Consolidation of Variable Interest Entities, to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. SFAS 167 requires additional disclosures about the reporting entitys involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entitys financial statements. SFAS 167 will be effective January 1, 2010 and we are in the process of evaluating the impact that the adoption of SFAS No. 166 will have on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162, which is now codified in FASB ASC 105, The Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. ASC 105 was effective for interim and annual financial statements issued after September 15, 2009. The adoption of ASC 105 did not have a material impact on our consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05 Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value (ASU 2009-05) which provides guidance on measuring the fair value of liabilities under FASB ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASU 2009-05 clarifies that the unadjusted quoted price for an identical liability, when traded as an asset in an active market is a Level 1 measurement for the liability and provides guidance on the valuation techniques to estimate fair value of a liability in the absence of a Level 1 measurement. ASU 2009-05 is effective for the first interim or annual reporting period beginning after its issuance. The adoption of ASU 2009-05 did not have a material effect on our consolidated financial statements.
In September 2009, ASU 2009-12, Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),was issued. The issuance allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investees net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entitys measurement date. Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed. The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted. The Company does not have investments in such entities and, consequently, there will be no impact to our financial statements.
10
NOTE 4: Allowance for Loan Losses and Unfunded Loan Commitments
An analysis of the activity in the allowance for loan losses for the three and nine months ended September 30, 2009 and 2008 is as follows (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance beginning of period |
|
$ |
61,403 |
|
$ |
44,152 |
|
$ |
61,336 |
|
$ |
22,771 |
|
Provision for loan losses |
|
13,462 |
|
10,418 |
|
121,967 |
|
65,951 |
|
||||
Loans charged off |
|
|
|
|
|
|
|
|
|
||||
Real estate construction |
|
(792 |
) |
|
|
(56,277 |
) |
(33,990 |
) |
||||
Real estate secured |
|
(3,059 |
) |
|
|
(23,152 |
) |
|
|
||||
Unsecured |
|
(246 |
) |
|
|
(33,407 |
) |
(254 |
) |
||||
|
|
(4,097 |
) |
|
|
(112,836 |
) |
(34,244 |
) |
||||
Allowance for unfunded loan commitments and lines of credit |
|
(106 |
) |
104 |
|
115 |
|
178 |
|
||||
Recoveries on loans previously charged off |
|
136 |
|
|
|
216 |
|
18 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance end of period |
|
$ |
70,798 |
|
$ |
54,674 |
|
$ |
70,798 |
|
$ |
54,674 |
|
Management believes the allowance for loan losses as of September 30, 2009, is adequate to absorb losses inherent in the loan portfolio. While the Company is responsible for determining the adequacy of the allowance, Managements estimates of the allowance are subject to review by the Federal Deposit Insurance Corporation (the FDIC) and the California Department of Financial Institutions (the CDFI) upon examination of the Bank by such authorities.
Loans are determined to be impaired when it is determined probable that the bank will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans include both non-performing and performing assets. Per banking industry convention, non-performing assets consist of loans past due 90 or more days and still accruing interest, loans on non-accrual status, and other real estate owned (OREO).
The increase in the provision for loan losses, loans charged off and the allowance for loan losses for the three and nine months ended September 30, 2009 reflect an adjustment to the factors utilized in calculating the allowance for loan losses. These include recent trends in delinquent, classified and non-performing loans in the Banks loan portfolio, as well as changes in property values in the market areas served by the Bank. The increase in the recorded investment in non-performing and performing impaired loans is a result of continued deterioration in the real estate market during the year. All impaired loans are evaluated for specific reserves and charge-offs as appropriate. Due to these deterioration factors, the Company has also increased the general reserve for non-impaired loans.
At September 30, 2009 and December 31, 2008, the recorded investment in non-performing and performing impaired loans net of charge-offs was $416,267,000 and $215,190,000, with specific reserves of $37,813,000 and $32,264,000, respectively. All loans for which impairment had been recognized had a related specific reserve or had been partially charged off at September 30, 2009 and December 31, 2008.
The average recorded investment in impaired loans during the third quarter ended September 30, 2009 and 2008 was $272,032,000, and $103,116,000, respectively. Interest income of $ 40,000 and $0 on impaired loans was recognized for cash payments received in the first nine months of 2009 and 2008, respectively. Foregone interest on impaired loans during the first nine months of 2009 and 2008 was $6,953,000 and $2,494,000, respectively.
11
NOTE 5: Fair Value Disclosures
FASB ASC 820 Fair Value Measurements and Disclosures (Formerly SFAS No. 157) provides a framework for measuring fair value under GAAP. This standard applies to all financial assets and liabilities, and certain non-financial assets and liabilities, that are being measured and reported at fair value on a recurring or non-recurring basis. For the Company, this includes the investment securities available-for-sale (AFS) portfolio, impaired loans, and other real estate owned (OREO).
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.
Level 3: Significant unobservable inputs that reflect the reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of the Companys valuation methodologies used to measure and disclose the fair values of its assets and liabilities on a recurring or nonrecurring basis:
Investment securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, when available, or the prices of other securities with similar characteristics. Level 1 securities include both U.S. Treasury and actively traded U.S. government sponsored enterprise debt securities, and Level 2 securities are comprised of U.S. government sponsored enterprise debt securities in accordance with GAAP.
Impaired Loans In accordance with GAAP, the Companys impaired loans are generally measured using the fair value of the underlying collateral, which is determined based on the most recent appraisal information received. Appraised values may be adjusted based on factors such as the Companys historical knowledge and changes in market conditions from the time of valuation. As of September 30, 2009, collateral dependent impaired loans totaled $314,729,000 net of the specific reserves. Collateral dependent impaired loans fall within Level 3 of the fair value hierarchy since they were measured at fair value based on appraisals of the underlying collateral.
OREO In accordance with GAAP, at the acquisition date, the Companys OREO assets are recorded at fair value, which is determined based on the most recent appraisal information received. Subsequent to the acquisition date, the Companys OREO assets are reported at the lower of carrying amount or fair value, which is determined based on the most recent appraisal information received. Appraised values may be adjusted based on factors such as the Companys historical knowledge and changes in market conditions from the time of valuation. As of September 30, 2009, OREO assets totaled $73,156,000, net of valuation allowance. OREO assets fall
12
within Level 3 of the fair value hierarchy since they were measured at fair value based on appraisals.
The balances of assets measured at fair value on a recurring basis as of September 30, 2009 were as follows (in $1,000s):
|
|
Total |
|
Quoted Prices |
|
Significant |
|
|||
|
|
|
|
|
|
|
|
|||
U. S. Treasury Securities |
|
$ |
2,249 |
|
$ |
2,249 |
|
$ |
|
|
U. S. Government Sponsored Enterprise debt securities |
|
24,939 |
|
1,000 |
|
23,939 |
|
|||
|
|
|
|
|
|
|
|
|||
Securities available for sale |
|
$ |
27,188 |
|
$ |
3,249 |
|
$ |
23,939 |
|
The amortized cost and estimated fair values of securities available for sale as of September 30, 2009 and December 31, 2008 were as follows (dollars in thousands):
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
September 30, 2009 |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury Securities |
|
$ |
2,248 |
|
$ |
1 |
|
$ |
|
|
$ |
2,249 |
|
U.S. Government sponsored Enterprise debt securities |
|
23,586 |
|
1,353 |
|
|
|
24,939 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
25,834 |
|
$ |
1,354 |
|
$ |
|
|
$ |
27,188 |
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2008 |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury Securities |
|
$ |
249 |
|
$ |
1 |
|
$ |
|
|
$ |
250 |
|
U.S. Government sponsored Enterprise debt securities |
|
23,955 |
|
522 |
|
|
|
24,477 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
24,204 |
|
$ |
523 |
|
$ |
|
|
$ |
24,727 |
|
At September 30, 2009 and December 31, 2008, no securities have been in a continuous unrealized loss position for greater than 12 months.
The balances of assets measured at fair value on a non-recurring basis as of September 30, 2009 and the total losses resulting from the fair value adjustments as of September 30, 2009 were as follows (in $1,000s):
|
|
|
|
|
|
Total Losses |
|
||||||
|
|
Total |
|
Significant |
|
Quarter |
|
Nine Months |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Impaired loans (1) |
|
$ |
334,818 |
|
$ |
334,818 |
|
$ |
(452 |
) |
$ |
(83,648 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO (2) |
|
77,825 |
|
77,825 |
|
(236 |
) |
(1,397 |
) |
||||
Balance at September 30, 2009 |
|
$ |
412,643 |
|
$ |
412,643 |
|
$ |
(688 |
) |
$ |
(85,045 |
) |
(1) Represents carrying value and related reserve remeasurements on collateral dependent loans for which adjustments are based upon the appraised value of the collateral. The fair value measurements of the impaired loans are presented before deducting the estimated costs to sell.
(2) The loss on OREO represents fair value adjustments. The fair value measurements of the OREO are presented before deducting the estimated costs to sell.
13
There were no material liabilities carried at fair value, measured on a recurring or non-recurring basis at September 30, 2009.
Fair Value of Financial Instruments
The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts (in thousands).
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||||
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
$ |
27,124 |
|
$ |
27,124 |
|
$ |
19,192 |
|
$ |
19,192 |
|
Federal funds sold |
|
20,695 |
|
20,695 |
|
42,340 |
|
42,340 |
|
||||
Interest-bearing deposits in financial institutions |
|
14,313 |
|
14,313 |
|
2,008 |
|
2,008 |
|
||||
Investment securities available for sale |
|
27,188 |
|
27,188 |
|
24,727 |
|
24,727 |
|
||||
Federal Home Loan Bank Stock |
|
7,990 |
|
7,990 |
|
6,557 |
|
6,557 |
|
||||
Loans |
|
1,916,812 |
|
1,920,647 |
|
2,257,479 |
|
2,327,785 |
|
||||
Accrued interest receivable |
|
6,195 |
|
6,195 |
|
9,462 |
|
9,462 |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Deposits: |
|
|
|
|
|
|
|
|
|
||||
Non-interest bearing |
|
$ |
387,862 |
|
$ |
387,862 |
|
368,517 |
|
368,517 |
|
||
Interest-bearing: |
|
|
|
|
|
|
|
|
|
||||
Time deposits |
|
926,128 |
|
931,119 |
|
1,101,319 |
|
1,132,401 |
|
||||
Money market and other deposits |
|
544,097 |
|
544,097 |
|
660,136 |
|
660,136 |
|
||||
Subordinated debentures |
|
100,517 |
|
100,517 |
|
100,517 |
|
100,805 |
|
||||
Federal funds purchased |
|
|
|
|
|
|
|
|
|
||||
Federal Home Loan Bank advances |
|
170,000 |
|
170,000 |
|
60,000 |
|
60,000 |
|
||||
Accrued interest payable |
|
7,740 |
|
7,740 |
|
8,985 |
|
8,985 |
|
||||
Fair values of commitments to extend credit and standby letters of credit are immaterial as of September 30, 2009 and December 31, 2008.
The fair values of cash and due from banks, federal funds sold, non-interest- bearing deposits, money market and other deposits, note payable, Federal funds purchased, FHLB advances, accrued interest receivable and payable, generally approximate their book value due to the short maturities.
The carrying value Federal Home Loan Bank stock approximates fair value, as the stock may be sold back to the Federal Home Loan Bank at carrying value.
The fair value of investment securities available for sale is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services. The fair value of loans and interest-bearing deposits is estimated based on present values using applicable risk-adjusted spreads to the U.S. Treasury curve to approximate current entry-value interest rates applicable to each category of such financial instruments. In obtaining such valuation from third parties, the Company has reviewed the methodologies used to develop their results.
