FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
Quarter Ended June 30, 2009
Commission File Number 0-10232
FIRST REGIONAL BANCORP
(Exact name of registrant as specified in its charter)
California |
| 95-3582843 |
State or other jurisdiction of |
| IRS Employer Identification Number |
incorporation or organization |
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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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Large Accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer x |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 |
| 11,836,016 |
Class |
| Outstanding on August 14, 2009 |
FIRST REGIONAL BANCORP
2
PART I - FINANCIAL INFORMATION
FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands Except Share Data)
(Unaudited)
|
| June 30, |
| December 31, |
| ||
Assets |
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Cash and cash equivalents |
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Cash and due from banks |
| $ | 24,065 |
| $ | 19,192 |
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Federal funds sold |
| 18,710 |
| 42,340 |
| ||
Total cash and cash equivalents |
| 42,775 |
| 61,532 |
| ||
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| ||
Investment securities, available for sale - at fair value - amortized cost of $25,960 (2009) and $24,204 (2008) |
| 27,002 |
| 24,727 |
| ||
Interest-bearing deposits in financial institutions |
| 14,006 |
| 2,008 |
| ||
Federal Home Loan Bank stock — at cost |
| 7,359 |
| 6,557 |
| ||
Loans - net of allowance for losses of $42,101 (2009) and $61,336 (2008) |
| 2,156,575 |
| 2,257,479 |
| ||
Premises and equipment - net of depreciation and amortization of $6,976 (2009) and $6,265 (2008) |
| 4,524 |
| 4,812 |
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Other real estate owned |
| 22,473 |
| 9,611 |
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Accrued interest receivable and other assets |
| 105,279 |
| 98,415 |
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Total Assets |
| $ | 2,379,993 |
| $ | 2,465,141 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Liabilities: |
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Deposits: |
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Non-interest bearing |
| $ | 399,433 |
| $ | 368,517 |
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Interest bearing: |
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Time deposits |
| 1,044,178 |
| 1,101,319 |
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Other deposits |
| 52,960 |
| 50,011 |
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Money market deposits |
| 514,028 |
| 610,125 |
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Total deposits |
| 2,010,599 |
| 2,129,972 |
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Federal Home Loan Bank advances |
| 110,000 |
| 60,000 |
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Accrued interest payable and other liabilities |
| 29,139 |
| 24,505 |
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Subordinated debentures |
| 100,517 |
| 100,517 |
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Total Liabilities |
| 2,250,255 |
| 2,314,994 |
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Commitments and contingencies (Note 6) |
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Shareholders’ Equity: |
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Common Stock — no par value; authorized 150,000,000 shares; |
| 45,315 |
| 45,005 |
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Retained earnings |
| 83,819 |
| 104,839 |
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Accumulated other comprehensive income - net of tax |
| 604 |
| 303 |
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Total Shareholders’ Equity |
| 129,738 |
| 150,147 |
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Total Liabilities and Shareholders’ Equity |
| $ | 2,379,993 |
| $ | 2,465,141 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
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| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
INTEREST INCOME: |
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Interest on loans |
| $ | 25,728 |
| $ | 35,957 |
| $ | 53,575 |
| $ | 76,253 |
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Interest on investment securities |
| 330 |
| 317 |
| 641 |
| 676 |
| ||||
Interest on deposits in financial institutions |
| 14 |
| 51 |
| 26 |
| 123 |
| ||||
Interest on federal funds sold |
| 17 |
| 105 |
| 60 |
| 173 |
| ||||
Total interest income |
| 26,089 |
| 36,430 |
| 54,302 |
| 77,225 |
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INTEREST EXPENSE: |
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Interest on deposits |
| 9,538 |
| 9,437 |
| 20,813 |
| 20,504 |
| ||||
Interest on subordinated debentures |
| 813 |
| 1,224 |
| 1,777 |
| 2,840 |
| ||||
Interest on FHLB advances |
| 60 |
| 1,628 |
| 82 |
| 3,336 |
| ||||
Interest on other borrowings |
| 0 |
| 24 |
| 0 |
| 32 |
| ||||
Total interest expense |
| 10,411 |
| 12,313 |
| 22,672 |
| 26,712 |
| ||||
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Net interest income |
| 15,678 |
| 24,117 |
| 31,630 |
| 50,513 |
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PROVISION FOR LOAN LOSSES |
| 31,116 |
| 44,743 |
| 38,616 |
| 55,533 |
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Net interest loss after provision for loan losses |
| (15,438 | ) | (20,626 | ) | (6,986 | ) | (5,020 | ) | ||||
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OTHER OPERATING INCOME: |
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Customer service fees |
| 1,853 |
| 1,931 |
| 3,655 |
| 3,855 |
| ||||
Other — net |
| 325 |
| 550 |
| 624 |
| 3,797 |
| ||||
Total other operating income |
| 2,178 |
| 2,481 |
| 4,279 |
| 7,652 |
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OTHER OPERATING EXPENSES: |
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Salaries and related benefits |
| 8,236 |
| 8,487 |
| 17,052 |
| 17,973 |
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Occupancy expense |
| 1,031 |
| 954 |
| 2,022 |
| 1,923 |
| ||||
Equipment expense |
| 468 |
| 471 |
| 894 |
| 904 |
| ||||
Promotion expense |
| 146 |
| 190 |
| 199 |
| 326 |
| ||||
Professional service expense |
| 1,578 |
| 905 |
| 2,776 |
| 1,755 |
| ||||
Customer service expense |
| 309 |
| 575 |
| 598 |
| 1,033 |
| ||||
Supplies and communication expense |
| 325 |
| 327 |
| 663 |
| 716 |
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FDIC Assessment |
| 3,908 |
| 485 |
| 6,307 |
| 969 |
| ||||
Reserve for VISA litigation (reversal) |
| — |
| — |
| — |
| (2,232 | ) | ||||
Other |
| 1,881 |
| 2,463 |
| 3,861 |
| 4,032 |
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Total other operating expenses |
| 17,882 |
| 14,857 |
| 34,372 |
| 27,399 |
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Loss before income taxes benefit |
| (31,142 | ) | (33,002 | ) | (37,079 | ) | (24,767 | ) | ||||
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INCOME TAXES BENEFIT |
| (13,359 | ) | (14,489 | ) | (16,059 | ) | (10,989 | ) | ||||
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NET LOSS |
| $ | (17,783 | ) | $ | (18,513 | ) | $ | (21,020 | ) | $ | (13,778 | ) |
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LOSS PER SHARE (Note 5) |
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Basic |
| $ | (1.50 | ) | $ | (1.57 | ) | $ | (1.78 | ) | $ | (1.17 | ) |
Diluted |
| $ | (1.50 | ) | $ | (1.57 | ) | $ | (1.78 | ) | $ | (1.17 | ) |
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)
|
| Six Months Ended |
| ||||
|
| 2009 |
| 2008 |
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OPERATING ACTIVITIES |
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Net Loss |
| $ | (21,020 | ) | $ | (13,778 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Provision for loan losses |
| 38,616 |
| 55,533 |
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Provision for loss on other real estate owned |
| 411 |
| — |
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Depreciation and amortization |
| 713 |
| 669 |
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Amortization of investment securities premiums and discounts-net |
| 20 |
| 17 |
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Stock compensation costs |
| 303 |
| 237 |
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Net gain on sale of other real estate owned |
| (68 | ) | — |
| ||
