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 March 31, 2007
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 |
incorporation or organization |
| 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 x No o
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. (as defined in Rule 12b-2 of the Exchange Act). Large Accelerated filer o Accelerated filer x Non-accelerated filer o
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 issuer’s classes of common stock, as of the latest practicable date.
Common Stock, No Par Value |
| 12,305,895 |
Class |
| Outstanding on May 8, 2007 |
FIRST REGIONAL BANCORP
INDEX
2
PART I - FINANCIAL INFORMATION
FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands Except Share Data)
(Unaudited)
|
| March 31, |
| December 31, |
| ||
ASSETS |
|
|
|
|
| ||
Cash and cash equivalents: |
|
|
|
|
| ||
Cash and due from banks |
| $ | 108,118 |
| $ | 72,134 |
|
Federal funds sold |
| 0 |
| 103,860 |
| ||
Total cash and cash equivalents |
| 108,118 |
| 175,994 |
| ||
Investment securities, available for sale, at fair value (with amortized cost of $25,213 in 2007 and $22,509 in 2006) |
| 25,557 |
| 22,465 |
| ||
Interest-bearing deposits in financial institutions |
| 5,020 |
| 5,020 |
| ||
Federal Home Loan Bank Stock — at cost |
| 10,947 |
| 12,385 |
| ||
|
|
|
|
|
| ||
Loans, net of allowance for losses of $20,694 in 2007 and $20,624 in 2006 |
| 1,823,526 |
| 1,805,301 |
| ||
Premises and equipment, net of accumulated depreciation |
| 4,345 |
| 3,838 |
| ||
Accrued interest receivable and other assets |
| 49,722 |
| 49,633 |
| ||
Total Assets |
| $ | 2,027,235 |
| $ | 2,074,636 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest bearing |
| $ | 412,788 |
| $ | 468,547 |
|
Interest bearing: |
|
|
|
|
| ||
Other deposits |
| 53,500 |
| 60,443 |
| ||
Money market deposits |
| 890,999 |
| 865,434 |
| ||
Time deposits |
| 229,642 |
| 233,335 |
| ||
Total deposits |
| 1,586,929 |
| 1,627,759 |
| ||
|
|
|
|
|
| ||
Federal Home Loan Bank advances |
| 170,000 |
| 190,000 |
| ||
Note payable |
| 225 |
| 262 |
| ||
Accrued interest payable and other liabilities |
| 20,175 |
| 16,820 |
| ||
Subordinated debentures |
| 92,785 |
| 92,785 |
| ||
Total Liabilities |
| 1,870,114 |
| 1,927,626 |
| ||
Commitments and contingencies (Note 4) |
|
|
|
|
| ||
Shareholders’ Equity: |
|
|
|
|
| ||
Common Stock-no par value; authorized 150,000,000 shares; outstanding 12,306,000 (2007) and 12,283,000 (2006) |
| 53,276 |
| 52,415 |
| ||
Unearned ESOP shares; 71,000 (2007) and 83,000 (2006) |
| (213 | ) | (249 | ) | ||
Total common stock-no par value; outstanding 12,235,000 (2007) and 12,200,000 (2006) |
| 53,063 |
| 52,166 |
| ||
Retained earnings |
| 103,858 |
| 94,870 |
| ||
Accumulated other comprehensive income (loss), net of tax |
| 200 |
| (26 | ) | ||
Total Shareholders’ Equity |
| 157,121 |
| 147,010 |
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 2,027,235 |
| $ | 2,074,636 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Per Share Data)
(Unaudited)
|
| Three Months Ended |
| ||||
|
| 2007 |
| 2006 |
| ||
INTEREST INCOME: |
|
|
|
|
| ||
Interest on loans |
| $ | 40,938 |
| $ | 36,507 |
|
Interest on investment securities |
| 237 |
| 42 |
| ||
Interest on deposits in financial institutions |
| 59 |
| 26 |
| ||
Interest on federal funds sold |
| 91 |
| 32 |
| ||
Total interest income |
| 41,325 |
| 36,607 |
| ||
INTEREST EXPENSE: |
|
|
|
|
| ||
Interest on deposits |
| 11,523 |
| 7,373 |
| ||
Interest on subordinated debentures |
| 1,683 |
| 1,043 |
| ||
Interest on FHLB advances |
| 1,595 |
| 2,436 |
| ||
Interest on other borrowings |
| 6 |
| 3 |
| ||
Total interest expense |
| 14,807 |
| 10,855 |
| ||
Net interest income |
| 26,518 |
| 25,752 |
| ||
PROVISION FOR LOAN LOSSES |
| 0 |
| 2,391 |
| ||
Net interest income after provision for loan losses |
| 26,518 |
| 23,361 |
| ||
OTHER OPERATING INCOME: |
|
|
|
|
| ||
Customer service fees |
| 1,495 |
| 1,737 |
| ||
Other-net |
| 872 |
| 215 |
| ||
Total other operating income |
| 2,367 |
| 1,952 |
| ||
OTHER OPERATING EXPENSES: |
|
|
|
|
| ||
Salaries and related benefits |
| 9,021 |
| 6,796 |
| ||
Occupancy expense |
| 819 |
| 622 |
| ||
Equipment expense |
| 373 |
| 305 |
| ||
Promotion expense |
| 131 |
| 155 |
| ||
Professional service expense |
| 782 |
| 752 |
| ||
Customer service expense |
| 542 |
| 360 |
| ||
Supply/communication expense |
| 352 |
| 379 |
| ||
Other expenses |
| 1,299 |
| 1,032 |
| ||
Total other operating expenses |
| 13,319 |
| 10,401 |
| ||
Income before provision for income taxes |
| 15,566 |
| 14,912 |
| ||
PROVISION FOR INCOME TAXES |
| 6,575 |
| 6,428 |
| ||
NET INCOME |
| $ | 8,991 |
| $ | 8,484 |
|
EARNINGS PER SHARE (Note 3) |
|
|
|
|
| ||
Basic |
| $ | 0.74 |
| $ | 0.70 |
|
Diluted |
| $ | 0.69 |
| $ | 0.65 |
|
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)
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
OPERATING ACTIVITIES |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net Income |