No adjustment was made to the entry-value interest rates for changes in credit of performing loans for which there are no known credit concerns. Management segregates loans in appropriate risk categories. Management believes that the risk factor embedded in the entry-value interest rates, along with the general reserves applicable to the performing loan portfolio for which there are no known credit concerns, results in a fair valuation of such loans on an entry-value basis. The recorded book value of $311,168,000 in 2009 and $111,057,000 in 2008 on non-performing and performing loans were not included in the fair value amounts because it is not practicable to reasonably assess the credit adjustment that would be applied in the marketplace for such loans.
14
The fair value of the junior subordinated deferrable debentures is estimated by discounting the cash flows through maturity based on prevailing market rates at each reporting date.
The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2009 and December 31, 2008. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.
NOTE 6: Other Real Estate Owned
Other real estate owned includes properties acquired through foreclosure. The Company had five (5) OREO properties December 31, 2008. During the nine months of 2009, the Company acquired fourteen (14) OREO properties and sold four (4) OREO properties for a total of fifteen (15) OREO properties at September 30, 2009. The balance of other real estate owned is as follows (in thousands):
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||
|
|
Number of |
|
Amount |
|
Number of |
|
Amount |
|
||
|
|
|
|
|
|
|
|
|
|
||
Other Real Estate Owned, Net: |
|
|
|
|
|
|
|
|
|
||
Land |
|
5 |
|
$ |
14,276 |
|
3 |
|
$ |
2,908 |
|
Apartments |
|
7 |
|
46,438 |
|
1 |
|
3,444 |
|
||
Condominium conversion |
|
|
|
|
|
1 |
|
3,259 |
|
||
Residential |
|
2 |
|
6,142 |
|
|
|
|
|
||
Construction |
|
1 |
|
6,300 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Other Real Estate Owned, Net |
|
|
|
$ |
73,156 |
|
|
|
$ |
9,611 |
|
NOTE 7: Earnings per Share and Stock Based Compensation
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. Due to the net loss recorded during the three and nine months ended September 30, 2009 and during the nine months ended September 30, 2008, incremental shares resulting from the assumed conversion, exercise or contingent issuance of securities is not included as their effect on earnings or loss per share would be anti-dilutive. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings (loss) per share is:
|
|
Three Months Ended September 30, 2009 |
|
||||||
|
|
Loss |
|
Weighted Average |
|
Per |
|
||
Basic Loss Per Share |
|
|
|
|
|
|
|
||
Loss available to common shareholders |
|
$ |
(14,581,000 |
) |
11,836,000 |
|
$ |
(1.23 |
) |
|
|
|
|
|
|
|
|
||
Effect of Dilutive Securities |
|
|
|
|
|
|
|
||
Incremental shares from assumed exercise of outstanding options |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Diluted Loss Per Share |
|
|
|
|
|
|
|
||
Loss available to common shareholders |
|
$ |
(14,581,000 |
) |
11,836,000 |
|
$ |
(1.23 |
) |
15
|
|
Three Months Ended September 30, 2008 |
|
||||||
|
|
Income |
|
Weighted Average |
|
Per |
|
||
Basic Earnings Per Share |
|
|
|
|
|
|
|
||
Income available to common shareholders |
|
$ |
1,182,000 |
|
11,822,000 |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
||
Effect of Dilutive Securities |
|
|
|
|
|
|
|
||
Incremental shares from assumed exercise of outstanding options |
|
|
|
937,000 |
|
(0.01 |
) |
||
|
|
|
|
|
|
|
|
||
Diluted Earnings Per Share |
|
|
|
|
|
|
|
||
Income available to common shareholders |
|
$ |
1,182,000 |
|
12,759,000 |
|
$ |
0.09 |
|
|
|
Nine Months Ended September 30, 2009 |
|
||||||
|
|
Loss |
|
Weighted Average |
|
Per |
|
||
Basic Loss Per Share |
|
|
|
|
|
|
|
||
Loss available to common shareholders |
|
$ |
(128,600,000 |
) |
11,836,000 |
|
$ |
(10.87 |
) |
|
|
|
|
|
|
|
|
||
Effect of Dilutive Securities |
|
|
|
|
|
|
|
||
Incremental shares from assumed exercise of outstanding options |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Diluted Loss Per Share |
|
|
|
|
|
|
|
||
Loss available to common shareholders |
|
$ |
(128,600,000 |
) |
11,836,000 |
|
$ |
(10.87 |
) |
|
|
Nine Months Ended September 30, 2008 |
|
||||||
|
|
Loss |
|
Weighted Average |
|
Per |
|
||
Basic Loss Per Share |
|
|
|
|
|
|
|
||
Loss available to common shareholders |
|
$ |
(12,596,000 |
) |
11,813,000 |
|
$ |
(1.07 |
) |
|
|
|
|
|
|
|
|
||
Effect of Dilutive Securities |
|
|
|
|
|
|
|
||
Incremental shares from assumed exercise of outstanding options |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Diluted Loss Per Share |
|
|
|
|
|
|
|
||
Loss available to common shareholders |
|
$ |
(12,596,000 |
) |
11,813,000 |
|
$ |
(1.07 |
) |
As discussed above, anti-dilutive shares from stock options are excluded from the computation of loss per share. The anti-dilutive stock options totaled 2,360,000 for the three and nine months ended September 30, 2009. There were 711,000 and 2,330,000 anti-dilutive stock options for the three and nine months ended September 30, 2008, respectively.
Stock Compensation Plans
In May 2005, the Companys Board of Directors adopted a non-qualified employee stock option plan that expires in 2015 and authorizes the issuance of up to 600,000 (amended to 800,000 in July 2008)shares of its common stock upon the exercise of options granted. The plan is intended to allow the Company the ability to grant stock options to persons who had not previously been awarded option grants commensurate with their positions, primarily persons hired since the exhaustion of options available for grant under the Companys previous stock option plans. The Companys Board of Directors believes that the Plan will assist the Company in attracting and retaining high quality officers and staff, and will provide grantees under the Plan with added incentive for high levels of performance and to assist in the effort to increase the Companys earnings. During 2005, 2007, 2008 and April 2009, the Company granted options to buy up to 177,000, 45,000, 506,000 and 50,000 shares of the Companys common stock to certain officers of the Company and its subsidiaries. All such granted options will vest over seven years and expire in 2015, 2017, 2018 and 2019, respectively.
16
In 1999, the Company adopted a nonqualified employee stock option plan that authorizes the issuance of up to 1,800,000 shares of its common stock and expires in 2009.
Under all plans, options may be granted at a price not less than the fair market value of the stock at the date of the grant.
A summary of the award activity under the stock option plans as of September 30, 2009 and changes during the nine-month period is presented below:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Shares |
|
Weighted |
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2009 |
|
2,330 |
|
$ |
6.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
50 |
|
2.60 |
|
|
|
|
|
|
Exercised |
|
(2 |
) |
2.92 |
|
|
|
|
|
|
Cancelled |
|
(18 |
) |
13.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2009 |
|
2,360 |
|
$ |
6.07 |
|
4.63 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at September 30, 2009 |
|
1,807 |
|
$ |
5.72 |
|
4.36 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2009 |
|
1,655 |
|
$ |
5.24 |
|
3.38 years |
|
|
|
The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2009 was $-0- and $1,000, respectively. The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2008 was $45,000 and $106,000 respectively. The total fair value of shares vested during the three and nine month periods ended September 30, 2009 was $298,000 and $605,000, respectively. The total fair value of shares vested during the three and nine month periods ended September 30, 2008 was $132,000 and $411,000, respectively.
As of September 30, 2009, there was $1,960,000 of total unrecognized compensation cost related to non-vested share-based compensation awards granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.87 years. The Company received $7,000 and $67,000 cash from the exercise of stock options during the nine month periods ended September 30, 2009 and 2008, respectively.
For the three and nine month periods ended September 30, 2009, stock based compensation expense reduced income before taxes by $151,000 and $454,000 and reduced net income by $87,000 and $263,000. This additional expense reduced both basic and diluted earnings per share by $0.01 for the three months ended September 30, 2009, and reduced both basic and diluted earnings per share by $0.02 for the nine months ended September 30, 2009 Cash provided by operating activities and cash provided by financing activities were not impacted during the nine months of 2009 as there were no excess tax benefits from the exercise of stock options.
For the three and nine month periods ended September 30, 2008, stock based compensation expense reduced income before taxes by $142,000 and $379,000 and reduced net income by $82,000 and $220,000. This additional expense reduced both basic and diluted earnings per share by $0.01 for the three months ended September 30, 2008, and reduced both basic and diluted earnings per share by $0.02 for the nine months ended September 30, 2008. Cash provided by operating activities decreased by $44,000 and cash provided by financing activities increased by an identical amount for the first nine months of 2008 related to excess tax benefits from the exercise of stock options.
NOTE 8: Income Taxes
The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the financial reporting and tax basis of its assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets when it is more-likely-than-not that a portion or all of the deferred tax assets will not be realized.
17
During the third quarter of 2009, the Company reviewed its analysis of whether a valuation allowance should be recorded against its deferred tax assets. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. During the third quarter of 2009, the estimated realization period for the deferred tax asset based on forecasts of future earnings extended further into the 20-year carryforward period compared to the realization period forecasted in the first quarter of 2009. This extended realization period, combined with the objective evidence of a two-year cumulative loss position and continued near-term losses represent significant negative evidence that caused the Company to conclude that a $57,344,000 deferred tax valuation allowance was required at September 30, 2009. Of this amount, $20,670,000 represents previously recognized deferred tax benefits where the Company has determined they can no longer meet the more likely than not threshold for recognizing this asset. To the extent that the Company generates taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance will ultimately reverse through income tax expense when the Company can demonstrate a sustainable return to profitability that would lead management to conclude that it is more likely than not that the deferred tax asset will be utilized during the 20-year carryforward period.
The Companys effective tax rate for the three and nine months ended September 30, 2009 was 0% and 3.7%, respectively. The Companys effective tax rate for the three and nine months ended September 30, 2008 was 33.3% and (45.2)%, respectively. The change in the effective tax rate is primarily due to the increase in the valuation allowance associated with the net operating losses incurred during the three and nine months ended September 30, 2009.
NOTE 9: Commitments and Contingencies
As of September 30, 2009, the Bank had a total of $13,838,000 in financial and performance standby letters of credit outstanding. No significant losses are anticipated as a result of these transactions.
NOTE 10: Comprehensive Income
The Companys comprehensive income includes all items which comprise net income plus the unrealized holding (losses) gains on available-for-sale securities. For the three and nine month periods ended September 30, 2009 and 2008, the Companys comprehensive income (loss), net of taxes, was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(Dollars in Thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
(14,581 |
) |
$ |
1,182 |
|
$ |
(128,600 |
) |
$ |
(12,596 |
) |
Other comprehensive income (loss) |
|
181 |
|
8 |
|
482 |
|
(158 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Total comprehensive income (loss) |
|
$ |
(14,400 |
) |
$ |
1,190 |
|
$ |
(128,118 |
) |
$ |
(12,754 |
) |
NOTE 11: Operating Segment Reports
Management has evaluated the Companys overall operation and determined that its business consists of certain reportable business segments as of September 30, 2009 and 2008: core banking operations, the administrative services in relation to TAS (as defined below), and Trust Services. The following describes these three business segments:
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 segments primary sources of revenue are interest income from loans and investment securities
18
and fees earned in connection with loans and deposits. This segments principal expenses consist of interest paid on deposits, personnel, and other general and administrative expenses. Core banking services also include the Banks merchant services operations, which provide credit card deposits and clearing services to retailers and other credit card accepting businesses and which generates fee income.
Trust Administrative Services - The principal business activity of the Banks division, Trust Administration Services (referred to as Administrative Services or TAS) 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 segments principal expenses consist of personnel, rent, data processing 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 segments principal expenses consist of personnel, data processing, professional service expenses, and other general and administrative expenses.
Total assets of TAS at September 30, 2009 and December 31, 2008 were $1,188,000 and $951,000, respectively and total assets of Trust Services at September 30, 2009 and December 31, 2008 were $71,000 and $72,000, respectively. The remaining assets reflected on the condensed consolidated balance Sheets of the Company are associated with core banking operations.
