SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended June 30, 2001
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 incorporation or organization | IRS Employer Identification Number |
1801 Century Park East, Los Angeles, California | 90067 |
Address of principal executive offices | Zip Code |
(310) 552-1776 | |
Registrant's 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 ý No o
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding in each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, No Par Value | 2,755,020 | |
Class | Outstanding on August 8, 2001 |
FIRST REGIONAL BANCORP
INDEX
PART I - FINANCIAL INFORMATION
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(unaudited)
June 30, 2001 | December 31, 2000 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 24,851 | $ | 20,819 | ||||
Federal funds sold | 35,455 | 38,740 | ||||||
Cash and cash equivalents | 60,306 | 59,559 | ||||||
Investment securities | 1,992 | 2,985 | ||||||
Interest-bearing deposits in financial institutions | 0 | 99 | ||||||
Loans, net of allowance for losses of $4,841,000 in 2001 and $4,600,000 in 2000 | 250,871 | 231,557 | ||||||
Premises and equipment, net of accumulated depreciation | 1,538 | 1,392 | ||||||
Accrued interest receivable and other assets | 11,068 | 10,487 | ||||||
Total Assets | $ | 325,775 | $ | 306,079 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 108,441 | $ | 99,632 | ||||
Interest Bearing: | ||||||||
Savings deposits | 12,150 | 13,394 | ||||||
Money market deposits | 111,505 | 99,626 | ||||||
Time deposits | 65,006 | 65,411 | ||||||
Total deposits | 297,102 | 278,063 | ||||||
Note payable | 1,087 | 1,163 | ||||||
Accrued interest payable and other liabilities | 3,895 | 4,074 | ||||||
Total Liabilities | 302,084 | 283,300 | ||||||
Shareholder's Equity: | ||||||||
Common Stock, no par value, 50,000,000 shares authorized; 2,755,000 and 2,795,000 shares outstanding in 2001 and 2000, respectively | 13,875 | 14,074 | ||||||
Less: Unearned ESOP shares; 115,000 and 123,000 outstanding in 2001 and 2000, respectively | (1,030 | ) | (1,102 | ) | ||||
Total common stock, no par value; Outstanding 2,640,000 (2001) and 2,672,000 (2000) shares | 12,845 | 12,972 | ||||||
Retained earnings | 10,844 | 9,806 | ||||||
Accumulated other comprehensive income | 2 | 1 | ||||||
Total Shareholders' Equity | 23,691 | 22,779 | ||||||
Total Liabilities and Shareholders' Equity | $ | 325,775 | $ | 306,079 | ||||
The accompanying notes are an integral part of these statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||
INTEREST INCOME: | |||||||||||||
Interest and fees on loans | $ | 5,382 | $ | 4,441 | $ | 11,140 | $ | 7,834 | |||||
Interest on deposits in financial Institutions | 0 | 58 | 2 | 150 | |||||||||
Interest on investment securities | 119 | 464 | 257 | 1,152 | |||||||||
Interest on federal funds sold | 459 | 344 | 735 | 801 | |||||||||
Total interest income | 5,960 | 5,307 | 12,134 | 9,937 | |||||||||
INTEREST EXPENSE: | |||||||||||||
Interest on deposits | 1,587 | 1,026 | 3,145 | 2,105 | |||||||||
Interest on other borrowings | 2 | 3 | 5 | 8 | |||||||||
Total interest expense | 1,589 | 1,029 | 3,150 | 2,113 | |||||||||
Net interest income | 4,371 | 4,278 | 8,984 | 7,824 | |||||||||
PROVISION FOR LOAN LOSSES | 300 | 564 | 800 | 714 | |||||||||
Net interest income after provision for loan losses | 4,071 | 3,714 | 8,184 | 7,110 | |||||||||
OTHER OPERATING INCOME | 543 | 283 | 1,058 | 744 | |||||||||
OPERATING EXPENSES: | |||||||||||||
Salaries and related benefits | 2,174 | 1,764 | 4,341 | 3,447 | |||||||||
Occupancy expense | 289 | 213 | 559 | 415 | |||||||||
Equipment expense | 133 | 112 | 277 | 235 | |||||||||