| $ | 8,991 |
| $ | 8,484 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Provision for loan losses |
| 0 |
| 2,391 |
| ||
Depreciation and amortization |
| 243 |
| 205 |
| ||
Amortization of investment securities premiums and discounts — net |
| 42 |
| (13 | ) | ||
Stock compensation costs |
| 144 |
| 144 |
| ||
Federal Home Loan Bank stock dividends |
| (186 | ) | (96 | ) | ||
Gains on sale/disposal of premises and equipment |
| (108 | ) | 0 |
| ||
Net loss on sale of securities |
| 29 |
| 0 |
| ||
Increase in accrued interest receivable and other assets |
| (251 | ) | (3,220 | ) | ||
Increase (decrease) in accrued interest payable and other liabilities |
| 3,355 |
| (2,673 | ) | ||
Tax benefit from stock options exercised |
| (255 | ) | 0 |
| ||
Increase in taxes payable |
| 255 |
| 8,231 |
| ||
Net cash provided by operating activities |
| 12,259 |
| 13,453 |
| ||
|
|
|
|
|
| ||
INVESTING ACTIVITIES |
|
|
|
|
| ||
Net increase in interest-bearing deposits in financial institutions |
| 0 |
| (22 | ) | ||
Purchases of investment securities |
| (5,257 | ) | (2,170 | ) | ||
Proceeds from maturities of investment securities |
| 2,482 |
| 266 |
| ||
Redemption (purchase) of Federal Home Loan Bank stock |
| 1,624 |
| (3,711 | ) | ||
Net increase in loans |
| (18,225 | ) | (102,896 | ) | ||
Proceeds from sale of premises and equipment |
| 108 |
| 0 |
| ||
Purchases of premises and equipment |
| (750 | ) | (203 | ) | ||
Net cash used in investing activities |
| (20,018 | ) | (108,736 | ) | ||
|
|
|
|
|
| ||
FINANCING ACTIVITIES |
|
|
|
|
| ||
Net (decrease)increase in non-interest bearing deposits and other interest bearing deposits |
| (37,137 | ) | 48,164 |
| ||
Net (decrease) increase in time deposits |
| (3,693 | ) | 53 |
| ||
Decrease in note payable |
| (37 | ) | (37 | ) | ||
(Decrease) increase in Federal Home Loan Bank advances |
| (20,000 | ) | 20,000 |
| ||
Issuance of subordinated debentures |
| 0 |
| 30,928 |
| ||
Stock options exercised |
| 124 |
| 77 |
| ||
Tax benefit from stock options exercised |
| 255 |
| 0 |
| ||
Common stock issued |
| 371 |
| 329 |
| ||
Net cash (used by) provided by financing activities |
| (60,117 | ) | 99,514 |
| ||
|
|
|
|
|
| ||
(Decrease) increase in cash and cash equivalents |
| (67,876 | ) | 4,231 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents, beginning of period |
| 175,994 |
| 67,964 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents, end of period |
| $ | 108,118 |
| $ | 72,195 |
|
|
|
|
|
|
| ||
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Interest paid |
| $ | 14,883 |
| $ | 10,744 |
|
Income taxes paid |
| $ | 2,200 |
| $ | 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
March 31, 2007
(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 Company’s 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 (which consist only of normal recurring adjustments) 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.
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 2006 annual report on Form 10-K.
NOTE 2: Recent Accounting Pronouncements
FIN 48 - - In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which supplements SFAS No. 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007. At the adoption date and as of March 31, 2007, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.
SEC Staff Accounting Bulletin No. 108 — In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Quantifying Financial Misstatements, which expresses the staff’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior-year misstatements, on the current-year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” (current-year income statement perspective) and “iron curtain” (year-end balance perspective) approaches. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. Management does not expect this guidance to have a material effect on the Company’s financial condition, results of operations, or cash flows.
6
SFAS No. 157 - In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 12, 2007, and interim periods within those years. The provisions of SFAS No. 157 should be applied prospectively. Management is assessing the potential impact on the Company’s financial condition, results of operations, and cash flows.
SFAS No. 159 - - In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115, which establishes presentation and disclosure requirements designed to facilitate comparisons that choose different measurement attributes for similar types of assets and liabilities. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This new guidance does not eliminate disclosure requirements included in other accounting standards, including fair value measurement disclosures required by SFAS No. 157 and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes the choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. Management is assessing the potential impact on the Company’s financial condition, results of operations, and cash flows.