Federal Home Loan Bank stock dividends |
| — |
| (275 | ) | ||
Realized gain on sale of VISA stock investments |
| — |
| (2,758 | ) | ||
Net gains on sale/disposal of premises and equipment |
| — |
| (3 | ) | ||
Tax benefit from stock options exercised |
| — |
| (25 | ) | ||
Deferred compensation expense |
| 474 |
| 555 |
| ||
Changes in assets and liabilities: |
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Increase in accrued interest receivable and other assets |
| (6,816 | ) | (23,557 | ) | ||
Increase (decrease) in accrued interest payable and other liabilities |
| 4,160 |
| (1,661 | ) | ||
Net cash provided by operating activities |
| 16,793 |
| 14,954 |
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INVESTING ACTIVITIES |
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Net (increase) decrease in interest-bearing deposits in financial institutions |
| (11,998 | ) | 5,039 |
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Purchases of investment securities — available for sale |
| (3,243 | ) | (1,238 | ) | ||
Proceeds from maturities of investment securities — available for sale |
| 1,467 |
| 4,209 |
| ||
Purchases of Federal Home Loan Bank stock |
| (802 | ) | (9,817 | ) | ||
Redemption of Federal Home Loan Bank stock |
| — |
| 47 |
| ||
Net decrease (increase) in loans |
| 42,312 |
| (316,920 | ) | ||
Purchase of CRA investments included in other assets |
| (266 | ) | (3,204 | ) | ||
Proceeds from sale of other real estate owned |
| 6,771 |
| — |
| ||
Proceeds from sale of premises and equipment |
| — |
| 8 |
| ||
Purchases of premises and equipment |
| (425 | ) | (556 | ) | ||
Net cash provided by (used in) used in investing activities |
| 33,816 |
| (322,432 | ) | ||
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FINANCING ACTIVITIES |
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Decrease in non-interest bearing deposits and and other interest bearing deposits |
| (62,232 | ) | (79,481 | ) | ||
Net (decrease) increase in time deposits |
| (57,141 | ) | 340,156 |
| ||
Decrease in note payable |
| — |
| (75 | ) | ||
Increase in Federal Home Loan Bank advances |
| 50,000 |
| 75,000 |
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Decrease in federal funds purchased |
| — |
| (20,955 | ) | ||
Stock options exercised |
| 7 |
| 12 |
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Tax benefit from stock options exercised |
| — |
| 25 |
| ||
Common stock repurchased and retired |
| — |
| (1,978 | ) | ||
Common stock issued |
| — |
| 327 |
| ||
Net cash (used in) provided by financing activities |
| (69,366 | ) | 313,031 |
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(Decrease) increase in cash and cash equivalents |
| (18,757 | ) | 5,553 |
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Cash and cash equivalents, beginning of period |
| 61,532 |
| 46,676 |
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Cash and cash equivalents, end of period |
| $ | 42,775 |
| $ | 52,229 |
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Supplemental Disclosures of Cash Flow Information — cash paid during the period for: |
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Interest paid |
| $ | 29,643 |
| $ | 26,140 |
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Income taxes paid |
| $ | 2,600 |
| $ | 13,500 |
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Supplemental Disclosures of non-cash investing and financing activities: |
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Other real estate owned acquired through foreclosure |
| $ | 19,976 |
| $ | — |
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Loan to facilitate sale of other real estate owned |
| $ | 2,600 |
| $ | — |
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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
June 30, 2009
(Unaudited)
NOTE 1: Basis of Presentation
First Regional Bancorp, a bank holding company (the “Company”), and one of its wholly-owned subsidiaries, First Regional Bank, a California state-chartered bank (the “Bank”), primarily serve Southern California through their branches. The 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 of a normal recurring nature necessary to present fairly the financial position and the results of operations for the interim periods. Interim results may not be indicative of annual operations.
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 2008 annual report on Form 10-K.
NOTE 2: Recent Accounting Pronouncements
SFAS No. 157 — In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value, and therefore, does not expand the use of fair value in any new circumstance. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an arm’s length transaction between market participants in the markets where we conduct business. SFAS 157 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The level of the reliability of inputs utilized for fair value calculations drives the extent of disclosure requirements of the valuation methodologies used under the standard. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The provisions of SFAS 157 should be applied prospectively, except for certain financial instruments for which the standard should be applied retrospectively. The adoption of this guidance has not had a material impact to the Company’s consolidated financial condition and results of operations.
FSP FAS No. 157-4 - In April 2009, the FASB issued FSP SFAS No.157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, to provide additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased, as some constituents indicated that SFAS No. 157 and FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, do not provide sufficient guidance on how to determine whether a market for a financial asset that historically was active is no longer active and whether a transaction is not orderly. Therefore, this FSP includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP SFAS No. 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. If a reporting entity elects to adopt early either FSP SFAS No. 115-2 and SFAS No. 124-2 or FSP SFAS No. 107-1 and Accounting Principles Board (“APB”) 28-1, the reporting entity also is required to adopt early this FSP. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The adoption of FSP SFAS No. 157-4 in the second quarter of 2009 has not had a material impact to the Company’s consolidated financial condition and results of operations.
6
FSP FAS No. 115-2 - - In April 2009, the FASB issued FSP SFAS No.115-2 and SFAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary impairment (“OTTI”) guidance in the U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to OTTI of equity securities. This FSP also requires increased and more timely disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. FSP SFAS No. 115-2 and SFAS No. 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. If a reporting entity elects to adopt early either FSP SFAS No. 157-4 or FSP SFAS No. 107-1 and APB 28-1, the reporting entity also is required to adopt early this FSP. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The adoption of FSP SFAS No. 115-2 and SFAS No. 124-2 in the second quarter of 2009 has not had a material impact to the Company’s consolidated financial condition and results of operations.
FSP FAS No. 107-1 - In April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, amending SFAS No. 107, Disclosure about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP SFAS No. 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. If a reporting entity elects to adopt early either FSP SFAS No. 157-4 or FSP SFAS No. 115-2 and SFAS No. 124-2, the reporting entity also is required to adopt early this FSP. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The adoption of FSP SFAS No. 107-1 and APB 28-1 in the second quarter of 2009 did not have a material impact on our consolidated financial statements.
SFAS No. 165 - In May 2009, the FASB issued SFAS No. 165, Subsequent Events, to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is to be applied to the accounting for and disclosure of subsequent events, and is applied to both interim and annual financial statements. This statement does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. Events that occurred subsequent to June 30, 2009 have been evaluated by the Company’s management in accordance with SFAS 165 through the time of filing this report on August 14, 2009. The adoption of SFAS No. 165 did not have a material impact on our consolidated financial statements.