Promotion expense | 106 | 81 | 141 | 131 | |||||||||
Professional service expense | 322 | 286 | 647 | 578 | |||||||||
Customer service expense | 119 | 121 | 251 | 282 | |||||||||
Supply/communication expense | 166 | 138 | 312 | 247 | |||||||||
Other expenses | 360 | 343 | 727 | 707 | |||||||||
Total operating expenses | 3,669 | 3,058 | 7,255 | 6,042 | |||||||||
Income before provision for income taxes | 945 | 939 | 1,987 | 1,812 | |||||||||
PROVISION FOR INCOME TAXES` | 390 | 389 | 820 | 749 | |||||||||
NET INCOME | $ | 555 | $ | 550 | $ | 1,167 | $ | 1,063 | |||||
EARNINGS PER SHARE (Note 2) | |||||||||||||
Basic | $ | 0.21 | $ | 0.20 | $ | 0.44 | $ | 0.39 | |||||
Diluted | $ | 0.21 | $ | 0.20 | $ | 0.44 | $ | 0.39 |
The accompanying notes are an integral part of these statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended | ||||||||||||
June 30, | ||||||||||||
2001 | 2000 | |||||||||||
OPERATING ACTIVITIES | ||||||||||||
Net Income | $ | 1,167 | $ | 1,063 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for loan losses | 800 | 714 | ||||||||||
depreciation and amortization | 146 | 113 | ||||||||||
Amortization of investment security and guaranteed loan premiums | 405 | 141 | ||||||||||
Accretion of investment security discounts | (28 | ) | (62 | ) | ||||||||
Decrease (increase) in interest receivable | 696 | (430 | ) | |||||||||
Decrease in interest payable | (39 | ) | (28 | ) | ||||||||
Increase (decrease) in taxes payable | 279 | (121 | ) | |||||||||
Net increase (decrease) in other liabilities | 839 | (1,223 | ) | |||||||||
Net cash provided by operating activities | 4,265 | 167 | ||||||||||
INVESTING ACTIVITIES | ||||||||||||
Decrease in investments in time deposits with other financial institutions | $ | 99 | $ | 2,963 | ||||||||
Decrease in investment securities | 1,024 | 46,895 | ||||||||||
Decrease (increase) in guaranteed loans | 6,020 | (15,682 | ) | |||||||||
Net increase in other loans | (26,539 | ) | (49,868 | ) | ||||||||
Increase in premises and equipment | (292 | ) | (213 | ) | ||||||||
Net increase in other assets | (1,277 | ) | (358 | ) | ||||||||
Net cash used in investing activities | (20,965 | ) | (16,263 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||
Net increase in noninterest bearing deposits money market deposits, and other deposits | 19,444 | 9,812 | ||||||||||
Net decrease in time deposits | (405 | ) | (4,930 | ) | ||||||||
Decrease in note payable | (76 | ) | (76 | ) | ||||||||
Decrease in securities sold under agreement to repurchase | (1,258 | ) | 0 | |||||||||
Decrease in shareholders’ equity | (258 | ) | (255 | ) | ||||||||
Net cash provided by financing activities | 17,447 | 4,551 | ||||||||||
Increase (decrease) in cash and cash equivalents | 747 | (11,545 | ) | |||||||||
Cash and cash equivalents, beginning of period | 59,559 | 47,164 | ||||||||||
Cash and cash equivalents, end of period | $ | 60,306 | $ | 35,619 | ||||||||
The accompanying notes are an integral part of these statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
NOTE 1 - | The consolidated financial statements include the accounts of First Regional Bancorp (the Company), a bank holding company, and its wholly-owned subsidiary, First Regional Bank (the Bank). Certain amounts in the 2000 financial statements have been reclassified to be comparable with the classifications used in the 2001 financial statements. |
In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2001 and December 31, 2000 and the results of operations for the three and six month periods ended June 30, 2001 and 2000. Interim results may not be indicative of annual operations. | |