NOTE 3: 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. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is:
|
| Three Months Ended March 31, 2007 |
| ||||||
|
|
|
| Weighted |
|
|
| ||
|
|
|
| Average |
| Per |
| ||
|
| Income |
| Shares |
| Share |
| ||
|
| (Numerator) |
| (Denominator) |
| Amount |
| ||
Basic EPS |
|
|
|
|
|
|
| ||
Income available to common shareholders |
| $ | 8,991,000 |
| 12,216,000 |
| $ | 0.74 |
|
|
|
|
|
|
|
|
| ||
Effect of Dilutive Securities |
|
|
|
|
|
|
| ||
Incremental shares from assumed exercise of outstanding options |
|
|
| 863,000 |
| (0.05 | ) | ||
|
|
|
|
|
|
|
| ||
Diluted EPS |
|
|
|
|
|
|
| ||
Income available to common shareholders |
| $ | 8,991,000 |
| 13,079,000 |
| $ | 0.69 |
|
7
|
| Three Months Ended March 31, 2006 |
| ||||||
|
|
|
| Weighted |
|
|
| ||
|
|
|
| Average |
| Per |
| ||
|
| Income |
| Shares |
| Share |
| ||
|
| (Numerator) |
| (Denominator) |
| Amount |
| ||
Basic EPS |
|
|
|
|
|
|
| ||
Income available to common shareholders |
| $ | 8,484,000 |
| 12,126,000 |
| $ | 0.70 |
|
|
|
|
|
|
|
|
| ||
Effect of Dilutive Securities |
|
|
|
|
|
|
| ||
Incremental shares from assumed exercise of outstanding options |
|
|
| 828,000 |
| (0.05 | ) | ||
|
|
|
|
|
|
|
| ||
Diluted EPS |
|
|
|
|
|
|
| ||
Income available to common shareholders |
| $ | 8,484,000 |
| 12,954,000 |
| $ | 0.65 |
|
Stock Compensation Plans
In May 2005, the Company’s Board of Directors adopted a nonqualified employee stock option plan that expires in 2015 and authorizes the issuance of up to 600,000 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 Company’s previous stock option plans. The Company’s 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 Company’s earnings. To date, none of the grants have been made to directors or executive officers of the Company or to directors of the Bank. During May and July 2005, the Company granted options to buy up to 177,000 shares of the Company’s common stock to certain officers of the Company and its subsidiaries. All such granted options will vest over seven years and expire in 2015. The exercise prices of the options granted in 2005 range from $20.50 to $25.00. No stock options were granted in 2006 or during the first quarter of 2007.
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 March 31, 2007 and changes during the 3 month period is presented below:
8
|
|
|
|
|
| Weighted- |
|
|
| ||
|
|
|
| Weighted- |
| Average |
| Aggregate |
| ||
|
| Shares |
| Average |
| Remaining |
| Intrinsic |
| ||
|
| (in |
| Exercise |
| Contractual |
| Value |
| ||
|
| thousands) |
| Price |
| Term |
| (In thousands) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding—January 1, 2007 |
| 1,836 |
| $ | 5.93 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| ||
Granted |
|
|
|
|
|
|
|
|
| ||
Exercised |
| (23 | ) | 5.44 |
|
|
|
|
| ||
Cancelled |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding—March 31, 2007 |
| 1,813 |
| $ | 5.93 |
| 5.76 years |
| $ | 43,094 |
|
|
|
|
|
|
|
|
|
|
| ||
Vested or expected to vest at March 31, 2007 |
| 1,461 |
| $ | 5.53 |
| 5.51 years |
| $ | 43,396 |
|
|
|
|
|
|
|
|
|
|
| ||
Exercisable at March 31, 2007 |
| 1,225 |
| $ | 4.37 |
| 5.70 years |
| $ | 31,029 |
|
The total intrinsic value of options exercised during the three month periods ended March 31, 2007 and 2006 was $607,000 and $549,000, respectively. The total fair value of shares vested during the three month periods ended March 31, 2007 and 2006 was $49,000 and $49,000, respectively.
As of March 31, 2007, there was $1,896,000 of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.76 years. The Company received $124,000 and $77,000 cash from the exercise of stock options during the three month periods ended March 31, 2007 and March 31, 2006, respectively.
For each of the three month periods ended March 31, 2007 and 2006, stock based compensation expense reduced income before taxes by $144,000 and reduced net income by $84,000. This additional expense reduced both basic and diluted earnings per share by $0.01 for the three months ended March 31, 2007 and 2006. Cash provided by operating activities decreased by $255,000 and cash provided by financing activities increased by an identical amount for the first quarter 2007 related to excess tax benefits from stock-based arrangements.
NOTE 4: Commitments and Contingencies
As of March 31, 2007 the Bank had a total of $11,442,000 standby letters of credit outstanding. No losses are anticipated as a result of these transactions.
The Company’s comprehensive income includes all items which comprise net income plus the unrealized holding gains (losses) on available-for-sale securities. For the three month periods ended March 31, 2007 and 2006, the Company’s comprehensive income was as follows:
| Three Months Ended |
| |||||
|
| March 31, |
| March 31, |
| ||
|
| 2007 |
| 2006 |
| ||
|
| (Dollars in Thousands) |
| ||||
Net income |
| $ | 8,991 |
| $ | 8,484 |
|
Other comprehensive income (loss) |
| 226 |
| (40 | ) | ||
Total comprehensive income |
| $ | 9,217 |
| $ | 8,444 |
|
9
NOTE 6: Operating Segment Reports
Management has evaluated the Company’s overall operation and determined that its business consists of certain reportable business segments as of March 31, 2007 and 2006: 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 segment’s primary sources of revenue are interest income from loans and investment securities and fees earned in connection with loans and deposits. This segment’s principal expenses consist of interest paid on deposits, personnel, and other general and administrative expenses. Core banking services also includes the Bank’s merchant services operations, which provides 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 Bank’s division, Trust Administrative 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 segment’s 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 segment’s principal expenses consist of personnel, data processing, professional service expenses, and other general and administrative expenses.