SFAS No. 166 - In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 addresses (1) practices that have developed since the issuance of SFAS No. 140 that are not consistent with the original intent and key requirements of that statement, and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. SFAS No. 166 is effective at the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual periods thereafter. Early adoption is prohibited. This statement must be applied to transfers occurring on or after the effective date. However, the disclosure provisions of this statement should be applied to transfers that occurred both before and after the effective date. Additionally, on and after the effective date, the concept of qualifying special-purpose entity (“SPE”) is no longer relevant for accounting purposes. Therefore, formerly qualifying SPEs, as defined under previous accounting standards, should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. We are in the process of
7
evaluating the impact that the adoption of SFAS No. 166 will have on our consolidated financial statements.
SFAS No. 167 - In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46 (R), to improve financial reporting by enterprises involved with variable interest entities (“VIEs”). SFAS No. 167 addresses: (1) the effects on certain provisions of FASB Interpretation No. (“FIN”) 46R, Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying SPE concept in SFAS No. 166, and (2) constituent concerns about the application of certain key provisions of FIN 46R, including those in which the accounting and disclosures under FIN 46R do not always provide timely and useful information about an enterprise’s involvement in a VIE. SFAS No. 167 is effective at the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual periods thereafter. Early adoption is prohibited. We are in the process of evaluating the impact that the adoption of SFAS No. 166 will have on our consolidated financial statements.
SFAS No. 168 - - In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (“Codification”) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for interim and annual financial statements issued after September 15, 2009. We will adopt SFAS No. 168 in the third quarter of 2009 and are in the process of evaluating the impact that the adoption will have on our consolidated financial statements.
NOTE 3: Allowance for Loan Losses and Unfunded Loan Commitments
An analysis of the activity in the allowance for loan losses for the three and six months ended June 30, 2009 and 2008 is as follows (in thousands):
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
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Balance – beginning of year |
| $ | 68,264 |
| $ | 33,580 |
| $ | 61,336 |
| $ | 22,771 |
|
Provision for loan losses |
| 31,116 |
| 44,743 |
| 38,616 |
| 55,533 |
| ||||
Loans charged off |
| (57,480 | ) | (34,244 | ) | (58,152 | ) | (34,244 | ) | ||||
Allowance for unfunded loan commitments and lines of credit |
| 125 |
| 55 |
| 221 |
| 74 |
| ||||
Recoveries on loans previously charged off |
| 76 |
| 18 |
| 80 |
| 18 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance – end of period |
| $ | 42,101 |
| $ | 44,152 |
| $ | 42,101 |
| $ | 44,152 |
|
Management believes the allowance for loan losses as of June 30, 2009, is adequate to absorb losses inherent in the loan portfolio.
At June 30, 2009 and December 31, 2008, the recorded investment in non-performing and performing impaired loans net of charge-offs was $262,123,000 and $215,190,000, with specific reserves of $15,434,000 and $32,264,000, respectively. All loans for which impairment had been recognized had a related specific reserve or had been partially charged off at June 30, 2009 and December 31, 2008.
The average recorded investment in impaired loans during the second quarter ended June 30, 2009 and 2008 was $269,179,000, and $68,702,000, respectively. No interest income on impaired loans was recognized for cash payments received in the first six months of 2009 or 2008. Foregone interest on impaired loans during the first six months of 2009 was $4,287,000. Foregone interest on impaired loans during the first six months of 2008 is not material to the results of operations of the Company.
8
NOTE 4: Fair Value Disclosures
The Company adopted SFAS 157 effective January 1, 2008. SFAS 157 provides a framework for measuring fair value under GAAP. This standard applies to all financial assets and liabilities, and certain non-financial assets and liabilities, that are being measured and reported at fair value on a recurring or non-recurring basis. For the Company, this includes the investment securities available-for-sale (“AFS”) portfolio, impaired loans, and other real estate owned (“OREO”).
As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.
Level 3: Significant unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its assets and liabilities on a recurring or nonrecurring basis:
Investment securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, when available, or the prices of other securities with similar characteristics. Level 1 securities include both U.S. Treasury and actively traded U.S. government sponsored enterprise debt securities, and Level 2 securities are comprised of U.S. government sponsored enterprise debt securities in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.
Impaired Loans — In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15, the Company’s impaired loans are generally measured using the fair value of the underlying collateral, which is determined based on the most recent appraisal information received, less costs to sell. Appraised values may be adjusted based on factors such as the Company’s historical knowledge and changes in market conditions from the time of valuation. As of June 30, 2009, collateral dependent impaired loans totaled $170,812,000 net of the specific reserves. Collateral dependent impaired loans fall within Level 3 of the fair value hierarchy since they were measured at fair value based on appraisals of the underlying collateral.
OREO — In accordance with FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, at the acquisition date, the Company’s OREO assets are recorded at fair value, which is determined based on the most recent appraisal information received, less anticipated costs to sell. Subsequent to the acquisition date, the
9
Company’s OREO assets are reported at the lower of carrying amount or fair value, which is determined based on the most recent appraisal information received, less anticipated costs to sell. Appraised values may be adjusted based on factors such as the Company’s historical knowledge and changes in market conditions from the time of valuation. As of June 30, 2009, OREO assets totaled $22,473,000, net of valuation allowance. OREO assets fall within Level 3 of the fair value hierarchy since they were measured at fair value based on appraisals.
The balances of assets measured at fair value on a recurring basis as of June 30, 2009 were as follows (in $1,000’s):
|
| Total |
| Quoted Prices |
| Significant |
| |||
|
|
|
|
|
|
|
| |||
U. S. Treasury Securities |
| $ | 2,249 |
| $ | 2,249 |
| $ | — |
|
U. S. Government Sponsored Enterprise debt securities |
| 24,753 |
| 1,000 |
| 23,753 |
| |||
|
|
|
|
|
|
|
| |||
Securities available for sale |
| $ | 27,002 |
| $ | 3,249 |
| $ | 23,753 |
|
The amortized cost and estimated fair values of securities available for sale as of June 30, 2009 and December 31, 2008 were as follows (dollars in thousands):
|
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
June 30, 2009 |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury Securities |
| $ | 2,248 |
| $ | 1 |
| $ | — |
| $ | 2,249 |
|
U.S. Government sponsored Enterprise debt securities |
| 23,712 |
| 1,041 |
| — |
| 24,753 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 25,960 |
| $ | 1,042 |
| $ | — |
| $ | 27,002 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2008 |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury Securities |
| $ | 249 |
| $ | 1 |
| $ | — |
| $ | 250 |
|
U.S. Government sponsored Enterprise debt securities |
| 23,955 |
| 522 |
| — |
| 24,477 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 24,204 |
| $ | 523 |
| $ | — |
| $ | 24,727 |
|
At June 30, 2009 and December 31, 2008, no securities have been in a continuous unrealized loss position for greater than 12 months.