While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company's 2000 annual report. | |
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets,” effective starting with fiscal years beginning after December 31, 2001. Management believes the adoption of this statement will not have a material effect on the Company’s financial statements; however to the extent that goodwill will no longer be amortized, there will be a positive effect on the Company’s income statement. At this time management has not determined the effect, if any, of the adoption of this statement. | |
NOTE 2 - | Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is: |
Three Months Ended June 30, 2001 | ||||||||
Income (Numerator) | Weighted Average Shares (Denominator) | Per Share Amount | ||||||
Basic EPS | ||||||||
Income available to common shareholders | $ | 555,000 | 2,638,176 | $ | 0.21 | |||
Effect of Dilutive Securities | ||||||||
Incremental shares from assumed exercise of outstanding options | 36,781 | (0.00 | ) | |||||
Diluted EPS | ||||||||
Income available to common shareholders | $ | 555,000 | 2,674,957 | $ | 0.21 | |||
Three Months Ended June 30, 2000 | ||||||||
Income (Numerator) | Weighted Average Shares (Denominator) | Per Share Amount | ||||||
Basic EPS | ||||||||
Income available to common shareholders | $ | 550,000 | 2,690,176 | $ | 0.20 | |||
Effect of Dilutive Securities | ||||||||
Incremental shares from assumed exercise of outstanding options | 9,966 | (0.00 | ) | |||||
Diluted EPS | ||||||||
Income available to common shareholders | $ | 550,000 | 2,700,142 | $ | 0.20 | |||
Six Months Ended June 30, 2001 | ||||||||
Income (Numerator) | Weighted Average Shares (Denominator) | Per Share Amount | ||||||
Basic EPS | ||||||||
Income available to common shareholders | $ | 1,167,000 | 2,644,822 | $ | 0.44 | |||
Effect of Dilutive Securities | ||||||||
Incremental shares from assumed exercise of outstanding options | 33,112 | (0.00 | ) | |||||
Diluted EPS | ||||||||
Income available to common shareholders | $ | 1,167,000 | 2,677,934 | $ | 0.44 | |||
Six Months Ended June 30, 2000 | ||||||||
Income (Numerator) | Weighted Average Shares (Denominator) | Per Share Amount | ||||||
Basic EPS | ||||||||
Income available to common shareholders | $ | 1,063,000 | 2,699,615 | $ | 0.39 | |||
Effect of Dilutive Securities | ||||||||
Incremental shares from assumed exercise of outstanding options | 15,551 | (0.00 | ) | |||||
Diluted EPS | ||||||||
Income available to common shareholders | $ | 1,063,000 | 2,715,166 | $ | 0.39 | |||
NOTE 3 - | As of June 30, 2001 the Bank had a total of $912,000 in standby letters of credit outstanding. No losses are anticipated as a result of these transactions. |
NOTE 4 - | The Company’s comprehensive income includes all items which comprise net income plus the unrealized holding gains on available-for-sale securities. For the three and six month periods ended June 30, 2001 and 2000, the Company’s comprehensive income was as follows: |
Three Months Ended | ||||||
June 30, 2001 | June 30, 2000 | |||||
(in thousands) | ||||||
Net Income | $ | 555 | $ | 550 | ||
Other comprehensive income | 2 | 3 | ||||
Total comprehensive income | $ | 557 | $ | 553 | ||
Six Months Ended | ||||||
June 30, 2001 | June 30, 2000 | |||||
(in thousands) | ||||||
Net Income | $ | 1,167 | $ | 1,063 | ||
Other comprehensive income | 3 | 4 | ||||
Total comprehensive income | $ | 1,170 | $ | 1,067 | ||
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
SUMMARY
First Regional Bancorp did not conduct any significant business activities independent of First Regional Bank. The following discussion and analysis relates primarily to the Bank.