Total assets of TAS at March 31, 2007 and December 31, 2006 were $974,000 and $842,000, respectively, and total assets of Trust Services at March 31, 2007 and December 31, 2006 were $28,000 and $31,000, respectively. The remaining assets reflected on the consolidated balance sheets of the Company are associated with core banking operations.
A table showing the net income for the core banking operations, administrative services, and trust services for the three month periods ended March 31, 2007 and 2006 (in thousands):
|
| Three Month Period Ended March 31, 2007 |
| ||||||||||
|
| Core Banking |
| Administrative |
| Trust |
| Combined |
| ||||
|
| Operations |
| Services |
| Services |
| Operations |
| ||||
Net interest income |
| $ | 26,518 |
|
|
|
|
| $ | 26,518 |
| ||
Provision for loan losses |
| 0 |
|
|
|
|
| 0 |
| ||||
Other operating income |
| 1,292 |
| $ | 563 |
| $ | 512 |
| 2,367 |
| ||
Other operating expenses |
| 12,344 |
| 670 |
| 305 |
| 13,319 |
| ||||
Provision (benefit) for income taxes |
| 6,533 |
| (45 | ) | 87 |
| 6,575 |
| ||||
Net income (loss) |
| $ | 8,933 |
| $ | (62 | ) | $ | 120 |
| $ | 8,991 |
|
10
|
| Three Month Period Ended March 31, 2006 |
| ||||||||||
|
| Core Banking |
| Administrative |
| Trust |
| Combined |
| ||||
|
| Operations |
| Services |
| Services |
| Operations |
| ||||
Net interest income |
| $ | 25,752 |
|
|
|
|
| $ | 25,752 |
| ||
Provision for loan losses |
| 2,391 |
|
|
|
|
| 2,391 |
| ||||
Other operating income |
| 850 |
| $ | 682 |
| $ | 420 |
| 1,952 |
| ||
Other operating expenses |
| 9,890 |
| 265 |
| 246 |
| 10,401 |
| ||||
Provision for income taxes |
| 6,180 |
| 175 |
| 73 |
| 6,428 |
| ||||
Net income |
| $ | 8,141 |
| $ | 242 |
| $ | 101 |
| $ | 8,484 |
|
In addition, the operations of the administrative services positively affect the results of core banking operations by providing a low-cost source of deposits.
11
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 Annual Report on Form 10-K for the year ended December 31, 2006. 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 management’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company’s financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its condensed consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management’s estimate of the allowance to increase or decrease and result in adjustments to the Company’s provision for loan losses.
As of March 31, 2007 total assets were $2,027,235,000 compared to $2,074,636,000 at December 31, 2006, a decrease of $47,401,000 or 2.3% and the March 31, 2007 asset level represents an increase compared to the $1,925,375,000 that existed on the same date in 2006. The 2007 asset decrease reflects a corresponding decrease in total deposits of $40,830,000 or 2.5%, from $1,627,759,000 at the end of 2006 to $1,586,929,000 at March 31, 2007. Overall deposits decreased with deposit growth in money market deposits and deposit reductions in noninterest bearing deposits while time deposits and other deposits showed a slight decrease. There were several changes in the composition of the Bank’s assets during the first quarter of 2007. The Bank’s core loan portfolio grew by $18,225,000 during the three month period, bringing the Bank’s total loans to $1,823,526,000 at March 31, 2007 from the December 31, 2006 total of $1,805,301,000. The combined effect of the increase in loans and the decrease in deposits was a decrease in the level of total liquid
12
assets (cash and due from banks, Federal funds sold and investment securities). Investment securities increased by $3.1 million, while cash and cash equivalents (cash and due from banks and Federal funds sold) decreased by $67.9 million in order to accommodate the changes that took place in the rest of the balance sheet.
The Company earned net income of $8,991,000 in the first quarter of 2007, compared to earnings of $8,484,000 in the three months ended March 31, 2006.
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. As was the case during 2006, in the first three months of 2007 the Company’s continued growth efforts resulted in an increase in interest earning assets, including loans. The Bank’s core loan portfolio increased during the first three months of 2007.
Total interest income increased by $4,718,000 (13%) for the three months ended March 31, 2007 compared to the same period in 2006 as total average earning assets were higher (5%) in 2007 than in 2006. The majority of the increase in interest income arises from a substantial increase of $4,431,000 (12%) in interest on loans from $36,507,000 for the three months ended March 31, 2006 compared to $40,938,000 for the same period in 2007. Although interest income increased reflecting an increase in the loan portfolio of $34,664,000 (2%) from March 31, 2006 to March 31, 2007, interest income was also affected by the Federal Reserve’s series of interest rate increases. For the three months ended March 31, 2007, interest expense on deposits increased by $4,150,000 (56%), to $11,523,000 from the 2006 level of $7,373,000 due to an increase in total deposits of $118,491,000 (8%) from March 31, 2006 to March 31, 2007. The increases in deposits were primarily in money market deposits and time deposits, while other deposits also showed increases and non-interest bearing demand deposit accounts decreased. For the three months ended March 31, 2007, interest expense on subordinated debentures increased by $640,000 (61%), to $1,683,000 from the 2006 level of $1,043,000 due to an increase of $30,928,000 in subordinated debentures on March 30, 2006, and also due to an increase in interest rates during the period. For the three months ended March 31, 2007 interest expense on FHLB advances decreased by $841,000 (35%), to $1,595,000 from the 2006 level of $2,436,000 due to a combination of a decrease of $60,000,000 in FHLB advances at March 31, 2007 compared to March 31, 2006 and an increase in interest rates during the period. The net result was an increase in net interest income of $766,000 (3%), from $25,752,000 in the first quarter of 2006 to $26,518,000 for the first three months of 2007.