The balances of assets measured at fair value on a non-recurring basis as of June 30, 2009 and the total losses resulting from the fair value adjustments as of June 30, 2009 were as follows (in $1,000’s):
10
|
|
|
| Significant |
| Total Losses |
| ||||||
|
| Total |
| Unobservable |
| Quarter |
| Six Months |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Impaired loans (1) |
| $ | 170,812 |
| $ | 170,812 |
| $ | (29,523 | ) | $ | (37,023 | ) |
OREO (2) |
| 22,473 |
| 22,473 |
| (265 | ) | (550 | ) | ||||
Balance at June 30, 2009 |
| $ | 193,285 |
| $ | 193,285 |
| $ | (29,788 | ) | $ | (37,573 | ) |
(1) Represents carrying value and related reserve remeasurements on collateral dependent loans for which adjustments are based upon the appraised value of the collateral, less costs to sell.
(2) The loss on OREO represents fair value adjustments.
There were no material liabilities carried at fair value, measured on a recurring or non-recurring basis at June 30, 2009.
NOTE 5: 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. In accordance with SFAF No. 128, Earnings Per Share, due to the net loss recorded during the three and six months ended June 30, 2009 and 2008, incremental shares resulting from the assumed conversion, exercise or contingent issuance of securities is not included as their effect on earnings or loss per share would be anti-dilutive. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings (loss) per share is:
|
| Three Months Ended June 30, 2009 |
| |||||||
|
| Loss |
| Weighted Average |
| Per |
| |||
Basic Loss Per Share |
|
|
|
|
|
|
| |||
Loss available to common shareholders |
| $ | (17,783,000 | ) | $ | 11,836,000 |
| $ | (1.50 | ) |
|
|
|
|
|
|
|
| |||
Effect of Dilutive Securities |
|
|
|
|
|
|
| |||
Incremental shares from assumed exercise of outstanding options |
| — |
| — |
| — |
| |||
|
|
|
|
|
|
|
| |||
Diluted Loss Per Share |
|
|
|
|
|
|
| |||
Loss available to common shareholders |
| $ | (17,783,000 | ) | $ | 11,836,000 |
| $ | (1.50 | ) |
|
| Three Months Ended June 30, 2008 |
| ||||||
|
| Loss |
| Weighted Average |
| Per |
| ||
Basic Loss Per Share |
|
|
|
|
|
|
| ||
Loss available to common shareholders |
| $ | (18,513,000 | ) | 11,797,000 |
| $ | (1.57 | ) |
|
|
|
|
|
|
|
| ||
Effect of Dilutive Securities |
|
|
|
|
|
|
| ||
Incremental shares from assumed exercise of outstanding options |
| — |
| — |
| 0.00 |
| ||
|
|
|
|
|
|
|
| ||
Diluted Loss Per Share |
|
|
|
|
|
|
| ||
Loss available to common shareholders |
| $ | (18,513,000 | ) | 11,797,000 |
| $ | (1.57 | ) |
11
|
| Six Months Ended June 30, 2009 |
| |||||||
|
|
|
| Weighted Average |
| Per |
| |||
Basic Loss Per Share |
|
|
|
|
|
|
| |||
Loss available to common shareholders |
| $ | (21,020,000) |
| $ | 11,836,000 |
| $ | (1.78 | ) |
|
|
|
|
|
|
|
| |||
Effect of Dilutive Securities |
|
|
|
|
|
|
| |||
Incremental shares from assumed exercise of outstanding options |
| — |
| — |
| — |
| |||
|
|
|
|
|
|
|
| |||
Diluted Loss Per Share |
|
|
|
|
|
|
| |||
Loss available to common shareholders |
| $ | (21,020,000 | ) | $ | 11,836,000 |
| $ | (1.78 | ) |
|
| Six Months Ended June 30, 2008 |
| ||||||
|
|
|
| Weighted Average |
| Per |
| ||
Basic Loss Per Share |
|
|
|
|
|
|
| ||
Loss available to common shareholders |
| $ | (13,778,000 | ) | 11,806,000 |
| $ | (1.17 | ) |
|
|
|
|
|
|
|
| ||
Effect of Dilutive Securities |
|
|
|
|
|
|
| ||
Incremental shares from assumed exercise of outstanding options |
| — |
| — |
| — |
| ||
|
|
|
|
|
|
|
| ||
Diluted Loss Per Share |
|
|
|
|
|
|
| ||
Loss available to common shareholders |
| $ | (13,778,000 | ) | 11,806,000 |
| $ | (1.17 | ) |
As discussed above, anti-dilutive shares from stock options are excluded from the computation of loss per share. The anti-dilutive stock options totaled 2,370,000 for the three and six months ended June 30, 2009. There were 1,098,000 and 1,126,000 anti-dilutive stock options for the three and six months ended June 30, 2008, respectively.
Stock Compensation Plans
In May 2005, the Company’s Board of Directors adopted a non-qualified employee stock option plan that expires in 2015 and authorizes the issuance of up to 600,000 (amended to 800,000 in July 2008)shares of its common stock upon the exercise of options granted. The plan is intended to allow the Company the ability to grant stock options to persons who had not previously been awarded option grants commensurate with their positions, primarily persons hired since the exhaustion of options available for grant under the 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. During 2005, 2007, 2008 and April 2009, the Company granted options to buy up to 177,000, 45,000, 506,000 and 50,000 shares of the 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, 2017, 2018 and 2019, respectively.
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 June 30, 2009 and changes during the six-month period is presented below:
12
|
|
|
|
|
| Weighted |
| Aggregate |
| |
|
|
|
|
|
|
|
|
|
| |
Outstanding – January 1, 2009 |
| 2,330 |
| $ | 6.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Granted |
| 50 |
| 2.60 |
|
|
|
|
| |
Exercised |
| (2 | ) | 2.92 |
|
|
|
|
| |
Cancelled |
| (8 | ) | 25.00 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Outstanding – June 30, 2009 |
| 2,370 |
| $ | 6.06 |
| 4.90 years |
| — |
|
|
|
|
|
|
|
|
|
|
| |
Vested or expected to vest at June 30,2009 |
| 1,813 |
| $ | 5.72 |
| 4.62 years |
| — |
|
|
|
|
|
|
|
|
|
|
| |
Exercisable at June 30, 2009 |
| 1,586 |
| $ | 5.16 |
| 3.40 years |
| — |
|
The total intrinsic value of options exercised during the three and six month periods ended June 30, 2009 was $0 and $1,000, respectively. The total intrinsic value of options exercised during the three and six month periods ended June 30, 2008 was $0 and $61,000, respectively. The total fair value of shares vested during the three and six month periods ended June 30, 2009 was $204,000 and $307,000, respectively. The total fair value of shares vested during the three and six month periods ended June 30, 2008 was $230,000 and $279,000, respectively.
As of June 30, 2009, there was $2,112,000 of total unrecognized compensation cost related to non-vested share-based compensation awards granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.69 years. The Company received $7,000 and $12,000 cash from the exercise of stock options during the six month periods ended June 30, 2009 and 2008, respectively.