For a more complete understanding of the Company and its operations reference should be made to the financial statements included in this report and in the Company’s 2000 Annual Report on Form 10-K. Certain statements in this report on Form 10-Q constitute “forward looking statements” under the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which the Company conducts operations, fluctuations in interest rates, credit quality, and government regulations. For additional information concerning these factors, see “Item 1. Business – Factors That May Affect Results” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
As of June 30, 2001 total assets were $325,775,000 compared to $306,079,000 at December 31, 2000, an increase of $19,696,000 or 6.4%. Moreover, the June 30, 2001 asset level represents an $88,496,000 (37.3%) increase over the $237,279,000 that existed on the same date in 2000. The 2001 asset growth reflects a corresponding increase in total deposits of $19,039,000 or 6.8%, from $278,063,000 at the end of 2000 to $297,102,000 at June 30, 2001. While overall deposits increased, the deposit growth was centered in noninterest bearing deposits and money market deposits while savings deposits and time deposits both experienced a slight decline. There were several changes in the composition of the Bank's assets during the first six months of 2001. The Bank’s core loan portfolio actually grew significantly by $19,314,000 during the six month period, bringing the Bank’s total loans to $250,871,000 at June 30, 2001 from the December 31, 2000 total of $231,557,000. The combined effect of the increase in loans and the growth in deposits was a slight decrease in the level of total liquid assets. Cash and due from banks, investment securities and time deposits with other financial institutions remained relatively constant, and Federal funds sold fell by $3.2 million in order to accommodate the changes that took place in the rest of the balance sheet.
The Company earned a profit of $555,000 in the three months ended June 30, 2001, compared to earnings of $550,000 in the second quarter of 2000. The results for the six months ended June 30, 2001 were profits of $1,167,000 compared to a profit of $1,063,000 for the corresponding period of 2000, an increase of 9.8%.
NET INTEREST INCOME
Total interest income increased by $653,000 (12%) for the second quarter of 2001 compared to the same period in 2000, and increased by $2,197,000 (22%) for the six month period ended June 30, 2001 compared to the prior year as total earning assets were substantially higher (33.4%) in 2001 than in 2000. The majority of the increase in interest income arises from a substantial increase of $3,306,000 (42%) in interest on loans from $7,834,000 for the six months ended June 30, 2000 compared to $11,140,000 for the same period in 2001. This increase in interest income on loans corresponds to a substantial increase in the loan portfolio of $64,350,000 (34%) from June 30, 2000 to June 30, 2001. For the three months ended June 30, 2001 interest expense increased by $560,000 (54%) to $1,589,000 from the 2000 level of $1,029,000 and for the six months ended June 30, 2001 interest expense increased by $1,037,000 (49%) to $3,150,000 from the 2000 level of $2,113,000. Interest expenses increased in these periods as total deposits were significantly higher than in the same periods in 2000. The net result was an increase in net interest income of $93,000 (2%), from $4,278,000 in the second quarter of 2000 to $4,371,000 for the second quarter of 2001 and an increase in net interest income of $1,160,000 (15%), from $7,824,000 for the six months ended June 30, 2000 to $8,984,000 for the first six months of 2001.
Interest Rates and Interest Differential
�� The following table sets forth the average balances outstanding for major categories of interest earning assets and interest bearing liabilities and the average interest rates earned and paid thereon:
For Period Ended June 30, | |||||||||||||||||||
2001 | 2000 | ||||||||||||||||||
Average Balance | Interest Income (2)/ Expense | Average Yield/ Rate % | Average Balance | Interest Income (2)/ Expense | Average Yield/ Rate % | ||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Interest Earning Assets | |||||||||||||||||||
Loans (1) | $ | 243,908 | $ | 11,140 | 9.1 | % | $ | 144,152 | $ | 7,834 | 10.9 | % | |||||||
Investment Securities | 8,677 | 257 | 5.9 | % | 39,186 | 1,152 | 5.9 | % | |||||||||||
Federal Funds Sold | 31,606 | 735 | 4.7 | % | 27,700 | 801 | 5.8 | % | |||||||||||
Time Deposits With Other Financial Institutions | 44 | 2 | 9.1 | % | 4,600 | 150 | 6.5 | % | |||||||||||