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 the Three Month Period Ended March 31, |
| ||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||
|
|
|
|
|
| Average |
|
|
|
|
| Average |
| ||||
|
| Average |
| Interest |
| Yield/ |
| Average |
| Interest |
| Yield/ |
| ||||
|
| Balance |
| Income(2) |
| Rate% |
| Balance |
| Income(2) |
| Rate% |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans(1) |
| $ | 1,831,040 |
| $ | 40,938 |
| 9.07 | % | $ | 1,755,251 |
| $ | 36,507 |
| 8.44 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment securities |
| 23,550 |
| 237 |
| 4.08 | % | 8,583 |
| 42 |
| 1.98 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing deposits in financial institutions |
| 5,004 |
| 59 |
| 4.78 | % | 3,362 |
| 26 |
| 3.14 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold |
| 6,765 |
| 91 |
| 5.46 | % | 3,344 |
| 32 |
| 3.88 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Earning Assets |
| $ | 1,866,359 |
| $ | 41,325 |
| 8.98 | % | $ | 1,770,540 |
| $ | 36,607 |
| 8.39 | % |
13
|
| For the Three Month Period Ended March 31, |
| ||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||
|
| Average |
| Interest |
| Yield/ |
| Average |
| Interest |
| Yield/ |
| ||||
|
| Balance |
| Expense |
| Rate% |
| Balance |
| Expense |
| Rate% |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other deposits |
| $ | 55,609 |
| $ | 325 |
| 2.37 | % | $ | 49,545 |
| $ | 109 |
| 0.89 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market accounts |
| 873,343 |
| 8,315 |
| 3.86 | % | 743,980 |
| 5,515 |
| 3.01 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Time deposits |
| 231,273 |
| 2,883 |
| 5.06 | % | 184,278 |
| 1,749 |
| 3.85 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Subordinated debentures |
| 92,785 |
| 1,683 |
| 7.36 | % | 62,201 |
| 1,043 |
| 6.80 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHLB advances |
| 118,578 |
| 1,595 |
| 5.46 | % | 218,267 |
| 2,436 |
| 4.53 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other borrowings |
| 407 |
| 6 |
| 5.98 | % | 81 |
| 3 |
| 15.02 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Interest |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Bearing Liabilities |
| $ | 1,371,995 |
| $ | 14,807 |
| 4.38 | % | $ | 1,258,352 |
| $ | 10,855 |
| 3.50 | % |
(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 quarter of $21,507,000 in 2007 and $18,710,000 in 2006 and is not net of deferred loan fees, which had an average balance in the first quarter of $7,563,000 in 2007 and $7,976,000 in 2006.
(2) Includes loan fees in the first quarter of $2,668,000 in 2007 and $2,201,000 in 2006.
The following table shows the net interest earnings and the net yield on average interest earning assets:
|
| For the Three Month |
| ||||
|
| Period Ended March 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| (Dollars in Thousands) |
| ||||
Total interest income(1) |
| $ | 41,325 |
| $ | 36,607 |
|
|
|
|
|
|
| ||
Total interest expense |
| 14,807 |
| 10,855 |
| ||
|
|
|
|
|
| ||
Net interest earnings |
| $ | 26,518 |
| $ | 25,752 |
|
|
|
|
|
|
| ||
Average interest earning assets |
| $ | 1,866,359 |
| $ | 1,770,540 |
|
|
|
|
|
|
| ||
Average interest bearing liabilities |
| $ | 1,371,995 |
| $ | 1,258,352 |
|
|
|
|
|
|
| ||
Net yield on average interest earning assets |
| 5.76 | % | 5.90 | % |
(1) Includes loan fees in the first quarter of $2,668,000 in 2007 and $2,201,000 in 2006.
14
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) |
| |||||||
|
| For the Three Month Periods |
| |||||||
|
| Ended March 31, |
| |||||||
|
| 2007 over 2006 |
| |||||||
|
| Volume |
| Rate |
| Net |
| |||
|
| (Dollars in Thousands) |
| |||||||
Interest Income(1) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Loans(2) |
| $ | 1,620 |
| $ | 2,811 |
| $ | 4,431 |
|
|
|
|
|
|
|
|
| |||
Interest-bearing deposits in financial institutions |
| 7 |
| 26 |
| 33 |
| |||
|
|
|
|
|
|
|
| |||
Investment securities |
| 121 |
| 74 |
| 195 |
| |||
|
|
|
|
|
|
|
| |||
Federal funds sold |
| 42 |
| 17 |
| 59 |
| |||
|
|
|
|
|
|
|
| |||
Total interest earning assets |
| $ | 1,790 |
| $ | 2,928 |
| $ | 4,718 |
|
|
|
|
|
|
|
|
| |||
Interest Expense(1) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Other deposits |
| $ | 15 |
| $ | 201 |
| $ | 216 |
|
|
|
|
|
|
|
|
| |||
Money market |
| 1,062 |
| 1,738 |
| 2,800 |
| |||
|
|
|
|
|
|
|
| |||
Time |
| 509 |
| 625 |
| 1,134 |
| |||
|
|
|
|
|
|
|
| |||
Subordinated debentures |
| 549 |
| 91 |
| 640 |
| |||
|
|
|
|
|
|
|
| |||
FHLB advances |
| (1,527 | ) | 686 |
| (841 | ) | |||
|
|
|
|
|
|
|
| |||
Other borrowings |
| 4 |
| (1 | ) | 3 |
| |||
|
|
|
|
|
|
|
| |||
Total interest bearing liabilities |
| $ | 612 |
| $ | 3,340 |
| $ | 3,952 |
|
(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 quarter of $2,668,000 in 2007 and $2,201,000 in 2006.