For the three and six month periods ended June 30, 2009, stock based compensation expense reduced income before taxes by $152,000 and $303,000 and reduced net income by $89,000 and $176,000. This additional expense reduced both basic and diluted earnings per share by $0.01 for the three months ended June 30, 2009, and reduced both basic and diluted earnings per share by $0.01 for the six months ended June 30, 2008. Cash provided by operating activities and cash provided by financing activities were not impacted during the first six months of 2009 as there were no excess tax benefits from the exercise of stock options.
For the three and six month periods ended June 30, 2008, stock based compensation expense reduced income before taxes by $121,000 and $237,000 and reduced net income by $70,000 and $137,000. This additional expense reduced both basic and diluted earnings per share by $0.01 for the three months ended June 30, 2008, and reduced both basic and diluted earnings per share by $0.01 for the six months ended June 30, 2008. Cash provided by operating activities decreased by $25,000 and cash provided by financing activities increased by an identical amount for the first six months of 2008 related to excess tax benefits from the exercise of stock options.
NOTE 6: Commitments and Contingencies
As of June 30, 2009, the Bank had a total of $13,944,000 in standby and commercial letters of credit outstanding. No significant losses are anticipated as a result of these transactions.
NOTE 7: Comprehensive Income
The Company’s comprehensive income includes all items which comprise net income plus the unrealized holding (losses) gains on available-for-sale securities. For the three and six month periods ended June 30, 2009 and 2008, the Company’s comprehensive loss, net of taxes, was as follows:
13
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (17,783 | ) | $ | (18,513 | ) | $ | (21,020 | ) | $ | (13,778 | ) |
Other comprehensive income (loss) |
| (24 | ) | (242 | ) | 301 |
| (166 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Total comprehensive loss |
| $ | (17,807 | ) | $ | (18,755 | ) | $ | (20,719 | ) | $ | (13,944 | ) |
NOTE 8: Operating Segment Reports
Management has evaluated the Company’s overall operation and determined that its business consists of certain reportable business segments as of June 30, 2009 and 2008: core banking operations, the administrative services in relation to TAS (as defined below), and Trust Services. The following describes these three business segments:
Core Bank Operations - The principal business activities of this segment are attracting funds from the general public and originating commercial and real estate loans for small and midsize businesses in Southern California. This 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 include the Bank’s merchant services operations, which provide credit card deposits and clearing services to retailers and other credit card accepting businesses and which generates fee income.
Trust Administrative Services - The principal business activity of the Bank’s division, Trust Administration Services (referred to as “Administrative Services” or “TAS”) is providing administrative services for self-directed retirement plans. The primary source of revenue for this segment is fee income from self-directed accounts. The 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 June 30, 2009 and December 31, 2008 were $956,000 and $951,000, respectively and total assets of Trust Services at June 30, 2009 and December 31, 2008 were $78,000 and $72,000, respectively. The remaining assets reflected on the condensed consolidated balance Sheets of the Company are associated with core banking operations.
A table showing the net income (loss) for the core banking operations, administrative services, and trust services for the three and six-month periods ended June 30, 2009 and 2008(in thousands).
|
| Three Month Period Ended June 30, 2009 |
| ||||||||||
|
| Core |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| $ | 15,678 |
|
|
|
|
| $ | 15,678 |
| ||
Provision for loan losses |
| 31,116 |
|
|
|
|
| 31,116 |
| ||||
Other operating income |
| 1,006 |
| $ | 657 |
| $ | 515 |
| 2,178 |
| ||
Other operating expenses |
| 16,764 |
| 813 |
| 305 |
| 17,882 |
| ||||
Provision (benefit) for income taxes |
| (13,382 | ) | (65 | ) | 88 |
| (13,359 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (17,814 | ) | $ | (91 | ) | $ | 122 |
| $ | (17,783 | ) |
14
|
| Three Month Period Ended June 30, 2008 |
| ||||||||||
|
| Core |
| Administrative |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| $ | 24,117 |
|
|
|
|
| $ | 24,117 |
| ||
Provision for loan losses |
| 44,743 |
|
|
|
|
| 44,743 |
| ||||
Other operating income |
| 1,238 |
| $ | 670 |
| $ | 573 |
| 2,481 |
| ||
Other operating expenses |
| 13,684 |
| 887 |
| 286 |
| 14,857 |
| ||||
Provision (benefit) for income taxes |
| (14,518 | ) | (91 | ) | 120 |
| (14,489 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (18,554 | ) | $ | (126) |
| $ | 167 |
| $ | (18,513 | ) |
|
| Six Month Period Ended June 30, 2009 |
| ||||||||||
|
| Core |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| $ | 31,630 |
|
|
|
|
| $ | 31,630 |
| ||
Provision for loan losses |
| 38,616 |
|
|
|
|
| 38,616 |
| ||||
Other operating income |
| 1,980 |
| $ | 1,223 |
| $ | 1,076 |
| 4,279 |
| ||
Other operating expenses |
| 32,037 |
| 1,709 |
| 626 |
| 34,372 |
| ||||
Provision (benefit) for income taxes |
| (16,044 | ) | (204 | ) | 189 |
| (16,059 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (20,999 | ) | $ | (282) |
| $ | 261 |
| $ | (21,020 | ) |
|
| Six Month Period Ended June 30, 2008 |
| ||||||||||
|
| Core |
| Administrative |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| $ | 50,513 |
|
|
|
|
| $ | 50,513 |
| ||
Provision for loan losses |
| 55,533 |
|
|
|
|
| 55,533 |
| ||||
Other operating income |
| 5,203 |
| $ | 1,277 |
| $ | 1,172 |
| 7,652 |
| ||
Other operating expenses |
| 25,191 |
| 1,622 |
| 586 |
| 27,399 |
| ||||
Provision (benefit) for income taxes |
| (11,090 | ) | (145 | ) | 246 |
| (10,989 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (13,918 | ) | $ | (200) |
| $ | 340 |
| $ | (13,778 | ) |
In addition, the operations of the administrative services positively affect the results of core banking operations by providing a source of low-cost deposits.
ITEM 2. 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, 2008. Certain statements in this report on Form 10-Q constitute “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, included herein may constitute forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from management’s
15
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, 2008.
The Company has established various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of the 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. Other accounting policies that require significant judgment and assumptions by management include the provision for income taxes, evaluation of investments for other than temporary impairment and stock-based compensation.