Total Interest Earning Assets | $ | 284,235 | $ | 12,134 | 8.5 | % | $ | 215,638 | $ | 9,937 | 9.2 | % | |||||||
For Period Ended June 30, | ||||||||||||||||||
2001 | 2000 | |||||||||||||||||
Average Balance | Income (2)/ Expense | Yield/ Rate % | Average Balance | Income (2)/ Expense | Yield/ Rate % | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||||
Interest Bearing Liabilities | ||||||||||||||||||
Savings deposits | $ | 1,770 | $ | 21 | 2.4 | % | $ | 1,794 | $ | 23 | 2.6 | % | ||||||
Money Market Accounts | 115,636 | 1,501 | 2.6 | % | 92,538 | 1,121 | 2.4 | % | ||||||||||
Time deposits | 63,817 | 1,623 | 5.1 | % | 38,808 | 961 | 5.0 | % | ||||||||||
Securities sold under agreements to repurchase | $ | 190 | $ | 5 | 5.3 | % | $ | 1,118 | $ | 8 | 1.4 | % | ||||||
Total interest bearing liabilities | $ | 181,413 | $ | 3,150 | 3.5 | % | $ | 134,258 | $ | 2,113 | 3.1 | % | ||||||
(1) | This figure reflects total loans, including non–accrual loans, and is not net of the allowance for possible losses, which had an average balance in the first six months of $4,795,000 in 2001 and $2,356,000 in 2000. |
(2) | Includes loan fees in the first six months of $719,000 in 2001 and $499,000 in 2000. |
The following table shows the net interest earnings and the net yield on average interest earning assets:
For Period Ended June 30, | ||||||
2001 | 2000 | |||||
(Dollars in Thousands) | ||||||
Total interest income (1) | $ | 12,134 | $ | 9,937 | ||
Total interest expense | 3,150 | 2,113 | ||||
Net interest earnings | $ | 8,984 | $ | 7,824 | ||
Average interest earning assets | $ | 284,235 | $ | 215,638 | ||
Average interest bearing liabilities | $ | 181,413 | $ | 134,258 | ||
Net yield on average interest earning assets | 6.3 | % | 7.3 | % |
(1) | Includes loan fees in the first six months of $719,000 in 2001 and $499,000 in 2000. |
The following table sets forth changes in interest income and interest expense. The net change as shown in the column "Net Increase (Decrease)" is segmented into the change attributable to variations in volume and the change attributable to variations in interest rates. Non–performing loans are included in average loans.
Increase (Decrease) June 30, 2001 over 2000 | |||||||||
Volume | Rate | Net | |||||||
(Dollars in Thousands) | |||||||||
Interest Income (1) | |||||||||
Loans (2) | $ | 4,297 | $ | (991 | ) | $ | 3,306 | ||
Investment securities | (904 | ) | 9 | (895 | ) | ||||
Funds sold | 170 | (236 | ) | (66 | ) | ||||
Interest on time deposits with other financial institutions | (246 | ) | 98 | (148 | ) | ||||
Total Interest Earning Assets | $ | 3,317 | $ | (1,120 | ) | $ | 2,197 | ||
Interest Expense (1) | |||||||||
Savings | $ | 0 | $ | (2 | ) | $ | (2 | ) | |
Money market | 295 | 85 | 380 | ||||||
Time | 635 | 27 | 662 | ||||||
Securities sold under agreements to repurchase | 1 | (4 | ) | (3 | ) | ||||
Total interest bearing liabilities | $ | 931 | $ | 106 | $ | 1,037 | |||
(1) | The change in interest due to both rate and volume has been allocated to the change due to volume and the change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each. | |
(2) | Includes loan fees in the first six months of $719,000 in 2001 and $499,000 in 2000. |
OTHER OPERATING INCOME
Other operating income increased to $543,000 in the second quarter of 2001 from $283,000 in the three months ended June 30, 2000. For the first half of 2001 other operating income also increased from $744,000 for the six months ended June 30, 2000 to $1,058,000 for the first six months of 2001. The Bank’s merchant services operation, which provides credit card deposit and clearing services to retailers and other credit card accepting businesses, had revenue that totaled $226,000 for the second quarter of 2001 and $434,000 for the six months ended June 30, 2001 in contrast with $183,000 for the second quarter of 2000 and $342,000 for the six months ended June 30, 2000. The Bank’s Trust Administration Services Corp. (TASC), a wholly owned subsidiary that provides administrative and custodial services to self-directed retirement plans, also had an increase in revenue to $293,000 for the six months ended June 30, 2001 in contrast with $133,000 in the first six months of 2000. Offsetting this income increase, in part, was the decrease in gains realized on the sale of land, which fell from $30,000 in 2000’s first half to $0 in the first half of 2001. Losses on securities sales totaled $24,000 for both the second quarter and the first six months of 2000 while no gains or losses on securities sales were realized in the first half of 2001.
LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES
The loan portfolio consisted of the following at June 30, 2001 and December 31, 2000:
June 30, | December 31, | |||||||
2001 | 2000 | |||||||
(Dollars in Thousands) | ||||||||
Commercial loans | $ | 66,383 | $ | 68,927 | ||||
Real estate construction loans | 64,313 | 53,352 | ||||||
Real estate loans | 96,761 | 78,809 | ||||||
Government guaranteed loans | 28,622 | 35,047 | ||||||
Other loans | 760 | 1,011 | ||||||
Total loans | 256,839 | 237,146 | ||||||
Less | - Allowances for loan losses | 4,841 | 4,600 | |||||
- Deferred loan fees | 1,127 | 989 | ||||||
Net loans | $ | 250,871 | $ | 231,557 | ||||
The allowance for possible loan losses is intended to reflect the known and unknown risks which are inherent in a loan portfolio. The adequacy of the allowance for loan losses is continually evaluated in light of many factors, including loan loss experience and current economic conditions. The allowance for loan losses is increased by provisions for loan losses, and is decreased by net charge-offs. Management believes the allowance for loan losses is adequate in relation to both existing and potential risks in the loan portfolio.
The Bank has historically evaluated the adequacy of its allowance for loan losses on an overall basis rather than by specific categories of loans. In determining the adequacy of the allowance for loan losses, management considers such factors as historical loan loss experience, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio.
The allowance for losses was $4,841,000 and $4,600,000 (or 1.89% and 1.95% of gross outstanding loans) at June 30, 2001 and December 31, 2000 respectively. Reflecting the Company's ongoing analysis of the risks presented by its loan portfolio, provisions for loan losses were $300,000 and $800,000 for the three and six month period ended June 30, 2001, compared to $564,000 and $714,000 for the same periods of 2000. For the three and six months ended June 30, 2001, the Company generated net loan charge-offs of $301,000 and 559,000; by comparison, in the first half of 2000 the Company experienced net loan recoveries of $85,000 and 95,000.
For the quarter ended June 30, 2001 the Company identified loans having an aggregate average balance of $1,875,000 which it concluded were impaired under SFAS No. 114. The Company's policy is generally to discontinue the accrual of interest income on impaired loans, and to recognize income on such loans only after the loan principal has been repaid in full and to establish a loss reserve for each of the loans which at June 30, 2001 totaled $300,000 for the loans as a group.
OTHER OPERATING EXPENSES
Other operating expenses increased in the first six months of 2001 compared to the same period of 2000, although some categories of expense actually decreased from the levels of previous periods. Other operating expenses rose to a total of $3,669,000 for the second quarter of 2001 from $3,058,000 for the three months ended June 30, 2000. For the six months ended June 30, 2001 other operating expenses totaled $7,255,000, an increase from $6,042,000 for the corresponding period in 2000.
Salary and related benefits increased by $410,000, rising from a total of $1,764,000 for the second quarter of 2000 to $2,174,000 for the same period in 2001, and also rose for the six months ended June 30, to $4,341,000 from $3,447,000 in 2000. The increase principally reflects increases in staffing which took place due to staffing in the new regional offices and the new trust division. The increase also reflects employee salary adjustments. Occupancy expense rose to $289,000 for the three months ended June 30, 2001 from $213,000 in the second quarter of 2000, the increases reflect the rent paid on the various facilities which house the Bank’s new regional offices and additional space at the main office. Total other operating expenses rose in 2001 compared to the prior year, increasing from $1,081,000 for the second quarter of 2000 to $1,206,000 for the second quarter of 2001 and a corresponding increase from $2,180,000 for the first six months of 2000 to $2,355,000 for the same period of 2001.