A table showing the net income (loss) for the core banking operations, administrative services, and trust services for the three and nine-month periods ended September 30, 2009 and 2008 (in thousands).
|
|
Three Month Period Ended September 30, 2009 |
|
||||||||||
|
|
Core |
|
|
|
|
|
|
|
||||
|
|
Banking |
|
Administrative |
|
Trust |
|
Combined |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
$ |
14,473 |
|
|
|
|
|
$ |
14,473 |
|
||
Provision for loan losses |
|
13,462 |
|
|
|
|
|
13,462 |
|
||||
Other operating income |
|
1,069 |
|
$ |
849 |
|
$ |
498 |
|
2,416 |
|
||
Other operating expenses |
|
17,005 |
|
687 |
|
316 |
|
18,008 |
|
||||
Provision (benefit) for income taxes |
|
(144 |
) |
68 |
|
76 |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
(14,781 |
) |
$ |
94 |
|
$ |
106 |
|
$ |
(14,581 |
) |
|
|
Three Month Period Ended September 30, 2008 |
|
||||||||||
|
|
Core |
|
|
|
|
|
|
|
||||
|
|
Banking |
|
Administrative
|
|
Trust |
|
Combined
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
$ |
23,738 |
|
|
|
|
|
$ |
23,738 |
|
||
Provision for loan losses |
|
10,418 |
|
|
|
|
|
10,418 |
|
||||
Other operating income |
|
1,239 |
|
$ |
587 |
|
$ |
567 |
|
2,393 |
|
||
Other operating expenses |
|
12,881 |
|
758 |
|
303 |
|
13,942 |
|
||||
Provision (benefit) for income taxes |
|
550 |
|
(72 |
) |
111 |
|
589 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
1,128 |
|
$ |
(99 |
) |
$ |
153 |
|
$ |
1,182 |
|
|
|
Nine Month Period Ended September 30, 2009 |
|
||||||||||
|
|
Core |
|
|
|
|
|
|
|
||||
|
|
Banking |
|
Administrative |
|
Trust |
|
Combined |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
$ |
44,824 |
|
|
|
|
|
$ |
44,824 |
|
||
Provision for loan losses |
|
121,967 |
|
|
|
|
|
121,967 |
|
||||
Other operating income |
|
3,049 |
|
$ |
2,072 |
|
$ |
1,574 |
|
6,695 |
|
||
Other operating expenses |
|
50,203 |
|
2,396 |
|
942 |
|
53,541 |
|
||||
Provision (benefit) for income taxes |
|
4,482 |
|
(136 |
) |
265 |
|
4,611 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
(128,779 |
) |
$ |
(188 |
) |
$ |
367 |
|
$ |
(128,600 |
) |
19
|
|
Nine Month Period Ended September 30, 2008 |
|
||||||||||
|
|
Core |
|
|
|
|
|
|
|
||||
|
|
Banking |
|
Administrative
|
|
Trust |
|
Combined |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
$ |
74,251 |
|
|
|
|
|
$ |
74,251 |
|
||
Provision for loan losses |
|
65,951 |
|
|
|
|
|
65,951 |
|
||||
Other operating income |
|
6,442 |
|
$ |
1,864 |
|
$ |
1,739 |
|
10,045 |
|
||
Other operating expenses |
|
38,072 |
|
2,380 |
|
889 |
|
41,341 |
|
||||
Provision (benefit) for income taxes |
|
(10,540 |
) |
(217 |
) |
357 |
|
(10,400 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
(12,790 |
) |
$ |
(299 |
) |
$ |
493 |
|
$ |
(12,596 |
) |
In addition, the operations of the administrative services positively affect the results of core banking operations by providing a source of low-cost deposits.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
First Regional Bancorp does 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 Companys Annual Report on Form 10-K for the year ended December 31, 2008. Certain statements in this report on Form 10-Q constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, included herein may constitute forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from managements expectations include fluctuations in interest rates, inflation, government regulations, and economic conditions and competition in the geographic and business areas in which First Regional Bancorp conducts its operations. For additional information concerning these factors, see Item 1. Business contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
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 Companys 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 managements estimate of the allowance to increase or decrease and result in adjustments to the Companys provision for loan losses. Other accounting policies that require significant judgment and assumptions by management include the provision for income taxes, evaluation of investments for other than temporary impairment and stock-based compensation.
20
As of September 30, 2009 total assets were $2,175,019,000 compared to $2,465,141,000 at December 31, 2008, a decrease of $290,122,000 or 11.8% and the September 30, 2009 asset level represents a $242,946,000 (10.1%) decrease over the $2,417,965,000 that existed on the same date in 2008. The Company has made a deliberate effort to reduce total assets and net loans in concert with our ongoing program of shrinking the asset base. Total deposits decreased by $271,885,000 or 12.8%, from $2,129,972,000 at the end of 2008 to $1,858,087,000 at September 30, 2009. While overall deposits decreased, the deposit decline was centered in time deposits, a $175,191,000 (15.9%) decrease and money market deposits, a $118,328,000 (19.4%) decrease, while non-interest bearing deposits and other deposits experienced an increase. There were several changes in the composition of the Banks assets during the nine months of 2009. The Banks loan portfolio decreased significantly by $340,667,000 during the nine-month period, bringing the Banks total loans, net of allowance for losses and deferred loan fees, to $1,916,812,000 at September 30, 2009 from the December 31, 2008 total of $2,257,479,000. Reflecting the current severe economic conditions for the nine months ended September 30, 2009, First Regional has made $121,967,000 in provisions to its allowance for loan losses and charged off a total of $112,836,000 in loans. These transactions brought the loan loss allowance to $70,798,000 or 3.56% of gross loans at September 30, 2009. Non-performing assets as of the same date totaled $384,324,000, net of charge-offs, or 18.65% of gross loans, including other real estate owned of $73,156,000, compared to $120,668,000 at December 31, 2008. The combined effect of the decrease in loans and the decrease in deposits was a slight decrease in the level of total liquid assets (cash and due from banks, Federal funds sold and investment securities). Investment securities and interest-bearing deposits in financial institutions increased by $14,766,000, while cash and cash equivalents (cash and due from banks and Federal funds sold), decreased by $13,713,000 in order to accommodate the changes that took place in the rest of the balance sheet.
For the nine months ended September 30, 2009, the Company established a deferred tax valuation allowance of $57,344,000. Of this amount, $20,670,000 represents previously recognized deferred tax benefits where the Company has determined they can no longer meet the more likely than not threshold for recognizing this asset. This valuation allowance was established in the second quarter of 2009. The remainder of the valuation allowance is associated with deferred tax assets that are associated with the current years continued losses.
The Company had a net loss of $14,581,000 in the three months ended September 30, 2009, compared to net income of $1,182,000 in the third quarter of 2008. The results for the nine months ended September 30, 2009 was a net loss of $128,600,000 compared to a net loss of $12,596,000 for the corresponding period of 2008, a decrease of 921%.
NET INTEREST INCOME
Net interest income is the excess of interest income earned on interest-earning assets over interest expense incurred on interest-bearing liabilities. Interest income and interest expense are determined by the average volume of interest-bearing assets or liabilities, and the average rate of interest earned or paid on those assets or liabilities. In contrast to the nine months of 2008, in the nine months of 2009 there was a slight increase in interest earning assets, excluding loans. The Banks core loan portfolio decreased during the nine months of 2009.
Total interest income decreased by $14,271,000 (38%) for the third quarter of 2009 compared to the same period in 2008, and decreased by $38,473,000 (34%) for the nine-month period ended September 30, 2009 compared to the same period in 2008 although total average earning assets were slightly higher (0.3%) in 2009 than in 2008. The majority of the decrease in interest income arises from a substantial decrease of $14,182,000 (38%) in interest on loans from $22,954,000 for the three months ended September 30, 2009 compared to $37,136,000 for the same period in 2008. Although interest income decreased primarily due to the Federal Reserves series of interest rate decreases, it also decreased due to a decrease in the loan portfolio of $331,122,000 (15%) and the increase in non-performing assets from $33,102,000 to $384,324,000 from September 30, 2008 to September 30, 2009. For the three months ended September 30, 2009 interest expense on deposits decreased by $3,767,000 (32%) to $8,117,000 from the 2008 level of $11,884,000 and for the nine months ended September 30, 2009 interest expense on deposits decreased by $3,458,000 (11%) to $28,930,000 from the 2008 level of $32,388,000 primarily due the Federal Reserves series of interest rate decreases but also due to a decrease in total deposits of $186,602,000 (9%) from September 30, 2008 to September 30, 2009. The decreases in deposits were
21
primarily in money market accounts, while savings deposits showed decreases and time deposits and demand deposits increased. For the three months ended September 30, 2009 interest expense on subordinated debentures decreased by $571,000 (47%) to $639,000 from the 2008 level of $1,210,000 due to a decrease in interest rates during the period. For the nine months ended September 30, 2009 interest expense on subordinated debentures decreased by $1,634,000 (40%) to $2,416,000 from the 2008 level of $4,050,000 due to a decrease in interest rates during the period. For the three months ended September 30, 2009 interest expense on FHLB advances decreased by $667,000 (89%), to $83,000 from the 2008 level of $750,000 due to a combination of a decrease of $24,021,000 in average FHLB advances for the three month period ended September 30, 2009 compared to September 30, 2008 and a decrease in interest rates during the period. For the nine months ended September 30, 2009 interest expense on FHLB advances decreased by $3,921,000 (96%), to $165,000 from the 2008 level of $4,086,000 due to the decrease in average FHLB advances compared to the prior year and due to a decrease in interest rates during the period. The net result was a decrease in net interest income of $9,265,000 (39%) from $23,738,000 in the third quarter of 2008 to $14,473,000 for the third quarter of 2009 and a decrease in net interest income of $29,427,000 (40%) from $74,251,000 for the nine months ended September 30, 2008 to $44,824,000 for the nine months of 2009.
Interest Rates and Interest Differential
The following table sets forth the average daily balances outstanding for major categories of interest earning assets and interest bearing liabilities and the average interest rates earned and paid thereon:
|
|
For the Three Month Period Ended September 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|
|
|
Interest |
|
Average |
|
|
|
Interest |
|
Average |
|
||||
|
|
Average |
|
Income |
|
Yield/ |
|
Average |
|
Income |
|
Yield/ |
|
||||
|
|
(Dollars in Thousands) |
|
||||||||||||||
|
|
|
|
||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans (1) |
|
$ |
2,071,899 |
|
$ |
22,954 |
|
4.4 |
% |
$ |
2,328,298 |
|
$ |
37,136 |
|
6.3 |
% |
Interest bearing deposits in financial institutions |
|
14,223 |
|
13 |
|
0.4 |
% |
2,002 |
|
13 |
|
2.6 |
% |
||||
Investment securities |
|
25,936 |
|
327 |
|
5.0 |
% |
24,583 |
|
329 |
|
5.3 |
% |
||||
Federal funds sold |
|
27,742 |
|
18 |
|
0.3 |
% |
21,434 |
|
105 |
|
1.9 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Interest Earning Assets |
|
$ |
2,139,800 |
|
$ |
23,312 |
|
4.3 |
% |
$ |
2,376,317 |
|
$ |
37,583 |
|
6.3 |
% |
|
|
For the Three Month Period Ended September 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
||||
|
|
Average |
|
Interest |
|
Yield/ |
|
Average |
|
Interest |
|
Yield/ |
|
||||
|
|
(Dollars in Thousands) |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other deposits |
|
$ |
52,938 |
|
$ |
59 |
|
0.4 |
% |
$ |
70,087 |
|
$ |
278 |
|
1.6 |
% |
Money market accounts |
|
504,499 |
|
1,350 |
|
1.1 |
% |
779,079 |
|
4,150 |
|
2.1 |
% |
||||
Time deposits |
|
997,410 |
|
6,708 |
|
2.7 |
% |
798,427 |
|
7,456 |
|
3.7 |
% |
||||
Subordinated debentures |
|
100,517 |
|
639 |
|
2.5 |
% |
100,517 |
|
1,210 |
|
4.8 |
% |
||||
FHLB advances |
|
106,359 |
|
83 |
|
0.3 |
% |
130,380 |
|
750 |
|
2.3 |
% |
||||
Other borrowings |
|
53 |
|
|
|
0.0 |
% |
230 |
|
1 |
|
1.7 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Interest Bearing Liabilities |
|
$ |
1,761,776 |
|
$ |
8,839 |
|
2.0 |
% |
$ |
1,878,720 |
|
$ |
13,845 |
|
2.9 |
% |
(1) This figure reflects total loans, including non-accrual loans, and is not net of the allowance for losses, which had an average balance in the third quarter of $63,691,000 in 2009 and $44,782,000 in 2008 and is not net of deferred loan fees,
22
which had an average balance in the third quarter of $3,089,000 in 2009 and $6,152,000 in 2008.