As of June 30, 2009 total assets were $2,379,993,000 compared to $2,465,141,000 at December 31, 2008, a decrease of $85,148,000 or 3.5% and the June 30, 2009 asset level represents a $92,395,000 (3.7%) decrease over the $2,472,388,000 that existed on the same date in 2008. The Company has made a deliberate effort to reduce total assets and net loans in concert with our ongoing program of shrinking the asset base, thereby further strengthening our capital position. Total deposits decreased by $119,373,000 or 5.6%, from $2,129,972,000 at the end of 2008 to $2,010,599,000 at June 30, 2009. While overall deposits decreased, the deposit decline was centered in time deposits, a $57,141,000 (5.2%) decrease and money market deposits, a $96,097,000 (15.8%) decrease, while non-interest bearing deposits and other deposits experienced an increase. There were several changes in the composition of the Bank’s assets during the first six months of 2009. The Bank’s loan portfolio decreased significantly by $100,904,000 during the six-month period, bringing the Bank’s total loans, net of allowance for losses and deferred loan fees, to $2,156,575,000 at June 30, 2009 from the December 31, 2008 total of $2,257,479,000. The combined effect of the decrease in loans and the decrease in deposits was a slight decrease in the level of total liquid assets (cash and due from banks, Federal funds sold and investment securities). Investment securities and interest-bearing deposits in financial institutions increased by $14,273,000, while cash and cash equivalents (cash and due from banks and Federal funds sold), decreased by $18,757,000 in order to accommodate the changes that took place in the rest of the balance sheet.
The Company had a net loss of $17,783,000 in the three months ended June 30, 2009, compared to a net loss of $18,513,000 in the second quarter of 2008. The results for the six months ended June 30, 2009 was a net loss of $21,020,000 compared to a net loss of $13,778,000 for the corresponding period of 2008, a decrease of 53%.
NET INTEREST INCOME
Net interest income is the excess of interest income earned on interest-earning assets over interest expense incurred on interest-bearing liabilities. Interest income and interest expense are determined by the average volume of interest-bearing assets or liabilities, and the average rate of interest earned or paid on those assets or liabilities. In contrast to the first six months of 2008, in the first six months of 2009 there was a decrease in interest earning assets, including loans. The Bank’s core loan portfolio decreased during the first six months of 2009.
Total interest income decreased by $10,341,000 (28%) for the second quarter of 2009 compared to the same period in 2008, and decreased by $22,923,000 (30%) for the six-month
16
period ended June 30, 2009 compared to the same period in 2008 although total average earning assets were higher (6%) in 2009 than in 2008. The majority of the decrease in interest income arises from a substantial decrease of $10,229,000 (28%) in interest on loans from $25,728,000 for the three months ended June 30, 2009 compared to $35,957,000 for the same period in 2008. Although interest income decreased primarily due to the Federal Reserve’s series of interest rate decreases, it also decreased due to a decrease in the loan portfolio of $125,029,000 (5%) and the increase in non-performing assets from $32,861,000 to $283,430,000 from June 30, 2008 to June 30, 2009. For the three months ended June 30, 2009 interest expense on deposits increased by $101,000 (1%) to $9,538,000 from the 2008 level of $9,437,000 and for the six months ended June 30, 2009 interest expense on deposits increased by $309,000 (2%) to $20,813,000 from the 2008 level of $20,504,000 primarily due an increase in total deposits of $28,847,000 (1%) from June 30, 2008 to June 30, 2009, but partially offset by the Federal Reserve’s series of interest rate decreases. The increases in deposits were primarily in time deposits, while demand deposits also showed increases and other deposits and money market accounts decreased. For the three months ended June 30, 2009 interest expense on subordinated debentures decreased by $411,000 (34%), to $813,000 from the 2008 level of $1,224,000 due to a decrease in interest rates during the period. For the six months ended June 30, 2009 interest expense on subordinated debentures decreased by $1,063,000 (37%), to $1,777,000 from the 2008 level of $2,840,000 due to a decrease in interest rates during the period. For the three months ended June 30, 2009 interest expense on FHLB advances decreased by $1,568,000 (96%), to $60,000 from the 2008 level of $1,628,000 due to a combination of a decrease of $100,000,000 in FHLB advances at June 30, 2009 compared to June 30, 2008 and a decrease in interest rates during the period. For the six months ended June 30, 2009 interest expense on FHLB advances decreased by $3,254,000 (98%), to $82,000 from the 2008 level of $3,336,000 due to the decrease in FHLB advances compared to the prior year and due to a decrease in interest rates during the period. The net result was a decrease in net interest income of $8,439,000 (35%), from $24,117,000 in the second quarter of 2008 to $15,678,000 for the second quarter of 2009 and a decrease in net interest income of $18,883,000 (37%), from $50,513,000 for the six months ended June 30, 2008 to $31,630,000 for the first six months of 2009.
Interest Rates and Interest Differential
The following table sets forth the average daily balances outstanding for major categories of interest earning assets and interest bearing liabilities and the average interest rates earned and paid thereon:
|
| For the Three Month Period Ended June 30, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| ||||||||||||
|
|
|
| Interest |
| Average |
|
|
| Interest |
| Average |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans (1) |
| $ | 2,277,383 |
| $ | 25,728 |
| 4.5 | % | $ | 2,293,118 |
| $ | 35,957 |
| 6.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits in financial institutions |
| 10,312 |
| 14 |
| 0.5 | % | 5,203 |
| 51 |
| 3.9 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment securities |
| 26,036 |
| 330 |
| 5.1 | % | 24,699 |
| 317 |
| 5.2 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold |
| 34,413 |
| 17 |
| 0.2 | % | 21,240 |
| 105 |
| 2.0 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Earning Assets |
| $ | 2,348,144 |
| $ | 26,089 |
| 4.5 | % | $ | 2,344,260 |
| $ | 36,430 |
| 6.3 | % |
17
|
| For the Three Month Period Ended June 30, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| ||||||||||||
|
|
|
|
|
| Average |
|
|
|
|
| Average |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other deposits |
| $ | 50,483 |
| $ | 55 |
| 0.4 | % | $ | 72,865 |
| $ | 287 |
| 1.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market accounts |
| 517,453 |
| 1,449 |
| 1.1 | % | 888,391 |
| 4,684 |
| 2.1 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Time Deposits |
| 1,091,262 |
| 8,034 |
| 3.0 | % | 469,121 |
| 4,466 |
| 3.8 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Subordinated debentures |
| 100,517 |
| 813 |
| 3.2 | % | 100,517 |
| 1,224 |
| 4.9 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHLB advances |
| 71,420 |
| 60 |
| 0.3 | % | 289,385 |
| 1,628 |
| 2.3 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other borrowings |
| — |
| — |
| 0.0 | % | 3,520 |
| 24 |
| 2.7 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Bearing Liabilities |
| $ | 1,831,135 |
| $ | 10,411 |
| 2.3 | % | $ | 1,823,799 |
| $ | 12,313 |
| 2.7 | % |
(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 second quarter of $73,669,000 in 2009 and $41,154,000 in 2008 and is not net of deferred loan fees, which had an average balance in the second quarter of $3,649,000 in 2009 and $7,001,000 in 2008.