The combined effects of the above-described factors resulted in income before taxes of $945,000 for the three months ended June 30, 2001 compared to $939,000 for the second quarter of 2000. For the six months ended June 30, 2001 income before taxes is $1,987,000 compared to $1,812,000 for the first six months of the prior year. In the second quarter, the Company's provision for taxes increased from $389,000 in 2000 to $390,000 in 2001. For the six months ended June 30, 2001 the provisions were $820,000 compared to $749,000 in 2000. The effective tax rate for 2001 and 2000 is 41%. This brought net income for the second quarter of 2001 to $555,000 compared to $550,000 for the same period in 2000. For the six months ended June 30, net income in 2001 was $1,167,000, while 2000 net income through June 30 was $1,063,000.
LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES
The Company's financial position remains liquid. Total liquid assets (cash and due from banks, interest bearing deposits in financial institutions, investment securities available for sale, and federal funds sold) stood at 21.0% of total deposits at June 30, 2001. This level represents a decrease from the 22.52% liquidity level which existed on December 31, 2000. In addition, at June 30, 2001 some $28.6 million of the Bank's total loans consisted of government guaranteed loans, which represent a significant source of liquidity due to the active secondary markets which exist for these assets. The ratio of net loans (including government guaranteed loans) to deposits was 84.4% and 83.3% as of June 30, 2001 and December 31, 2000, respectively.
Because customer deposits are the Company's principal funding source outside of its capital, management has attempted to match rates and maturities of its deposits with its investment and loan portfolios as part of its liquidity and asset and liability management policies. The objective of these policies is to limit the fluctuations of net interest income resulting from interest rate changes. The table which follows indicates the repricing or maturity characteristics of the major categories of the Bank's assets and liabilities as of June 30, 2001, and thus the relative sensitivity of the Bank's net interest income to changes in the overall level of interest rates.
Category | Floating Rate | Less than one month | One month but less than six months | Six months but less than one year | One year but less than five years | Five years or more | Non-interest earning or bearing | Total | |||||||||
Fed funds sold | 35,455 | 0 | 0 | 0 | 0 | 0 | 0 | 35,455 | |||||||||
Time deposits with other banks | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||
Investment securities | 0 | 1,002 | 990 | 0 | 0 | 0 | 0 | 1,992 | |||||||||
Subtotal | 35,455 | 1,002 | 990 | 0 | 0 | 0 | 0 | 37,447 | |||||||||
Loans | 249,237 | 80 | 1,515 | 0 | 39 | 0 | 0 | 250,871 | |||||||||
Total earning assets | 284,692 | 1,082 | 2,505 | 0 | 39 | 0 | 0 | 288,318 | |||||||||
Cash and due from banks | 0 | 0 | 0 | 0 | 0 | 0 | 24,851 | 24,851 | |||||||||
Premises and equipment | 0 | 0 | 0 | 0 | 0 | 0 | 1,538 | 1,538 | |||||||||
Other real estate owned | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||
Other assets | 0 | 0 | 0 | 0 | 0 | 0 | 11,068 | 11,068 | |||||||||
Total non-earning assets | 0 | 0 | 0 | 0 | 0 | 0 | 37,457 | 37,457 | |||||||||
Total assets | 284,692 | 1,082 | 2,505 | 0 | 39 | 0 | 37,457 | 325,775 | |||||||||
Funds purchased | 199 | 0 | 0 | 0 | 0 | 0 | 0 | 199 | |||||||||
Repurchase agreements | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||
Subtotal | 199 | 0 | 0 | 0 | 0 | 0 | 0 | 199 | |||||||||
Savings deposits | 12,150 | 0 | 0 | 0 | 0 | 0 | 0 | 12,150 | |||||||||
Money market deposits | 111,505 | 0 | 0 | 0 | 0 | 0 | 0 | 111,505 | |||||||||
Time deposits | 0 | 43,451 | 19,120 | 2,132 | 303 | 0 | 0 | 65,006 | |||||||||
Total bearing liabilities | 123,854 | 43,451 | 19,120 | 2,132 | 303 | 0 | 0 | 188,860 | |||||||||
Demand deposits | 0 | 0 | 0 | 0 | 0 | 0 | 108,441 | 108,441 | |||||||||
Other liabilities | 0 | 0 | 0 | 0 | 0 | 0 | 4,783 | 4,783 | |||||||||
Equity capital | 0 | 0 | 0 | 0 | 0 | 0 | 23,691 | 23,691 | |||||||||
Total non-bearing liabilities | 0 | 0 | 0 | 0 | 0 | 0 | 136,915 | 136,915 | |||||||||
Total liabilities | 123,854 | 43,451 | 19,120 | 2,132 | 303 | 0 | 136,915 | 325,775 | |||||||||
GAP | 160,838 | (42,369 | ) | (16,615 | ) | (2,132 | ) | (264 | ) | 0 | (99,458 | ) | 0 | ||||
Cumulative GAP | 160,838 | 118,469 | 101,854 | 99,722 | 99,458 | 99,458 | 0 | 0 |
As the table indicates, the vast majority of the Company's assets are either floating rate or, if fixed rate, have short maturities. Since the yields on these assets quickly adjust to reflect changes in the overall level of interest rates, there are no significant unrealized gains or losses with respect to the Company's assets, nor is there much likelihood of large realized or unrealized gains or losses developing in the future.