(2) Includes loan fees for the third quarter of $909,000 in 2009 and $1,994,000 in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Month Period Ended September 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|
|
|
Interest |
|
Average |
|
|
|
Interest |
|
Average |
|
||||
|
|
Average |
|
Income |
|
Yield/ |
|
Average |
|
Income |
|
Yield/ |
|
||||
|
|
(Dollars in Thousands) |
|
||||||||||||||
|
|
|
|
||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans (1) |
|
$ |
2,224,890 |
|
$ |
75,250 |
|
4.5 |
% |
$ |
2,249,687 |
|
$ |
113,389 |
|
6.7 |
% |
Interest bearing deposits in financial institutions |
|
8,891 |
|
39 |
|
0.6 |
% |
4,737 |
|
136 |
|
3.8 |
% |
||||
Investment securities |
|
25,530 |
|
968 |
|
5.1 |
% |
24,698 |
|
1,005 |
|
5.4 |
% |
||||
Federal funds sold |
|
44,544 |
|
78 |
|
0.2 |
% |
17,182 |
|
278 |
|
2.2 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Interest Earning Assets |
|
$ |
2,303,855 |
|
$ |
76,335 |
|
4.4 |
% |
$ |
2,296,304 |
|
$ |
114,808 |
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Month Period Ended September 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
||||
|
|
Average |
|
Interest |
|
Yield/ |
|
Average |
|
Interest |
|
Yield/ |
|
||||
|
|
(Dollars in Thousands) |
|
||||||||||||||
|
|
|
|
||||||||||||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other deposits |
|
$ |
51,675 |
|
$ |
186 |
|
0.5 |
% |
$ |
67,834 |
|
$ |
831 |
|
1.6 |
% |
Money market accounts |
|
531,668 |
|
4,598 |
|
1.2 |
% |
876,026 |
|
16,117 |
|
2.5 |
% |
||||
Time deposits |
|
1,092,283 |
|
24,146 |
|
3.0 |
% |
524,208 |
|
15,440 |
|
3.9 |
% |
||||
Subordinated debentures |
|
100,517 |
|
2,416 |
|
3.2 |
% |
100,517 |
|
4,050 |
|
5.4 |
% |
||||
FHLB advances |
|
67,629 |
|
165 |
|
0.3 |
% |
213,544 |
|
4,086 |
|
2.6 |
% |
||||
Other borrowings |
|
30 |
|
|
|
0.0 |
% |
1,489 |
|
33 |
|
3.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Interest Bearing Liabilities |
|
$ |
1,843,802 |
|
$ |
31,511 |
|
2.3 |
% |
$ |
1,783,618 |
|
$ |
40,557 |
|
3.0 |
% |
(1) This figure reflects total loans, including non-accrual loans, and is not net of the allowance for losses, which had an average balance in the first nine months of $66,315,000 in 2009 and $37,068,000 in 2008 and is not net of deferred loan fees, which had an average balance in the nine months of $3,659,000 in 2009 and $6,848,000 in 2008.
(2) Includes loan fees for the nine months of $3,237,000 in 2009 and $6,512,000 in 2008. The following table shows the net interest earnings and the net yield on average interest earning assets:
23
|
|
For the Three Month |
|
For the Nine Month |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(Dollars in Thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Total interest income (l) |
|
$ |
23,312 |
|
$ |
37,583 |
|
$ |
76,335 |
|
$ |
114,808 |
|
Total interest expense |
|
8,839 |
|
13,845 |
|
31,511 |
|
40,557 |
|
||||
Net interest earnings |
|
$ |
14,473 |
|
$ |
23,738 |
|
$ |
44,824 |
|
$ |
74,251 |
|
|
|
|
|
|
|
|
|
|
|
||||
Average interest earnings assets |
|
$ |
2,139,800 |
|
$ |
2,376,317 |
|
$ |
2,303,855 |
|
$ |
2,296,304 |
|
|
|
|
|
|
|
|
|
|
|
||||
Average interest bearing liabilities |
|
$ |
1,761,776 |
|
$ |
1,878,720 |
|
$ |
1,843,802 |
|
$ |
1,783,618 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net yield on average interest earning assets |
|
2.7 |
% |
4.0 |
% |
2.6 |
% |
4.3 |
% |
(1) Includes loan fees in the third quarter of $909,000 in 2009 and $1,994,000 in 2008 and the nine months of $3,237,000 in 2009 and $6,512,000 in 2008.
The following table sets forth changes in interest income and interest expense. The net change as shown in the column Net 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.
|
|
Net Increase (Decrease) |
|
Net Increase (Decrease) |
|
||||||||||||||
|
|
2009 over 2008 |
|
2009 over 2008 |
|
||||||||||||||
|
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
||||||
|
|
(Dollars in Thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest income (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Loans (2) |
|
$ |
(3,741 |
) |
$ |
(10,441 |
) |
$ |
(14,182 |
) |
$ |
(1,239 |
) |
$ |
(36,900 |
) |
$ |
(38,139 |
) |
Interest bearing deposits in financial institutions |
|
|
|
|
|
|
|
(2,850 |
) |
2,753 |
|
(97 |
) |
||||||
Federal funds sold |
|
45 |
|
(132 |
) |
(87 |
) |
(454 |
) |
254 |
|
(200 |
) |
||||||
Investment securities |
|
20 |
|
(22 |
) |
(2 |
) |
37 |
|
(74 |
) |
(37 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total interest earning assets |
|
$ |
(3,676 |
) |
$ |
(10,595 |
) |
$ |
(14,271 |
) |
$ |
(4,506 |
) |
$ |
(33,967 |
) |
$ |
(38,473 |
) |
|
|
Net Increase (Decrease) |
|
Net Increase (Decrease) |
|
||||||||||||||
|
|
2009 over 2008 |
|
2009 over 2008 |
|
||||||||||||||
|
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
||||||
|
|
(Dollars in Thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest Expense (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other deposits |
|
$ |
(56 |
) |
$ |
(163 |
) |
$ |
(219 |
) |
$ |
(163 |
) |
$ |
(482 |
) |
$ |
(645 |
) |
Money market accounts |
|
(1,159 |
) |
(1,641 |
) |
(2,800 |
) |
(4,908 |
) |
(6,611 |
) |
(11,519 |
) |
||||||
Subordinated Debentures |
|
|
|
(571 |
) |
(571 |
) |
|
|
(1,634 |
) |
(1,634 |
) |
||||||
Time deposits |
|
5,726 |
|
(6,474 |
) |
(748 |
) |
11,300 |
|
(2,594 |
) |
8,706 |
|
||||||
FHLB advances |
|
(117 |
) |
(550 |
) |
(667 |
) |
(1,722 |
) |
(2,199 |
) |
(3,921 |
) |
||||||
Other borrowings |
|
|
|
(1 |
) |
(1 |
) |
(16 |
) |
(17 |
) |
(33 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total interest bearing liabilities |
|
$ |
4,394 |
|
$ |
(9,400 |
) |
$ |
(5,006 |
) |
$ |
4,491 |
|
$ |
(13,537 |
) |
$ |
(9,046 |
) |
(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 third quarter of $909,000 in 2009 and $1,994,000 in 2008 and the nine months of $3,237,000 in 2009 and $6,512,000 in 2008.
24
PROVISION FOR LOAN LOSSES
The allowance for loan losses is intended to reflect the known and unknown risks, which are inherent in a loan portfolio at the time of reporting. 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.
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 and other appropriate data to identify the risks in the loan portfolio.
The first major element includes a detailed analysis of the loan portfolio in two phases. In the first phase individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are not expected to be collected in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loans effective interest rate, the fair value of the loans 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 insure an appropriate level of allowance is present or established.
Central to the first phase and the Banks 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 borrowers 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 borrowers 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 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 Companys methodology for assessing the appropriateness of the allowance consists of managements considerations of all known relevant internal and external factors that may affect a loans collectibility. This includes managements 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.
Reflecting the Companys ongoing analysis of the risks presented by its loan portfolio and concerns with the economic climate and its potential impact, the allowance for losses was $70,798,000 and $61,336,000 (or 3.56% and 2.64% of gross outstanding loans) at September 30, 2009 and December 31, 2008, respectively. There was a $13,462,000 total provision for loan losses primarily related to an increase in the general valuation reserve, during the three month period ended September 30, 2009, compared to $10,418,000 including $9,015,000 related to impaired loans for the same period of 2008. There was a $121,967,000 total provision for loan losses primarily related to impaired loans, during the nine-month period ended September 30, 2009, compared to $65,951,000 including $61,518,000 related to
25
impaired loans for the same period of 2008. For the three and nine months ended September 30, 2009, the Company generated net loan charge-offs of $4,097,000 and $112,836,000, respectively, compared to net loan charge-offs of $0 and $34,244,000 for the three and nine months ended September 30, 2008, respectively. The Company had loan recoveries of $216,000 and $18,000 during the nine months ended September 30, 2009 and 2008, respectively.
The allowance for loan losses has been allocated to the major categories of loans as set forth in the following table. The allocations are estimates based upon historical loss experience and management judgment. The allowance for loan losses should not be interpreted as an indication that charge-offs will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories, since even in this allocation is an unallocated portion, and, as previously stated, the total allowance is applicable to the entire portfolio (dollar amounts in the following table are in thousands).
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||
|
|
Allowance |
|
Ratio of |
|
Allowance |
|
Ratio of |
|
||
|
|
|
|
|
|
|
|
|
|
||
Commercial |
|
$ |
3,307 |
|
12 |
% |
$ |
15,121 |
|
12 |
% |
Real Estate |
|
37,162 |
|
68 |
% |
22,737 |
|
62 |
% |
||
Real Estate Construction |
|
17,329 |
|
20 |
% |
23,478 |
|
26 |
% |
||
Government Guaranteed |
|
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
|
||
Unallocated |
|
13,000 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Total |
|
$ |
70,798 |
|
100 |
% |
$ |
61,336 |
|
100 |
% |
The unallocated reserve of $13 million at September 30, 2009 relates to additional qualitative adjustments to the reserves established in light of continued declines in real estate values and declining economic conditions.