(2) Includes loan fees in the second quarter of $1,044,000 in 2009 and $2,245,000 in 2008.
|
| For the Six Month Period Ended June 30, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| ||||||||||||
|
|
|
| Interest |
| Average |
|
|
| Interest |
| Average |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans (1) |
| $ | 2,302,286 |
| $ | 53,575 |
| 4.7 | % | $ | 2,211,408 |
| $ | 76,253 |
| 6.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits in financial institutions |
| 6,180 |
| 26 |
| 0.9 | % | 6,120 |
| 123 |
| 4.0 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment securities |
| 25,324 |
| 641 |
| 5.1 | % | 24,756 |
| 676 |
| 5.5 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold |
| 53,084 |
| 60 |
| 0.2 | % | 15,033 |
| 173 |
| 2.3 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Earning Assets |
| $ | 2,386,874 |
| $ | 54,302 |
| 4.6 | % | $ | 2,257,317 |
| $ | 77,225 |
| 6.9 | % |
18
|
| For the Six Month Period Ended June 30, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| ||||||||||||
|
|
|
|
|
| Average |
|
|
|
|
| Average |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other deposits |
| $ | 51,034 |
| $ | 127 |
| 0.5 | % | $ | 66,694 |
| $ | 553 |
| 1.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market accounts |
| 545,476 |
| 3,248 |
| 1.2 | % | 925,032 |
| 11,967 |
| 2.6 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Time Deposits |
| 1,140,506 |
| 17,438 |
| 3.1 | % | 385,592 |
| 7,984 |
| 4.2 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Subordinated debentures |
| 100,517 |
| 1,777 |
| 3.6 | % | 100,517 |
| 2,840 |
| 5.7 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHLB advances |
| 47,943 |
| 82 |
| 0.3 | % | 255,582 |
| 3,336 |
| 2.6 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other borrowings |
| — |
| — |
| 0.0 | % | 2,126 |
| 32 |
| 3.0 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Bearing Liabilities |
| $ | 1,885,476 |
| $ | 22,672 |
| 2.4 | % | $ | 1,735,543 |
| $ | 26,712 |
| 3.1 | % |
(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 six months of $67,649,000 in 2009 and $33,174,000 in 2008 and is not net of deferred loan fees, which had an average balance in the first six months of $3,949,000 in 2009 and $7,199,000 in 2008.
(2) Includes loan fees in the first six months of $2,328,000 in 2009 and $4,518,000 in 2008. The following table shows the net interest earnings and the net yield on average interest earning assets:
|
| For the Three Month |
| For the Six Month |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
|
| (Dollars in Thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Total interest income (l) |
| $ | 26,089 |
| $ | 36,430 |
| $ | 54,302 |
| $ | 77,225 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest expense |
| 10,411 |
| 12,313 |
| 22,672 |
| 26,712 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest earnings |
| $ | 15,678 |
| $ | 24,117 |
| $ | 31,630 |
| $ | 50,513 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average interest earnings assets |
| $ | 2,348,144 |
| $ | 2,344,260 |
| $ | 2,386,874 |
| $ | 2,257,317 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average interest bearing liabilities |
| $ | 1,831,135 |
| $ | 1,823,799 |
| $ | 1,885,476 |
| $ | 1,735,543 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net yield on average interest earning assets |
| 2.7 | % | 4.1 | % | 2.7 | % | 4.5 | % |
(1) Includes loan fees in the second quarter of $1,044,000 in 2009 and $2,245,000 in 2008 and first six months of $2,328,000 in 2009 and $4,518,000 in 2008.
The following table sets forth changes in interest income and interest expense. The net change as shown in the column “Net” is segmented into the change attributable to
19
variations in volume and the change attributable to variations in interest rates. Non-performing loans are included in average loans.
|
| Net Increase (Decrease) |
| Net Increase (Decrease) |
| ||||||||||||||
|
| 2009 over 2008 |
| 2009 over 2008 |
| ||||||||||||||
|
| Volume |
| Rate |
| Net |
| Volume |
| Rate |
| Net |
| ||||||
|
| (Dollars in Thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest income (1) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans (2) |
| $ | (243 | ) | $ | (9,986 | ) | $ | (10,229 | ) | $ | 3,303 |
| $ | (25,981 | ) | $ | (22,678 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest bearing deposits in financial institutions |
| 31 |
| (68 | ) | (37 | ) | 1 |
| (98 | ) | (97 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal funds sold |
| 195 |
| (283 | ) | (88 | ) | (176 | ) | 63 |
| (113 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment securities |
| 18 |
| (5 | ) | 13 |
| 17 |
| (52 | ) | (35 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest earning assets |
| $ | 1 |
| $ | (10,342 | ) | $ | (10,341 | ) | $ | 3,145 |
| $ | (26,068 | ) | $ | (22,923 | ) |
|
| Net Increase (Decrease) |
| Net Increase (Decrease) |
| ||||||||||||||
|
| 2009 over 2008 |
| 2009 over 2008 |
| ||||||||||||||
|
| Volume |
| Rate |
| Net |
| Volume |
| Rate |
| Net |
| ||||||
|
| (Dollars in Thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest Expense (1) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other deposits |
| $ | (69 | ) | $ | (163 | ) | $ | (232 | ) | $ | (107 | ) | $ | (319 | ) | $ | (426 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Money Market |
| (1,521 | ) | (1,714 | ) | (3,235 | ) | (3,771 | ) | (4,948 | ) | (8,719 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Subordinated Debentures |
| — |
| (411 | ) | (411 | ) | — |
| (1,063 | ) | (1,063 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Time Deposits |
| 4,312 |
| (744 | ) | 3,568 |
| 10,899 |
| (1,445 | ) | 9,454 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FHLB Advances |
| (736 | ) | (832 | ) | (1,568 | ) | (1,573 | ) | (1,681 | ) | (3,254 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other Borrowings |
| (12 | ) | (12 | ) | (24 | ) | (16 | ) | (16 | ) | (32 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest bearing liabilities |
| $ | 1,974 |
| $ | (3,876 | ) | $ | (1,902 | ) | $ | 5,432 |
| $ | (9,472 | ) | $ | (4,040 | ) |
(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 second quarter of $1,044,000 in 2009 and $2,245,000 in 2008 and first six months of $2,328,000 in 2009 and $4,518,000 in 2008.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is intended to reflect the known and unknown risks, which are inherent in a loan portfolio at the time of reporting. The adequacy of the allowance for loan losses is continually evaluated in light of many factors, including loan loss experience and current economic conditions. The allowance for loan losses is increased by provisions for loan losses, and is decreased by net charge-offs. Management believes the allowance for loan losses is adequate in relation to both existing and potential risks in the loan portfolio.
In determining the adequacy of the allowance for loan losses, management considers such factors as historical loan loss experience, known problem loans, evaluations made by bank
20
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, 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 and concerns with the economic climate and its potential impact, the allowance for losses was $42,101,000 and $61,336,000 (or 1.91% and 2.64% of gross outstanding loans) at June 30, 2009 and December 31, 2008, respectively. There was a $31,116,000 total provision for loan losses primarily related to impaired loans, during the three month period ended June 30, 2009, compared to $44,743,000 including $43,468,000 related to impaired loans for the same period of 2008. There was a $38,616,000 total provision for loan losses primarily related to impaired loans, during the six-month period ended June 30, 2009, compared to $55,533,000 including $52,503,000 related to impaired loans for the same period of 2008. For the three and six months ended June 30, 2009, the Company generated net loan charge-offs of $57,480,000 and $58,152,000, respectively, compared to net loan charge-offs of $34,244,000 for both the three and six months ended June 30, 2008. The Company had loan recoveries of $80,000 and $18,000 during the six months ended June 30, 2009 and 2008, respectively.