The Bank's investment portfolio continues to be composed of high quality, low risk securities, primarily U.S. Treasury or Agency securities. As mentioned above, no gains or losses were recorded on securities sales in the first half of 2001. As of June 30, 2001 the Company's investment portfolio contained gross unrealized gains of $3,000 and no unrealized losses. By comparison, at June 30, 2000 the Company's investment portfolio contained gross unrealized gains of $4,000 and no unrealized losses. The unrealized net gain (adjusted for taxes) of $2,000 at June 30, 2001 gave rise to a $2,000 increase in the Company's shareholders' equity as of that date. Because the Company's holdings of securities are intended to serve as a source of liquidity should conditions warrant, the securities have been classified by the Company as "available for sale."
Total capital was $23,691,000 and $22,779,000 as of June 30, 2001 and December 31, 2000, respectively. The Company's capital ratios for those dates in comparison with regulatory capital requirements were as follows:
6-30-01 | 12-31-00 | ||||
Leverage Ratio (Tier I Capital to Assets): | |||||
Regulatory requirement | 4.00 | % | 4.00 | % | |
First Regional Bancorp | 7.33 | % | 7.40 | % |
The "regulatory requirement" listed represents the level of capital required for Adequately Capitalized status.
In addition, bank regulators have issued risk-adjusted capital guidelines which assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity. The Company's risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows:
6-30-01 | 12-31-00 | ||||
Tier I Capital to Assets: | |||||
Regulatory requirement | 4.00 | % | 4.00 | % | |
First Regional Bancorp | 8.43 | % | 9.60 | % | |
6-30-01 | 12-31-00 | ||||
Tier I + Tier II Capital to Assets: | |||||
Regulatory requirement | 8.00 | % | 8.00 | % | |
First Regional Bancorp | 9.69 | % | 10.90 | % |
The Company believes that it will continue to meet all applicable capital standards.
INFLATION
The impact of inflation on the Company differs significantly from other industries, since virtually all of its assets and liabilities are monetary. During periods of rising inflation, companies with net monetary assets will always experience a reduction in purchasing power. Inflation continues to have an impact on salary, supply, and rent expenses, but the rate of inflation in general and its impact on these expenses in particular has remained moderate in recent years.
Litigation
In the normal course of business, the Company and the Bank are involved in litigation. Management does not expect the ultimate outcome of any pending litigation to have a material effect on the Company’s financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual meeting of shareholders on May 17, 2001. The Board of Directors was elected as follows:
Fred M. Edwards
H. Anthony Gartshore
Gary Horgan
Thomas E. McCullough
Lawrence J. Sherman
Jack A. Sweeney
Marilyn Sweeney
No other matters were submitted for shareholder vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
There are no exhibits to this report.
Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2001.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST REGIONAL BANCORP | |
Date: August 9, 2001 | /s/ Jack A. Sweeney |
Jack A. Sweeney, Chairman of the Board and Chief Executive Officer | |
Date: August 9, 2001 | /s/ Thomas McCullough |
Thomas McCullough, Chief Financial Officer |