15
OTHER OPERATING INCOME
Other operating income rose to $2,367,000 in the first quarter of 2007 from $1,952,000 in the three months ended March 31, 2006. The Bank’s Trust Administrative Services division that provides administrative and custodial services to self-directed retirement plans, had revenue which decreased from $682,000 in first quarter of 2006 to $563,000 in the first quarter of 2007. The decrease in TAS revenues relates to a decrease in the number of customer accounts as a result of a management decision to reduce accounts that it considered high risk. The Bank’s Trust Services Department, which provides trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters, had revenue of $512,000 in first quarter of 2007 and $420,000 in first quarter of 2006. 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 decreased to $134,000 for the three months ended March 31, 2007 in contrast with $404,000 in the corresponding period of 2006. The decrease in revenues relates primarily to a reduction of deposit accounts relating to internet “e-wallet” accounts which have reduced activity levels due to changes in applicable regulations. During the first three months of 2007 gains of $108,000 and no losses on sales of premises and equipment were realized. In contrast, during the first three months of 2006 no gains or losses on sales of premises and equipment were realized. No gains and $29,000 in losses on securities sales were realized in the first quarter of 2007. In comparison, no gains or losses on securities sales were realized in the first quarter of 2006.
OTHER OPERATING EXPENSES
Overall, other operating expenses increased in the first quarter of 2007 compared to the same period of 2006. Other operating expenses rose to a total of $13,319,000 for the first quarter of 2007 from $10,401,000 for the three months ended March 31, 2006. While the total expense figures increased primarily due to the increases in overall bank growth, most components continue to be moderated by the effects of an ongoing program of expense control.
Salary and related benefits increased by $2,225,000, rising from a total of $6,796,000 for the first quarter of 2006 to $9,021,000 for the same period in 2007. The increase in this expense category principally reflects the increases in staffing in the main office and the regional offices as part of the Company’s growth initiative and also reflects employee salary adjustments. The total of all other operating expenses rose in 2007 compared to the prior year, increasing from $2,983,000 for the first quarter of 2006 to $3,479,000 for the first three months of 2007.
The combined effects of the above-described factors resulted in income before taxes of $15,566,000 for the three months ended March 31, 2007 compared to $14,912,000 for the first quarter of 2006. In the first quarter, the Company’s provision for taxes increased from $6,428,000 in 2006 to $6,575,000 in 2007. This brought net income for the first quarter of 2007 to $8,991,000 compared to $8,484,000 for the same period in 2006.
Investment Securities
The amortized cost and estimated fair values of securities available for sale as of March 31, 2007 and December 31, 2006 were as follows:
16
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
|
| Cost |
| Gains |
| (Losses) |
| Value |
| ||||
March 31, 2007 |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities |
| $ | 245,000 |
| $ | 0 |
| $ | 0 |
| $ | 245,000 |
|
U.S. government sponsored enterprise debt securities |
| 24,968,000 |
| 417,000 |
| (73,000 | ) | 25,312,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 25,213,000 |
| $ | 417,000 |
| ($73,000 | ) | $ | 25,557,000 |
| |
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2006 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities |
| $ | 248,000 |
| $ | 0 |
| $ | 0 |
| $ | 248,000 |
|
U.S. government sponsored enterprise debt securities |
| 20,100,000 |
| 114,000 |
| (107,000 | ) | 20,107,000 |
| ||||
Mutual funds |
| 2,161,000 |
| 0 |
| (51,000 | ) | 2,110,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 22,509,000 |
| $ | 114,000 |
| ($158,000 | ) | $ | 22,465,000 |
|
LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES
Loan Portfolio
The loan portfolio consisted of the following at March 31, 2007 and December 31, 2006:
| March 31, |
| December 31, |
| |||
|
| 2007 |
| 2006 |
| ||
|
| (Dollars in Thousands) |
| ||||
Commercial loans |
| $ | 240,024 |
| $ | 223,571 |
|
Real estate construction loans |
| 426,684 |
| 375,175 |
| ||
Real estate loans |
| 1,179,352 |
| 1,226,870 |
| ||
Government guaranteed loans |
| 4,093 |
| 4,827 |
| ||
Other loans |
| 1,840 |
| 3,096 |
| ||
|
|
|
|
|
| ||
Total loans |
| 1,851,993 |
| 1,833,539 |
| ||
|
|
|
|
|
| ||
Less — Allowances for loan losses |
| 20,694 |
| 20,624 |
| ||
— Deferred loan fees |
| 7,773 |
| 7,614 |
| ||
|
|
|
|
|
| ||
Net loans |
| $ | 1,823,526 |
| $ | 1,805,301 |
|
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 Bank’s 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 Bank’s 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
17
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 Bank’s loans are floating rate and have no prepayment penalties.
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 March 31, 2007 and December 31, 2006, the Company had $935,431,000 and $1,026,515,000 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, negative amortization loans, “option-ARMs”, or sub-prime loan products.
Certain customers of the Bank control various separate legal entities representing, in the aggregate, significant borrowing concentration, including as much as $154 million, as of March 31, 2007. While each individual loan is separately and independently underwritten, and while the majority of such loans are secured by commercial real property, these borrowing concentrations nevertheless present certain risks.
The allowance for 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.