Loans are determined to be impaired when it is determined probable that the bank will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans include both non-performing and performing assets. Per banking industry convention, non-performing assets consist of loans past due 90 or more days and still accruing interest, loans on non-accrual status, and other real estate owned (OREO). As of September 30, 2009 First Regional had $748,000 in loans past due 90 or more days which were still accruing interest, and $73,156,000 in other real estate owned. The Companys non-performing assets as of September 30, 2009, which consist of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and other real estate owned, were as follows:
26
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||
Asset Type |
|
Number |
|
Amount |
|
Number |
|
Amount |
|
||
|
|
|
|
|
|
|
|
|
|
||
Loans On Non-Accrual Status: |
|
|
|
|
|
|
|
|
|
||
Land Loans |
|
18 |
|
$ |
87,839,000 |
|
4 |
|
$ |
22,506,000 |
|
Construction Loans |
|
11 |
|
98,556,000 |
|
5 |
|
39,297,000 |
|
||
Commercial real estate loans |
|
8 |
|
31,544,000 |
|
8 |
|
16,357,000 |
|
||
Apartment loans |
|
6 |
|
49,224,000 |
|
0 |
|
|
|
||
Residential loan |
|
|
|
|
|
1 |
|
7,096,000 |
|
||
Condominium complexes |
|
3 |
|
33,096,000 |
|
0 |
|
|
|
||
Unsecured Loans |
|
6 |
|
10,161,000 |
|
5 |
|
7,261,000 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Net Non-Accrual Loans |
|
|
|
310,420,000 |
|
|
|
92,517,000 |
|
||
|
|
|
|
|
|
|
|
|
|
||
90 or More Days Past Due: |
|
|
|
|
|
|
|
|
|
||
Land loans |
|
|
|
|
|
3 |
|
14,200,000 |
|
||
Apartment loan |
|
|
|
|
|
1 |
|
4,340,000 |
|
||
Commercial real estate loan |
|
|
|
|
|
|
|
|
|
||
Unsecured loans |
|
3 |
|
748,000 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Loans Past Due 90 days or more |
|
|
|
748,000 |
|
|
|
18,540,000 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Non-Performing Loans |
|
|
|
$ |
311,168,000 |
|
|
|
$ |
111,057,000 |
|
|
|
|
|
|
|
|
|
|
|
||
Other Real Estate Owned, Net: |
|
|
|
|
|
|
|
|
|
||
Land |
|
5 |
|
$ |
14,276,000 |
|
3 |
|
2,908,000 |
|
|
Apartments |
|
7 |
|
46,438,000 |
|
1 |
|
3,444,000 |
|
||
Condominium conversion |
|
|
|
|
|
1 |
|
3,259,000 |
|
||
Residential |
|
2 |
|
6,142,000 |
|
|
|
|
|
||
Construction |
|
1 |
|
6,300,000 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Other Real Estate Owned, Net |
|
|
|
73,156,000 |
|
|
|
9,611,000 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Non-Performing Assets |
|
|
|
$ |
384,324,000 |
|
|
|
$ |
120,668,000 |
|
Performing assets that are considered impaired due to concerns with the economic climate consist of the following:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||
Asset Type |
|
Number |
|
Amount |
|
Number |
|
Amount |
|
||
Commercial real estate |
|
7 |
|
$ |
35,536,000 |
|
|
|
|
|
|
Apartment loans |
|
6 |
|
53,522,000 |
|
10 |
|
$ |
60,883,000 |
|
|
Land loan |
|
|
|
|
|
1 |
|
4,831,000 |
|
||
Unsecured |
|
4 |
|
2,911,000 |
|
1 |
|
24,221,000 |
|
||
Construction |
|
2 |
|
13,130,000 |
|
1 |
|
14,198,000 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Performing Assets Considered Impaired |
|
|
|
$ |
105,099,000 |
|
|
|
$ |
104,133,000 |
|
|
|
|
|
|
|
|
|
|
|
||
Total Performing and Non-Performing Loans Considered Impaired |
|
|
|
$ |
416,267,000 |
|
|
|
$ |
215,190,000 |
|
Thus, at September 30, 2009 and December 31, 2008, the Company has identified non-performing and performing loans, net of charge-offs, totaling $416,267,000 and $215,190,000, which it concluded were impaired. These loans are principally secured by real estate or other guarantees.
The Companys policy is to cease the accrual of interest on loans which become 90 days or more past due. In limited circumstances, the Bank will continue to accrue interest on a past due loan if it is considered well-secured and is in the process of collection or renewal. Loans past due 90 days or more and still accruing interest represent less than 1% of the Banks loans.
27
Loans past due 90 days and still accruing at each quarter end are either successfully resolved or are placed on non-accrual status in the subsequent quarter. Accordingly, the loans past due 90 days and still accruing at any quarter end are generally different from those of the preceding quarter end. The composition of the loans past due 90 days and still accruing fluctuates in response to the changing characteristics of the underlying loans.
The Companys policy is to recognize income on such non-accrual loans only after the loan principal has been repaid in full. The Company has established a loss reserve for each of the performing and non-performing impaired loans, which at September 30, 2009 and December 31, 2008 totaled $37,813,000 and $32,264,000, respectively, for the loans as a group.
Other real estate owned includes properties acquired through foreclosure. The Company had five (5) OREO properties December 31, 2008. During the nine months of 2009, the Company acquired fourteen (14) OREO properties and sold four (4) OREO properties for a total of fifteen (15) OREO properties at September 30, 2009.
At September 30, 2009, the Company has identified loans having an aggregate average balance of $272,032,000, which it concluded were impaired. By comparison, at September 30, 2008, the Company had identified loans having an aggregate average balance of $103,116,000, which it concluded were impaired. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability of impairment. 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 and or charges off a portion of the balance for each of these credits.
OTHER OPERATING INCOME
Other operating income increased to $2,416,000 in the third quarter of 2009 from $2,393,000 in the three months ended September 30, 2008. For the first nine months of 2009 other operating income decreased to $6,695,000 from $10,045,000 for the nine months of 2009. During the first quarter of 2008, the Company realized a gain of $2,758,000 on the redemption of restricted stock of Visa Inc. The Banks Trust Administration Services division, which provides administrative and custodial services to self-directed retirement plans, had revenue, which increased to $849,000 for the third quarter of 2009 and $2,072,000 for the nine months ended September 30, 2009 in contrast with $587,000 in the third quarter of 2008 and $1,864,000 in the first nine months of 2008. The Banks Trust Department, that provides trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters, had revenue of $498,000 and $1,574,000 in the three and nine months ended September 30, 2009 and revenue of $567,000 and $1,739,000 during three and nine months ended September 30, 2008. The Banks merchant services operation, which provides credit card deposit and clearing services to retailers and other credit card accepting businesses, had revenue that totaled $538,000 for the third quarter of 2009 and $1,337,000 for the nine months ended September 30, 2009 in contrast with $339,000 for the third quarter of 2008 and $1,139,000 for the nine months ended September 30, 2008. During the nine months of 2009, no gains of or losses on sales of premises and equipment were realized. In contrast, during the nine months of 2008 gains of $3,000 and no losses on sales of premises and equipment were realized. During the first nine months of 2008, the Company realized a gain of $2,758,000 on the redemption of restricted stock of Visa Inc. No losses on securities sales were realized in the first nine months of 2009 or 2008. The Bank recorded $162,000 in OTTI charges during the first nine months of 2008. During the first nine months of 2009, a net loss of $576,000 was realized on the sale of the four OREO properties. No OREO properties were sold during the first nine months of 2008.
OTHER OPERATING EXPENSES
Overall operating expenses increased in the first nine months of 2009 compared to the same period of 2008. Operating expenses rose to a total of $18,008,000 for the third quarter of 2009 from $13,942,000 for the three months ended September 30, 2008. For the nine months ended September 30, 2009 operating expenses totaled $53,541,000 an increase from $41,341,000 for the corresponding period in 2008. Included in other operating expenses
28
during the first quarter of 2008 is a reversal of a litigation accrual of $2,232,000 further described below.
Salary and related benefits increased by $179,000 (2.3%), from a total of $7,815,000 for the third quarter of 2008 to $7,994,000 for the same period in 2009, and for the nine months ended September 30, 2009 decreased to $25,046,000 from $25,788,000 for the nine month period in 2008. The nine-month period decrease in this expense category principally reflects decreases in staffing and also reflects employee incentive adjustments. Occupancy expense rose to $3,038,000 for the nine months ended September 30, 2009 from $2,916,000 in the same period of 2008. The increase reflects the rent paid on additional space at the various facilities which house the Banks headquarters and many of the regional offices. The total of all other operating expenses rose in 2009 compared to the prior year, increasing from $12,637,000 for the first nine months of 2008 to $25,457,000 for the same period of 2009 and increased from $5,134,000 in the third quarter of 2008 to $8,998,000 for the third quarter of 2009.
The FDIC assessment increased to $1,922,000 in the third quarter of 2009, compared to $512,000 in the third quarter of 2008. The FDIC assessment increased to $8,229,000 for the nine months of 2009 compared to $1,481,000 during the nine months of 2008. On May 22, 2009, the FDIC adopted a rule designed to replenish the deposit insurance fund. This rule establishes a special assessment of five basis points (bps) on each FDIC-insured depository institutions assets minus its Tier 1 capital, with a maximum assessment not to exceed 10 bps of an institutions domestic deposits. This special assessment was calculated based on asset levels at June 30, 2009 and was collected on September 30, 2009. Included in the FDIC assessment noted above, the Corporation recorded a charge of $1,000,000 in the second quarter of 2009 in connection with this assessment. Additionally, beginning April 1, 2009, the FDIC increased fees on deposits based on a revised risk-weighted methodology, which increased the base assessment rates. The FDIC is currently evaluating a number of approaches to maintain its reserves at mandated levels. Such approaches include additional special assessments, requiring financial institutions to prepay future deposit insurance premiums, accessing the FDICs credit line with the U.S. Treasury, or some combination of these or other approaches. At this time it is uncertain which approach the FDIC will pursue, or the impact, if any, that the FDICs approach will have on the Company.
During the fourth quarter of 2007, the Company recorded a charge of $2,232,000 for its share of contingent liabilities relating to settlement of lawsuits by Visa Inc. This charge was reversed in the first quarter of 2008 after the successful completion of the Visa Inc. initial public offering (IPO), where a portion of the proceeds from the IPO funded an escrow account expected to be used for litigation settlement/claims, reducing all other operating expenses.
The combined effects of the above-described factors resulted in a loss before taxes of $14,581,000 for the three months ended September 30, 2009 compared to income before taxes of $1,771,000 for the third quarter of 2008. For the nine months ended September 30, 2009 the loss before taxes is $123,989,000 compared to a loss of $22,996,000 for the first nine months of the prior year. In the third quarter, the Companys provision for taxes decreased from tax of $589,000 in 2008 to no tax in 2009. For the nine months ended September 30, 2009, the tax provision was $4,611,000 compared to a tax benefit of $10,400,000 in 2008. The effective tax rate for the nine-month periods ended September 30, 2009 and 2008 are 3.7% and (45.2%), respectively. This brought net loss for the third quarter of 2009 to $14,581,000 compared to net income of $1,182,000 for the same period in 2008. For the nine months ended September 30, net loss in 2009 was $128,600,000 while 2008 net loss for the same period was $12,596,000.
INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale as of September 30, 2009 and December 31, 2008 were as follows (dollars in thousands):
29
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
September 30, 2009 |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury Securities |
|
$ |
2,248 |
|
$ |
1 |
|
$ |
|
|
$ |
2,249 |
|
U.S. Government sponsored Enterprise debt securities |
|
23,586 |
|
1,353 |
|
|
|
24,939 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
25,834 |
|
$ |
1,354 |
|
$ |
|
|
$ |
27,188 |
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2008 |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury Securities |
|
$ |
249 |
|
$ |
1 |
|
$ |
|
|
$ |
250 |
|
U.S. Government sponsored Enterprise debt securities |
|
23,955 |
|
522 |
|
|
|
24,477 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
24,204 |
|
$ |
523 |
|
$ |
|
|
$ |
24,727 |
|
At September 30, 2009 and December 31, 2008, no securities have been in a continuous unrealized loss position for greater than 12 months.
LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES
The loan portfolio consisted of the following at September 30, 2009 and December 31, 2008:
|
|
September 30, |
|
December 31, |
|
||
|
|
(Dollars in Thousands) |
|
||||
|
|
|
|
|
|
||
Commercial loans |
|
$ |
237,165 |
|
$ |
276,885 |
|
Real estate construction loans |
|
406,542 |
|
603,866 |
|
||
Land loans |
|
177,299 |
|
249,468 |
|
||
Apartment loans |
|
464,216 |
|
541,330 |
|
||
Other real estate loans |
|
701,886 |
|
647,960 |
|
||
Government guaranteed loans |
|
741 |
|
1,337 |
|
||
Other loans |
|
2,460 |
|
2,601 |
|
||
|
|
|
|
|
|
||
Total loans |
|
1,990,309 |
|
2,323,447 |
|
||
|
|
|
|
|
|
||
Less Allowances for loan losses |
|
(70,798 |
) |
(61,336 |
) |
||
Deferred loan fees |
|
(2,699 |
) |
(4,632 |
) |
||
Net loans |
|
$ |
1,916,812 |
|
$ |
2,257,479 |
|
Government guaranteed loans represent loans for which the repayment of principal and interest is guaranteed by the U.S. government. The loans bear contractual interest at various rates tied to national prime lending rates.
The Banks lending is concentrated in real estate and businesses in Southern California. From time to time, this area has experienced adverse economic conditions. Future declines in the local economy or in real estate values may result in increased losses that cannot reasonably be predicted at this date. No industry constitutes a concentration in the Banks portfolio, except the real estate construction industry.
The Bank offers a full range of lending services including commercial, real estate, and real estate construction loans. The Bank has developed a substantial portfolio of short- and medium-term mini-perm first trust deed loans for income properties as well as specializing in construction lending for moderate-size commercial and residential projects. The Bank also offers commercial loans for commercial and industrial borrowers, which includes equipment financing as well as short-term loans. Typically, the Banks loans are variable rate loans are priced at a margin over Wall Street Journal Prime, adjusting daily, and are fully-indexed from inception. Because the Banks variable rate
30
loans adjust daily and are fully-indexed from inception, the year of origination of the Banks loans does not have a material impact on borrower performance or loan defaults.
Major Loan Products
Lending operations are focused on specialized niche segments rather than the types of credit products that one might consider typical for financial institutions. The Company has no involvement in consumer lending, such as home mortgages, homeowner equity lines of credit, consumer installment loans, credit cards, and so forth. Instead, the Company focuses its lending operations on construction loans, mini-perm loans on income properties, bridge loans on income properties, land loans, and unsecured commercial loans (both term loans and lines of credit) to corporations and professionals. Each loan is different, and is individually underwritten. The underwriting process includes and evaluation of the borrowers credit history using credit reporting resources, but the Company does not utilize FICO scores or other credit scoring models. The Companys loan products and the related underwriting expectations at loan inception are as follows:
Construction Loans
Construction loans are made for the purpose of constructing residential or non-residential structures for sale or investment, and are secured by a first lien on the subject property. The Companys construction loans are typically underwritten to have a loan-to-value ratio (LTV) of 75% or less based on the as-finished value of the project, with the borrower expected to provide cash equity in the project for the balance. Loans typically require the personal guaranty of the borrowing entitys principal owner, and the borrower must demonstrate a clear credit history and be able to document sufficient net worth and liquidity to provide appropriate support to the credit. Loans are typically granted for terms of up to 24 months, although loans may be extended if additional time is needed to complete or market the project. Loans typically are interest-only with interest payments due monthly. In most cases the monthly interest payments are made by using interest reserves that are estimated and held back for this purpose from the proceeds of the loan at loan inception. The construction loan balance including accrued interest is then due at maturity. Interest is payable monthly by the borrower on construction loans that have fully utilized their interest reserves. Loans typically are priced at a margin over Wall Street Journal Prime, adjusting daily, and are fully-indexed from inception. Construction loans are typically repaid from the sale of the project at completion, or by permanent financing obtained by the borrower for properties built for investment purposes.
Mini-perm Loans
Mini-perm loans are made for the purpose of acquiring or holding an income producing property for a short to intermediate term, and are secured by a first lien on the subject property. The Companys mini-perm loans are typically underwritten to have a loan-to-value ratio (LTV) of 80% or less based on the stabilized value of the project, with the borrower expected to provide cash equity in the project for the balance. Typical mini-perm loan underwriting calls for the propertys stabilized cash flow to provide debt service coverage of 115% or more, and we stress test that cash flow to gauge the impact of a 200 basis point increase in interest rates. Loans typically require the personal guaranty of the borrowing entitys principal owner, and the borrower must demonstrate a clear credit history and be able to document sufficient net worth and liquidity to provide appropriate support to the credit. Loans are typically granted for terms of up to 7 years, although loans may be extended. Loans typically call for monthly payments of principal and interest based on a 20-year amortization schedule, with the balance due at maturity. Loans typically are priced at a margin over Wall Street Journal Prime, adjusting daily, and are fully-indexed from inception. Mini-perm loans are typically repaid from the sale of the property, or by permanent financing obtained by the borrower.
Bridge Loans
Bridge loans short term loans made for the purpose of acquiring or holding an income producing property during a period of renovation, repositioning, or other enhancement, and are secured by a first lien on the subject property. The Companys bridge loans are typically underwritten to have a loan-to-value ratio (LTV) of 80% or less based on the stabilized value of the project, with the borrower expected to provide cash equity in the project for the balance. Typical mini-perm loan underwriting calls for the propertys stabilized cash flow to provide debt service coverage of 115% or more, and we stress test that cash flow to gauge the impact of a 200 basis point increase in interest rates. Loans typically require the personal guaranty of the borrowing entitys principal owner, and the borrower must demonstrate a clear credit history and be able to document
31
sufficient net worth and liquidity to provide appropriate support to the credit. Loans are typically granted for terms of up to 24 months, although loans may be extended. Loans typically are interest-only with payments due monthly and the balance due at maturity. Loans typically are priced at a margin over Wall Street Journal Prime, adjusting daily, and are fully-indexed from inception. Bridge loans are typically repaid from the sale of the property, or by permanent financing obtained by the borrower.
Land Loans
The Companys land loans are similar in structure and purpose to its bridge loans, in that they are short term loans made for the purpose of acquiring or holding land during a period of entitlement or other enhancement. The loans are secured by a first lien on the subject property. The Companys land loans are typically underwritten to have a loan-to-value ratio (LTV) of 60% or less based on the appraised value of the project, with the borrower expected to provide cash equity in the project for the balance. Loans typically require the personal guaranty of the borrowing entitys principal owner, and the borrower must demonstrate a clear credit history and be able to document sufficient net worth and liquidity to provide appropriate support to the credit. Loans are typically granted for terms of up to 24 months, although loans may be extended. Loans typically are interest-only with payments due monthly and the balance due at maturity. Loans typically are priced at a margin over Wall Street Journal Prime, adjusting daily, and are fully-indexed from inception. Land loans are typically repaid from the sale of the property, or by construction financing obtained by the borrower once property entitlements have been obtained.
Unsecured Commercial Loans Term Loans
The Companys unsecured commercial term loans are short to intermediate term loans made for a variety of purposes. Typical uses of term loans are for the acquisition of plant, equipment, or other assets that will generate an income stream sufficient to repay the loan over its term. Loans are typically unsecured, although in some cases the loan will be supported by a lien on certain borrower assets. The Company typically does not engage in accounts receivable, inventory, or other asset based lending types. Loans typically require the personal guaranty of the borrowing entitys principal owner, and the borrower must demonstrate a clear credit history and be able to document sufficient net worth, income, and liquidity to provide appropriate support to the credit. Loans are typically granted for terms of up to 60 months, although loans are often renewed on an annual basis. Loans typically call for monthly payments of principal and interest, with any remaining balance due at maturity. Loans typically are priced at a margin over Wall Street Journal Prime, adjusting daily, and are fully-indexed from inception. Term loans are typically repaid from the income stream generated by the borrower, or from other borrower assets.
Unsecured Commercial Loans Lines of Credit
The Companys unsecured commercial lines of credit are term loans made for a variety of purposes. Typical uses of lines of credit are to provide working capital to borrowers, or for the acquisition of inventories that will be liquidated to generate an income stream sufficient to repay the loan over its term. Lines of credit typically require the personal guaranty of the borrower, and the borrower must demonstrate a clear credit history and be able to document sufficient net worth, income, and liquidity to provide appropriate support to the credit. Lines of credit are typically granted for terms of up to 12 months, although lines of credit may be extended on occasion. Lines of credit typically call for monthly interest-only payments, with any remaining balance due at maturity. Lines of credit typically are revolving, in that the balance may be paid down and re-borrowed during the loan term, and typically borrowers are expected to be out of debt for at least a portion of the term of the line of credit. Loans typically are priced at a margin over Wall Street Journal Prime, adjusting daily, and are fully-indexed from inception. Lines of credit are typically repaid from the income stream generated by the borrower, or from other borrower assets.
Interest-only loans allow interest-only payments for a fixed period of time. The loans generally mature at the end of the interest-only period and require a balloon payment. At September 30, 2009 and December 31, 2008, the Company had $919,144,000 and $1,042,205,000 of short-and medium-term mini-perm first trust deed loans for income properties with interest-only payments that have a balloon payment at loan maturity. The Bank does not offer residential mortgage products, including negative amortization loans, or option-ARMs.
32
Other types of interest only loans as of September 30, 2009 and December 31, 2008 were as follows:
|
|
September 30, |
|
December 31, |
|
||
Real estate construction loans |
|
$ |
389,493,000 |
|
$ |
590,336,000 |
|
Commercial loans |
|
$ |
180,457,000 |
|
$ |
227,223,000 |
|
Certain customers of the Bank control various separate legal entities representing, in the aggregate, significant borrowing concentrations, including as much as $89,159,000 as of September 30, 2009. While each individual loan is separately and independently underwritten, and while the majority of such loans are secured by commercial real property and are performing, these borrowing concentrations nevertheless present certain risks.
Non-accrual loans, net of charge-offs, totaled $310,420,000 and $92,517,000 at September 30, 2009 and December 31, 2008, respectively. Loans which were past due by 90 days or more but not on non-accrual were $748,000 and $18,540,000 at September 30, 2009 and December 31, 2008, respectively. The Bank had $35,341,000 and $0 in troubled debt restructured loans as of September 30, 2009 and December 31, 2008, respectively. These restructured loans were various multifamily and one single family residence loans, and provided for forgiveness of principal and other concessions.
Allowance for unfunded loan commitments and lines of credit is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. The Bank uses the same standards of credit underwriting in entering into these commitments to extend credit as it does for making loans. Commitments may expire unused, and consequently, the above amounts do not necessarily represent future cash requirements. The majority of the commitments above carry variable interest rates. There is risk inherent in all credit transactions, and accordingly commitments to extend credit are included in determining the appropriate level of the allowance for unfunded commitments and credit exposures. The allowance for unfunded loan commitments and lines of credit is included in other liabilities in the accompanying condensed consolidated statements of financial condition. Net adjustments to the allowance for unfunded loan commitments and lines of credit are included in the provision for loan losses. At September 30, 2009 and December 31, 2008, the allowance for unfunded loan commitments and lines of credit was $255,000 and $370,000, respectively.
LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES
Total liquid assets (cash and due from banks, investment securities, federal funds sold and interest bearing deposits in financial institutions) stood at 4.8% of total deposits at September 30, 2009. This level represents an increase from the 4.1% liquidity level, which existed on December 31, 2008. In addition, at September 30, 2009 some $15,741,000 of the Banks total assets consisted of government guaranteed assets, 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 104% and 106% as of September 30, 2009 and December 31, 2008, respectively.
The Company utilizes a variety of funding sources in conducting its operations, including the use of brokered deposits as defined by banking regulators. Such brokered deposits totaled $760,000,000 at December 31, 2008. As a result of First Regional Banks regulatory agreement with the FDIC and the DFI, the bank is prohibited from accepting or renewing any brokered deposit, as defined, unless it receives a waiver from the FDIC. The bank has not received a brokered deposit waiver, and has no plans to seek such a waiver at this time. Instead, existing brokered deposits are being allowed to leave the bank as they mature. As of September 30, 2009 the balance of the brokered deposits had been reduced to $411,479,000; of these, $162,177,000 mature in 2009, of which $74,000,000 was paid out in October, leaving a total of $88,177,000 maturing in November and December, 2009, $157,928,000 mature in 2010, and $91,374,000 mature in 2011. The bank anticipates that future brokered deposit outflows, as well as normal deposit activity by customers, will be accommodated using the proceeds of loan repayments, and other lines of credit.
33
Because customer loan and deposit activity can be unpredictable, the bank maintains various supplemental funding sources, including borrowing lines with the Federal Home Loan Bank, the Federal Reserve Discount Window, and other lines of credit. These lines may be withdrawn at any time. The bank is a member of the Federal Home Loan Bank of San Francisco (FHLB), which provides an additional source for short and long-term funding. Borrowings from the FHLB were $170,000,000 at September 30, 2009. FHLB borrowings are secured by $527,107,000 in multifamily and commercial real estate loans available as collateral at the FHLB. As of September 30, 2009, the Bank has additional borrowing capacity at the Federal Home Loan Bank of $67,418,000 based upon collateral currently pledged. During the third quarter of 2009, the Bank initiated a line at the Federal Reserve Discount Window secured by $346,399,000 in construction and commercial loans available as collateral with the Federal Reserve. As of September 30, 2009, the Bank had $190,520,000 available for use through this short-term borrowing facility based upon loans pledged and there were no borrowings.
The bank believes that it has sufficient liquid assets and supplemental funding sources available to accommodate future brokered deposit outflows and customer activity that can reasonably be anticipated. Should the bank be unable, however, to accommodate future brokered deposit outflows or customer activity this would threaten the banks ability to remain viable.
Total shareholders equity was $22,491,000 and $150,147,000 as of September 30, 2009 and December 31, 2008, respectively. The Companys and the Banks capital ratios for those dates in comparison with regulatory capital requirements were as follows:
|
|
September 30, |
|
December 31, |
|
|
|
|
|
|
|
Leverage Ratio (Tier 1 Capital to Average Assets |
|
|
|
|
|
Regulatory requirement |
|
4.00 |
% |
4.00 |
% |
Company |
|
1.29 |
% |
8.19 |
% |
Bank |
|
5.35 |
% |
9.19 |
% |
The regulatory requirement listed represents the level of capital required for Adequately Capitalized status.
The Bank is also subject to a regulatory order with the FDIC and the DFI that calls for the Bank to increase its Tier 1 leverage ratio to 10% by September 30, 2009 and maintain at least that level thereafter. For the quarter ended September 30, 2009 the Banks Tier 1 leverage ratio was 5.35%, so the Bank is not in compliance with this requirement of the regulatory order. Based on their respective capital ratios as of September 30, 2009, the Company is considered significantly undercapitalized while the Bank is considered undercapitalized. The Bank has developed a Capital Restoration Plan to address this deficiency, which contemplates several approaches to increasing the Banks capital to acceptable levels, including the possibilities of a rights offering to existing Company shareholders or the issuance of new Company shares to interested investors. There can be no assurance that these approaches will be successful. Should the Bank be unable to increase its capital to acceptable levels, or should its capital levels deteriorate further, the Bank could be subject to additional regulatory action.
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 Companys and the Banks risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows:
34
|
|
September 30, |
|
December 31, |
|
|
|
|
|
|
|
Tier 1 Capital to Risk-Weighted Assets: |
|
|
|
|
|
Regulatory requirement |
|
4.00 |
% |
4.00 |
% |
Company |
|
1.38 |
% |
8.09 |
% |
Bank |
|
5.61 |
% |
9.08 |
% |
|
|
September 30, |
|
December 31, |
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets: |
|
|
|
|
|
Regulatory requirement |
|
8.00 |
% |
8.00 |
% |
Company |
|
2.76 |
% |
11.28 |
% |
Bank |
|
6.89 |
% |
10.34 |
% |
At the conclusion of an examination by the FDIC and DFI of the Bank in 2007, the FDIC expressed concern regarding a previously unidentified BSA concern relating to the Banks program of providing custodial services to individual retirement accounts (IRAs) administered by non-bank third parties.
In 2008, the FDIC requested that the Bank enter into a cease and desist order, principally addressing the Banks BSA duties in connection with such third party administered retirement accounts. While the Bank has questioned the need for such a cease and desist order, the Bank concluded that it was advisable for the Bank to enter into, rather than undertake a formal challenge to, the requested cease and desist order. The Bank believes it fully complied with the BSA related components of this Cease and Desist Order. The order also contains standard provisions regarding the prevention of violations of all laws and regulations. While subsequent examinations have found no further BSA violations, some violations of appraisal rules and other regulations have been noted. For this reason, the Bank has not yet achieved full compliance with all terms of this order. No assurance can be given that the FDIC will not require further action if the Bank fails to comply with the terms of the cease and desist order or otherwise fails to correct the deficiencies identified.
During February 2009, the Bank signed an order to cease and desist with the FDIC and the DFI to further strengthen the Banks operations. The agreement between the Bank and its regulators is expected to help guide the Bank in addressing the impacts of todays challenging economic environment. The agreement formalizes many of the initiatives, which the Bank has already adopted, and provides useful milestones for measuring the Banks progress as it moves forward. The agreement includes valuable input from the FDIC and DFI in the development of this program, and also reflects our shared goals of achieving a strong and profitable institution.
As part of the Banks 2009 regulatory examination by the FDIC and the DFI, there were certain loan grading changes and changes in the qualitative reserves resulting from declining trends noted in the delinquent, classified and non-performing loans. As a result of these findings, we concluded that the allowance for loan losses as of June 30, 2009 should be and was increased by $69.9 million to reflect these matters, an additional $50.6 million in loan charge-offs, $1.3 million in interest reversal on impaired loans, $1.2 million in losses on foreclosed properties that were deemed to have existed as of June 30, 2009 and a $20.7 million cost of establishing a valuation allowance for deferred tax assets.
In September 2009, the Bank received a Prompt Corrective Action Notification of Capital letter from the FDIC. The letter indicated that the banks capital category was considered undercapitalized as of June 30, 2009. The letter reminded the Bank of the requirement for undercapitalized institutions to develop a Capital Restoration Plan, and of
35
restrictions on growth, branching, and new lines of business imposed pursuant to section 38 of the Federal Deposit Insurance Act. The Bank has developed a Capital Restoration Plan to address this deficiency, which contemplates several approaches to increasing the Banks capital to acceptable levels, including the possibilities of a rights offering to existing Company shareholders or the issuance of new Company shares to interested investors. There can be no assurance that these approaches will be successful.
What is the status of First Regionals regulatory agreements?
First Regionals wholly-owned subsidiary, First Regional Bank, consented to an agreement with the FDIC and the California Department of Financial Institutions in the form of an order to cease and desist, which become effective on February 23, 2009.
The principle components of the agreement, and the status of the Banks compliance efforts, are as follows:
· Retain qualified management, and continue the active involvement of the board of directors in managing the Banks activities.
The Banks existing management remains in place; no changes in management were suggested or required, and none have been made. The board of directors is maintaining its active involvement in the management of the Bank. The regulatory agreement calls for management to be evaluated based on its ability to comply with the agreement and restore the Bank to safe and sound condition. To the extent that management has not yet fully achieved these objectives, full compliance with the regulatory agreement has not yet been achieved.
· Increase capital by $12 million, increase capital ratios based on a pre-determined schedule, and develop a comprehensive capital plan to assure compliance with that schedule. No dividends may be declared without prior regulatory approval.
The $12 million capital increase called for in the agreement, as well as a subsequent $5 million contribution, was made by First Regional Bancorp in the first quarter of 2009 using its existing cash reserves. The schedule referred to in the agreement calls for the Bank to increase its Tier 1 leverage ratio to 9.5% immediately, and to further increase it to 10% by September 30. For the quarter ended September 30, 2009 the Banks Tier 1 leverage ratio was 5.35%, so the Bank is not in compliance with this requirement of the regulatory order. The Bank has developed a Capital Restoration Plan to address this deficiency, which contemplates several approaches to increasing the Banks capital to acceptable levels, including the possibilities of a rights offering to existing Company shareholders or the issuance of new Company shares to interested investors. There can be no assurance that these approaches will be successful. Should the Bank be unable to increase its capital to acceptable levels, or should its capital levels deteriorate further, the Bank could be subject to additional regulatory action. No dividends have been declared by the Bank.
· Eliminate from the books any assets classified loss and a portion of any assets classified doubtful that have not already been charged-off or collected, and develop a comprehensive plan to reduce classified assets based on a pre-determined schedule.
The provision relates solely to the Banks classified assets as of June 30, 2008. The assets classified loss and the portion of the assets classified doubtful were eliminated from the Banks books by the end of 2008. The Bank developed a written plan to reduce the remaining classified assets, and has implemented it. The schedule referred to in the agreement calls for the Bank to reduce the classified assets from their original level of $218 million to $130 million by June 30, and to $110 million by September 30. As of September 30 the balance of the classified assets had been reduced to $66.7 million, meaning that the Bank has met both the June 30 and the September 30 goals. The Bank is continuing its efforts to collect all of the classified assets even though the goals contained in the agreement have already been met.
· Create and implement a plan to increase the diversification of the Banks lending activities.
36
The Bank has adopted and implemented the diversification plan called for in the agreement. Under the plan, over time the Bank will reduce the amount of real estate lending it does, and increase its other types of lending. The Bank has also adopted revised policies limiting the permissible amount of credit that may be granted to a borrower and his related interests to 50% of Tier 1 capital until December 31, 2009, and to 25% of Tier 1 capital thereafter. The Bank has also adopted revised policies reducing the permissible amount of credit that may be extended to individual borrowers and their related interests.
· Create and implement a comprehensive profit plan to improve the Banks earnings performance.
The profit plan called for in the agreement has been adopted and implemented. While profits are expected to remain under pressure for a time as the Bank deals with its problem assets, improvement is anticipated in the future.
· Update or revise the Banks written policies in the areas of credit administration and liquidity management.
Updated policies have been adopted by the board of directors for both of these functional areas and include a comprehensive liquidity contingency plan.
· Correct all violations of laws or regulations, and take action to prevent future violations.
Such violations included certain technical violations, such as regulations requiring a bank to prepare an updated evaluation of real property value, even for a loan extension made with no new money lent. The Bank is in the process of correcting all previous appraisal-related violations by obtaining an updated appraisal or by performing a collateral evaluation.
With regard to operating policies and procedures as a result of the order, impending operational changes and any changes to accounting policies, procedures and methodologies, the focus of the order was primarily focused on updating or revising those policies to document our existing practices, rather than revising the practices themselves. Such policy updates and revisions include the following:
· Allowance for Loan and Lease Loss Policy was enhanced to ensure the Banks written policy accurately reflects the Banks current procedures.
· Lending and Collection Policies
Financial Statement and Loan Applications section slightly modified to ensure written policy accurately reflects the Banks current procedures relating to the reconciliation of compiled or company prepared financial statements and tax statements relating to partnerships.
The Construction Loans section was enhanced to include the evaluation of any new construction lending staff and periodic reviews of all construction lending staff members. It should be noted that all Bank employees have a formal evaluation completed in accordance with the Banks Human Resources department policies.
The Credit Administration section of the policy was enhanced to include a target limit for related borrower concentrations of 25% of Tier 1 Capital and reserves.
The Problem Credit Identification Section was modified to include the benchmarks outlined in the order, which state that the Banks Watch List shall include relevant information on all loans in excess of $500,000 classified during an examination and all loans in excess of $1,000,000 that warrant individual review. The Banks practice is to generally include any problem loan on the Banks Watch List, if not already on the Banks list of classified assets. The Bank intends to continue this practice.
The Exceptions to Policy section has been modified to include formal monitoring of compliance with loan policy guidelines.
· Liquidity Policy
37
The Policy has been enhanced to include plans for achieving specific levels of liquidity, which incorporates the reduction of volatile funding sources such as brokered deposits.