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. The first phase is conducted in accordance with SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are 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 loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon measuring the impairment, the Bank will insure an appropriate level of allowance is present or established.
Central to the first phase and the Bank’s credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel. Credits are monitored by line and credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred. Management performs a detailed analysis of these loans, including, but not limited to, cash flows,
18
appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.
The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics in accordance with SFAS No. 5, “Accounting for Contingencies”. In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio allowance. Additionally, groups of non-homogeneous loans, such as construction loans, are also reviewed to determine a portfolio allowance. The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other-behavioral characteristics of the subject portfolios.
The second major element in the Company’s methodology for assessing the appropriateness of the allowance consists of management’s considerations of all known relevant internal and external factors that may affect a loan’s collectibility. This includes management’s estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period.
Reflecting the Company’s ongoing analysis of the risks presented by its loan portfolio, the allowance for losses was $20,694,000 and $20,624,000 (or 1.12% and 1.12% of gross outstanding loans) at March 31, 2007 and December 31, 2006, respectively. There was no provision for loan losses during the three month period ended March 31, 2007, compared to $2,391,000 for the same period of 2006. For the three months ended March 31, 2007 and 2006, the Company generated net loan charge-offs of $0 and $941,000, respectively. The Company had loan recoveries of $79,000 and $0 during the three months ended March 31, 2007 and 2006, respectively.
For the quarter ended March 31, 2007, the Company has identified loans having an aggregate average balance of $26,000 which it concluded were impaired under SFAS No. 114. By comparison, for the quarter ended March 31, 2006, the Company had identified loans having an aggregate average balance of $1,674,000 which it concluded were impaired under SFAS No. 114. The total of impaired loans at March 31, 2007 was $63,000. 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 March 31, 2007 totaled $53,000 for the loans as a group.
LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES
The Company’s financial position remains liquid. Total liquid assets (cash and due from banks, investment securities, federal funds sold, and interest bearing deposits in financial institutions) stood at 8.7% of total deposits at March 31, 2007. This level represents a decrease from the 12.5% liquidity level which existed on December 31, 2006. In addition, at March 31, 2007, some $4.1 million of the Bank’s total loans consisted of government guaranteed loans, which represent an additional 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 114.9% and 110.8% as of March 31, 2007 and December 31, 2006, respectively.
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 March 31, 2007 and were secured by loans available as collateral at the FHLB. As of March 31, 2007, the Bank has additional borrowing capacity at the Federal Home Loan Bank of $414,081,000.
19
Total shareholders’ equity was $157,121,000 and $147,010,000 as of March 31, 2007 and December 31, 2006, respectively. The Company’s and the Bank’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:
|
| 3-31-07 |
| 12-31-06 |
|
Leverage Ratio (Tier I Capital to Average Assets): |
|
|
|
|
|
Regulatory requirement |
| 4.0 | % | 4.0 | % |
Company |
| 10.2 | % | 9.6 | % |
Bank |
| 12.1 | % | 11.8 | % |
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 and the Bank’s risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows:
|
| 3-31-07 |
| 12-31-06 |
|
Tier I Capital to Risk-weighted Assets: |
|
|
|
|
|
Regulatory requirement |
| 4.0 | % | 4.0 | % |
Company |
| 9.8 | % | 9.2 | % |
Bank |
| 11.2 | % | 11.0 | % |
|
| 3-31-07 |
| 12-31-06 |
|
Total Capital to Risk-weighted Assets: |
|
|
|
|
|
Regulatory requirement |
| 8.0 | % | 8.0 | % |
Company |
| 12.6 | % | 12.2 | % |
Bank |
| 12.2 | % | 12.0 | % |
At March 31, 2007, the Company and the Bank exceeded the minimum risk-based capital ratios and leverage ratio required to be considered “well capitalized”. The Company and the Bank believe that they will continue to meet all applicable capital standards.
As a result of a 2005 examination of the Bank by the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Institutions (“DFI”), the Bank has identified certain deficiencies and other concerns, principally with respect to the Bank Secrecy Act (“BSA”). As a result, the Bank took corrective action directed toward achieving full compliance with BSA and addressing the other concerns so identified. Subsequently, the Bank entered into an informal agreement with the FDIC and DFI with respect to such corrective action. In 2006, the FDIC and DFI conducted another examination which indicated that, while improvement had been achieved, additional corrections were still required. In response, the Bank implemented further remedial action, and believes that the corrective action taken to date has substantially addressed the regulatory concerns embodied in the informal agreement. While the Company does not expect such concerns to have a material adverse monetary or other impact on its financial condition or results of operations, no assurance can be given that the FDIC and DFI will not require further action if the Bank fails to maintain full compliance with the terms of the informal agreement.
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
20
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 our business in our contractual obligations during the quarter ended March 31, 2007.
BORROWINGS
Junior Subordinated Deferrable Debentures
During 2006, 2005, 2004, 2002 and 2001, the Company established First Regional Statutory Trusts I through VII (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 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 $92,785,000 at March 31, 2007 and at December 31, 2006. 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 Bank’s 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 sheet 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since customer deposits are the Company’s 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 Company’s 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 Bank’s assets and liabilities as of March 31, 2007, and thus the relative sensitivity of the Bank’s net interest income to changes in the overall level of interest rates.