There was no material impact on the Banks financial statements as a result of its compliance with the regulatory order although there was a reallocation of Company resources devoted to order compliance. The Company did not experience an increase in professional expenses and FDIC insurance costs, but these items resulted from increased levels of non-performing assets and related changes in the Companys condition rather than from compliance with the regulatory order.
As evidenced above, the Bank has made progress thus far in complying with most aspects of the regulatory agreement. The Bank will continue its efforts to achieve full compliance, especially in the areas of management, capital, and violations of laws and regulations.
In addition, First Regional Bancorp has entered into a written agreement with the Federal Reserve Bank of San Francisco which became effective on April 21, 2009. The Company is currently in full compliance with the agreement, and expects to remain so. The principle components of this agreement, and the status of the Companys compliance efforts, are as follows:
· The Company shall not declare or pay dividends without prior regulatory approval
The Company has never declared or paid dividends in its history, and no dividends are anticipated at this time.
· The Company shall not take dividends or other forms of payment from First Regional Bank without prior regulatory approval.
No such payments are being sought at this time, and dividend payments by the Bank are already restricted under the terms of the Banks regulatory agreement.
· The Company and its non-bank subsidiaries shall not make any distributions of principal, interest or other sums on subordinated debentures or trust preferred securities without prior regulatory approval.
In accordance with their terms, the Company has deferred payments on its outstanding trust preferred securities and the associated subordinated debentures.
· The Company and its non-bank subsidiaries shall not incur, increase, or guarantee any debt without prior regulatory approval.
No such debt transactions have occurred since the effective date of the agreement, and none are contemplated at this time.
· The Company shall not purchase or redeem stock without prior regulatory approval.
No shares have been purchased or redeemed since the effective date of the agreement, and no further purchases or redemptions are contemplated at this time.
· The Company shall develop and submit a revised written capital plan to maintain sufficient capital on a consolidated and a bank-only basis.
The revised plan was adopted and implemented. Based on recent operating results, however, the Company has failed to maintain sufficient capital on a consolidated and a bank-only basis. A Capital Restoration Plan has been developed to address this deficiency, which contemplates several approaches to increasing capital to acceptable levels. Should the Company or the Bank be unable to increase capital to acceptable levels, or should capital levels deteriorate further, the Company and/or the Bank could be subject to additional regulatory action.
As just described, the Company expects to achieve and maintain full compliance with its written agreement.
In the interest of preserving its remaining cash reserves, the Company intends to defer interest payments on its trust-preferred securities. The Company has the right to defer interest payments
38
for up to five years under the indentures governing its various trust-preferred securities.
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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There were no material changes outside of the ordinary course of business pertaining to contractual obligations during the quarter ended September 30, 2009.
BORROWINGS
Junior Subordinated Deferrable Debentures
During 2007, 2006, 2005, 2004, 2002 and 2001, the Company established First Regional Statutory Trusts I through VIII (collectively, the Trusts), statutory business trusts and wholly owned subsidiaries of the Company. The Trusts were formed for the sole purpose of issuing securities and investing the proceeds thereof in obligations of the Company and engaging in certain other limited activities.
During 2007, 2006, 2005, 2004, 2002 and 2001, the Trusts issued Cumulative Preferred Capital Securities (the Trust Securities) in private placement transactions, which represent undivided preferred beneficial interests in the assets of the Trusts. Concurrent with the issuance of the Trust Securities, the Trusts purchased Junior Subordinated Deferrable Debentures (the Debentures) from the Company, which aggregated $100,517,000 at September 30, 2009 and at December 31, 2008. After each applicable issuance and purchase, the Company invested a substantial majority of the net proceeds from the applicable sale of Debentures in the Bank as additional paid-in capital to support the Banks future growth. The structure of these transactions enabled the Company to obtain additional Tier 1 capital for regulatory reporting purposes while permitting the Company to deduct the payment of future cash distributions for tax purposes. The debentures, must be redeemed within 30 years and are recorded in the liability section of the consolidated balance sheets in accordance with accounting principles generally accepted in the United States of America even though they are treated as capital for regulatory purposes. Holders of the debentures are entitled to receive cumulative cash distributions, payable quarterly in arrears, equal to three-month LIBOR plus an interest factor.
In the interest of preserving its remaining cash reserves the Company intends to defer interest payments on its trust-preferred securities. The Company has the right to defer interest payments for up to five years under the indentures governing its various trust-preferred securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since customer deposits are the Companys principal funding source outside of its capital, management has attempted to match rates 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 manage the Companys interest rate sensitivity and 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 Banks assets and liabilities as of September 30, 2009, and thus the relative sensitivity of the Banks net interest income to changes in the overall level of interest rates.
39
(In Thousands)
|
|
|
|
|
|
One month |
|
Six months |
|
One year |
|
|
|
|
|
|
|
||||||||
|
|
Floating |
|
Less than |
|
but less |
|
but less |
|
but less |
|
Five years |
|
Non-interest |
|
|
|
||||||||
Category |
|
Rate |
|
one month |
|
six months |
|
one year |
|
five years |
|
or more |
|
or bearing |
|
Total |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Federal funds sold |
|
$ |
20,695 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
20,695 |
|
Interest-bearing deposits in financial institutions |
|
|
|
12,010 |
|
2,002 |
|
301 |
|
|
|
|
|
|
|
14,313 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Investment securities |
|
|
|
|
|
3,249 |
|
|
|
2,633 |
|
21,306 |
|
|
|
27,188 |
|
||||||||
Subtotal |
|
20,695 |
|
12,010 |
|
5,251 |
|
301 |
|
2,633 |
|
21,306 |
|
|
|
62,196 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Loans, net of allowance for losses |
|
1,834,175 |
|
3,121 |
|
46,263 |
|
4,836 |
|
28,417 |
|
|
|
|
|
1,916,812 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total earning assets |
|
1,854,870 |
|
15,131 |
|
51,514 |
|
5,137 |
|
31,050 |
|
21,306 |
|
|
|
1,979,008 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Cash and due from banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
27,124 |
|
27,124 |
|
||||||||
Premises and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,281 |
|
4,281 |
|
||||||||
Other real estate owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
73,156 |
|
73,156 |
|
||||||||
Federal Home Loan Bank stock |
|
7,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,990 |
|
||||||||
Other assets |
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
68,460 |
|
83,460 |
|
||||||||
Total non-earning assets |
|
7,990 |
|
|
|
15,000 |
|
|
|
|
|
|
|
173,021 |
|
196,011 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total assets |
|
$ |
1,862,860 |
|
$ |
15,131 |
|
$ |
66,514 |
|
$ |
5,137 |
|
$ |
31,050 |
|
$ |
21,306 |
|
$ |
173,021 |
|
$ |
2,175,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Federal Home Loan Bank advances |
|
$ |
170,000 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
170,000 |
|
Federal Funds Purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Subtotal |
|
170,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
170,000 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Other deposits |
|
52,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
52,300 |
|
||||||||
Money market deposits |
|
491,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
491,797 |
|
||||||||
Time deposits |
|
|
|
176,534 |
|
476,318 |
|
123,316 |
|
149,960 |
|
|
|
|
|
926,128 |
|
||||||||
Subordinated debentures |
|
|
|
|
|
100,517 |
|
|
|
|
|
|
|
|
|
100,517 |
|
||||||||
Total interest bearing liabilities |
|
714,097 |
|
176,534 |
|
576,835 |
|
123,316 |
|
149,960 |
|
|
|
|
|
1,740,742 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
387,862 |
|
387,862 |
|
||||||||
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
23,924 |
|
23,924 |
|
||||||||
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
22,491 |
|
22,491 |
|
||||||||
Total non-interest bearing liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
434,277 |
|
434,277 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total liabilities and shareholders equity |
|
$ |
714,097 |
|
$ |
176,534 |
|
$ |
576,835 |
|
$ |
123,316 |
|
$ |
149,960 |
|
$ |
|
|
$ |
434,277 |
|
$ |
2,175,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
GAP |
|
$ |
1,148,763 |
|
$ |
(161,403 |
) |
$ |
(510,321 |
) |
$ |
(118,179 |
) |
$ |
(118,910 |
) |
$ |
21,306 |
|
$ |
(261,256 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Cumulative GAP |
|
$ |
1,148,763 |
|
$ |
987,360 |
|
$ |
477,039 |
|
$ |
358,860 |
|
$ |
239,950 |
|
$ |
261,256 |
|
$ |
|
|
$ |
|
|
As the table indicates, the vast majority of the Companys 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 Companys assets, nor is there much likelihood of large realized or unrealized gains or losses developing in the future.
The Banks investment portfolio continues to be composed of high quality, low risk securities, including U.S. Treasury or Government Sponsored Enterprises debt securities. The balance of the Banks investment portfolio contains investments that qualify for CRA investment status. No gains or losses on securities sales were realized in the first nine months of 2009. By comparison, during the first nine months of 2008, the Company realized a gain of $2,758,000 on the redemption of restricted stock of Visa Inc., and no losses were recorded on securities sales in the first nine months of 2008. The Bank recorded $162,000 in OTTI charges during the first nine months of 2008. As of September 30, 2009 the Banks investment portfolio contained $1,354,000 gross unrealized gains and no gross unrealized losses, a net gain of $1,354,000 for unrealized gains of $785,000 net of tax benefit. By comparison, at September 30, 2008 the Companys investment portfolio contained
40
$42,000 gross unrealized gains and gross unrealized losses of $56,000, for net unrealized losses of $8,000 net of tax benefit. Because the Companys 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, and thus unrealized gains and losses have no effect on the Companys income statement.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of the Registrants management, including its Chief Executive Officer and Chief Financial Officer, an evaluation was performed of the effectiveness of the design and operation of the our disclosure controls and procedures. Based upon this evaluation, the Registrants Chief Executive Officer and Chief Financial Officer concluded that the Registrants disclosure controls and procedures were not effective as of September 30, 2009, to ensure that information required to be disclosed in the reports the Registrant files and submits under the Exchange Act are recorded, processed, summarized and reported as and when required due to a material weakness in our internal controls over financial reporting.
Our conclusion was primarily related to our review and reassessment of managements policies and procedures for the monitoring and timely evaluation of and revision to managements approach for assessing credit risk inherent in the loan portfolio to reflect changes in the economic environment in the allowance for loan losses.
Changes in Internal Control Over Financial Reporting
The Company has identified a material weakness as described above. There were no other changes in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Remediation Steps to Address Material Weakness
As of the date of this filing, the Company is in the process of establishing new policies and procedures with respect to how the allowance for loan losses are established and disclosed.
41
ITEM 1. LEGAL PROCEEDINGS
Litigation
In the ordinary course of business, the Company and the Bank are involved in litigation. Management does not expect the ultimate outcome of any pending legal proceedings to have a material effect on the Companys financial position or results of operations.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risk factors associated with First Regionals business activities, which are discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008. These include risks associated with the Companys financial and operating results and with an investment in the Companys common stock, and have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2008, and updated in the quarterly report on Form 10-Q for the period ended June 30, 2009.
ITEM 6. EXHIBITS
The following is a table of exhibits to this Quarterly Report on Form 10-Q.
Exhibit No. |
|
Description |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
31.2 |
|
Certification of the Corporate Secretary furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
31.3 |
|
Certification of the Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
32 |
|
Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act |
Items 2, 3, 4 and 5 of Part II of Form 10-Q are not applicable and have been omitted.
42
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: November 23, 2009 |
/s/ H. Anthony Gartshore |
|
H. Anthony Gartshore, |
|
President & Chief Executive Officer |
|
|
|
|
Date: November 23, 2009 |
/s/ Thomas E. McCullough |
|
Thomas E. McCullough, Corporate Secretary |
|
|
|
|
Date: November 23, 2009 |
/s/ Elizabeth Thompson |
|
Elizabeth Thompson, Principal Accounting Officer |
43
Exhibit Index
Exhibit No. |
|
Description |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
31.2 |
|
Certification of the Corporate Secretary furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
31.3 |
|
Certification of the Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
32 |
|
Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act |
44