21
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
| One month |
| Six months |
| One year |
|
|
| Non-interest |
|
|
| ||||||||
|
| Floating |
| Less than |
| but less than |
| but less than |
| but less than |
| Five years |
| earning |
|
|
| ||||||||
Category |
| Rate |
| one month |
| six months |
| one year |
| five years |
| or more |
| or bearing |
| Total |
| ||||||||
Fed funds sold |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
|
Interest-bearing deposits in financial institutions |
| 0 |
| 0 |
| 5,020 |
| 0 |
| 0 |
| 0 |
| 0 |
| 5,020 |
| ||||||||
Investment securities |
| 0 |
| 0 |
| 1,241 |
| 0 |
| 0 |
| 24,316 |
| 0 |
| 25,557 |
| ||||||||
Subtotal |
| 0 |
| 0 |
| 6,261 |
| 0 |
| 0 |
| 24,316 |
| 0 |
| 30,577 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loans, net of allowance for losses |
| 1,705,895 |
| 339 |
| 7,853 |
| 2,636 |
| 106,803 |
| 0 |
| 0 |
| 1,823,526 |
| ||||||||
Total earning assets |
| 1,705,895 |
| 339 |
| 14,114 |
| 2,636 |
| 106,803 |
| 24,316 |
| 0 |
| 1,854,103 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and due from banks |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 108,118 |
| 108,118 |
| ||||||||
Premises and equipment |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 4,345 |
| 4,345 |
| ||||||||
Other real estate owned |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||||||
Deferred income taxes |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 14,312 |
| 14,312 |
| ||||||||
Federal Home Loan Bank stock |
| 10,947 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 10,947 |
| ||||||||
Other assets |
| 0 |
| 0 |
| 7,188 |
| 0 |
| 0 |
| 0 |
| 28,222 |
| 35,410 |
| ||||||||
Total non-earning assets |
| 10,947 |
| 0 |
| 7,188 |
| 0 |
| 0 |
| 0 |
| 154,997 |
| 173,132 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total assets |
| $ | 1,716,842 |
| $ | 339 |
| $ | 21,302 |
| $ | 2,636 |
| $ | 106,803 |
| $ | 24,316 |
| $ | 154,997 |
| $ | 2,027,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Federal Home Loan Bank advances |
| $ | 0 |
| $ | 170,000 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 170,000 |
|
Repurchase agreements |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||||||
Subtotal |
| 0 |
| 170,000 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 170,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other deposits |
| 53,500 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 53,500 |
| ||||||||
Money market deposits |
| 890,999 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 890,999 |
| ||||||||
Time deposits |
| 0 |
| 59,243 |
| 99,357 |
| 63,428 |
| 7,614 |
| 0 |
| 0 |
| 229,642 |
| ||||||||
Subordinated debentures |
| 0 |
| 0 |
| 92,785 |
| 0 |
| 0 |
| 0 |
| 0 |
| 92,785 |
| ||||||||
Total interest bearing liabilities |
| 944,499 |
| 229,243 |
| 192,142 |
| 63,428 |
| 7,614 |
| 0 |
| 0 |
| 1,436,926 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Demand deposits |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 412,788 |
| 412,788 |
| ||||||||
Note payable |
| 0 |
| 225 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 225 |
| ||||||||
Other liabilities |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 20,175 |
| 20,175 |
| ||||||||
Shareholders’ equity |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 157,121 |
| 157,121 |
| ||||||||
Total non-interest bearing liabilities and shareholders’ equity |
| 0 |
| 225 |
| 0 |
| 0 |
| 0 |
| 0 |
| 590,084 |
| 590,309 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total liabilities and shareholders’ equity |
| $ | 944,499 |
| $ | 229,468 |
| $ | 192,142 |
| $ | 63,428 |
| $ | 7,614 |
| $ | 0 |
| $ | 590,084 |
| $ | 2,027,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
GAP |
| $ | 772,343 |
| ($229,129 | ) | ($170,840 | ) | ($60,792 | ) | $ | 99,189 |
| $ | 24,316 |
| ($435,087 | ) | $ | 0 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cumulative GAP |
| $ | 772,343 |
| $ | 543,214 |
| $ | 372,374 |
| $ | 311,582 |
| $ | 410,771 |
| $ | 435,087 |
| $ | 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 include high quality, low risk securities, including U.S. Treasury or Government Sponsored Enterprise debt securities. The balance of the Bank’s investment portfolio contains investments that qualify for CRA investment status. No gains and $29,000 in losses were recorded on securities sales during the first quarter of 2007. In comparison, no gains or losses on securities sales were realized during the first quarter of 2006. At March 31, 2007, the Company’s investment portfolio contained $417,000 in gross unrealized gains and $73,000 in gross unrealized losses, a net gain of $344,000 for unrealized net gains of $200,000, net of tax. By comparison, as of March 31, 2006 the Bank’s investment portfolio contained no gross unrealized gains and gross unrealized losses of $115,000, for unrealized losses net of tax benefit of $67,000. Because the Company’s holdings of securities are intended to
22
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 Company’s income statement.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2007. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date. There were no significant changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2007 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
23
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 litigation to have a material effect on the Company’s 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 the Company’s 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, 2006. These include risks associated with the Company’s financial and operating results and with an investment in the Company’s common stock, and have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2006.
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 of the 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.
24
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: May 10, 2007 |
| /s/ Jack A. Sweeney |
|
| Jack A. Sweeney, Chairman of the Board |
|
| and Chief Executive Officer |
|
|
|
|
|
|
Date: May 10, 2007 |
| /s/ Thomas E. McCullough |
|
| Thomas E. McCullough, Corporate Secretary |
|
|
|
|
|
|
Date: May 10, 2007 |
| /s/ Elizabeth Thompson |
|
| Elizabeth Thompson, Chief Financial Officer |
25
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 of the furnished pursuant to Section 906 of the Sarbanes-Oxley Act |
|
26