The allowance for loan losses has been allocated to the major categories of loans as set forth in the following table. The allocations are estimates based upon historical loss
21
experience and management judgment. The allowance for loan losses should not be interpreted as an indication that charge-offs will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories, since even in this allocation is an unallocated portion, and, as previously stated, the total allowance is applicable to the entire portfolio (dollar amounts in the following table are in thousands).
|
| June 30, 2009 |
| December 31, 2008 |
| ||||||
|
| Allowance |
| Ratio of |
| Allowance |
| Ratio of |
| ||
|
|
|
|
|
|
|
|
|
| ||
Commercial |
| $ | 3,253 |
| 11 | % | $ | 15,121 |
| 12 | % |
Real Estate |
| 21,505 |
| 65 | % | 22,737 |
| 62 | % | ||
Real Estate Construction |
| 17,343 |
| 24 | % | 23,478 |
| 26 | % | ||
Government Guaranteed |
| — |
| — |
| — |
| — |
| ||
Other |
| — |
| — |
| — |
| — |
| ||
Unallocated |
| — |
| — |
| — |
| — |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total |
| $ | 42,101 |
| 100 | % | $ | 61,336 |
| 100 | % |
Loans are determined to be impaired when it is determined probable that the bank will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans include both non-performing and performing assets. Per banking industry convention, non-performing assets consist of loans past due 90 or more days and still accruing interest, loans on non-accrual status, and other real estate owned (“OREO”). As of June 30, 2009 First Regional had $17,727,000 in loans past due 90 or more days which were still accruing interest, and $22,473,000 in other real estate owned. The Company’s non-performing assets as of June 30, 2009, which consist of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and other real estate owned, were as follows:
|
| June 30, 2009 |
| December 31, 2008 |
| ||||||
Asset Type |
| Number |
| Amount |
| Number |
| Amount |
| ||
|
|
|
|
|
|
|
|
|
| ||
Loans On Non-Accrual Status: |
|
|
|
|
|
|
|
|
| ||
Land Loans |
| 15 |
| $ | 66,411,000 |
| 4 |
| $ | 22,506,000 |
|
Construction Loans |
| 10 |
| 94,084,000 |
| 5 |
| 39,297,000 |
| ||
Commercial real estate loans |
| 6 |
| 27,294,000 |
| 8 |
| 16,357,000 |
| ||
Apartment loans |
| 8 |
| 29,221,000 |
| 0 |
| — |
| ||
Residential loan |
| 3 |
| 8,160,000 |
| 1 |
| 7,096,000 |
| ||
Condominium complexes |
| 4 |
| 13,077,000 |
| 0 |
| — |
| ||
Unsecured Loans |
| 10 |
| 4,983,000 |
| 5 |
| 7,261,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Net Non-Accrual Loans |
|
|
| 243,230,000 |
|
|
| 92,517,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
90 or More Days Past Due: |
|
|
|
|
|
|
|
|
| ||
Land loans |
| 2 |
| 8,180,000 |
| 3 |
| 14,200,000 |
| ||
Apartment loan |
| 1 |
| 4,206,000 |
| 1 |
| 4,340,000 |
| ||
Commercial real estate loan |
| 1 |
| 4,251,000 |
| — |
| — |
| ||
Unsecured loan |
| 5 |
| 1,090,000 |
| — |
| — |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total Loans Past Due 90 days or more |
|
|
| 17,727,000 |
|
|
| 18,540,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total Non-Performing Loans |
|
|
| $ | 260,957,000 |
|
|
| $ | 111,057,000 |
|
|
|
|
|
|
|
|
|
|
| ||
Other Real Estate Owned, Net: |
|
|
|
|
|
|
|
|
| ||
Land |
| 5 |
| 7,167,000 |
| 3 |
| 2,908,000 |
| ||
Apartment |
| 1 |
| 5,311,000 |
| 1 |
| 3,444,000 |
| ||
Condominium conversion |
| — |
| — |
| 1 |
| 3,259,000 |
| ||
Residential loan |
| 1 |
| 3,695,000 |
| — |
| — |
| ||
Construction loan |
| 1 |
| 6,300,000 |
| — |
| — |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total Other Real Estate Owned, Net |
|
|
| 22,473,000 |
|
|
| 9,611,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total Non-Performing Assets |
|
|
| $ | 283,430,000 |
|
|
| $ | 120,668,000 |
|
22
Performing assets that are considered impaired due to concerns with the economic climate consist of the following:
|
| June 30, 2009 |
| December 31, 2008 |
| ||||||
Asset Type |
| Number |
| Amount |
| Number |
| Amount |
| ||
|
|
|
|
|
|
|
|
|
| ||
Apartment loans |
| — |
| $ | — |
| 10 |
| $ | 60,883,000 |
|
Land loan |
| 1 |
| 1,166,000 |
| 1 |
| 4,831,000 |
| ||
Unsecured |
| — |
| — |
| 1 |
| 24,221,000 |
| ||
Construction |
| — |
| — |
| 1 |
| 14,198,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total Performing Assets Considered Impaired |
|
|
| $ | 1,166,000 |
|
|
| $ | 104,133,000 |
|
|
|
|
|
|
|
|
|
|
| ||
Total Performing and Non-Performing Loans Considered Impaired |
|
|
| $ | 262,123,000 |
|
|
| $ | 215,190,000 |
|
Thus, at June 30, 2009 and December 31, 2008, the Company has identified non-performing and performing loans, net of charge-offs, totaling $262,123,000 and $215,190,000, which it concluded were impaired. These loans are principally secured by real estate or other guarantees. The Company’s policy is generally to discontinue the accrual of interest income on non-performing impaired loans, and to recognize income on such loans only after the loan principal has been repaid in full. The Company has established a loss reserve for each of the performing and non-performing impaired loans, which at June 30, 2009 and December 31, 2008 totaled $15,434,000 and $32,264,000 for the loans as a group.
Other real estate owned includes properties acquired through foreclosure. The Company had five (5) OREO properties December 31, 2008. During the first six months of 2009, the Company acquired five (5) OREO properties and sold two (2) OREO properties for a total of eight (8) OREO properties at June 30, 2009.
At June 30, 2009, the Company has identified loans having an aggregate average balance of $269,179,000, which it concluded were impaired under SFAS No. 114. By comparison, at June 30, 2008, the Company had identified loans having an aggregate average balance of $68,702,000, which it concluded were impaired under SFAS No. 114. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability of impairment. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses and or charges off a portion of the balance for each of theses credits.
OTHER OPERATING INCOME
Other operating income decreased to $2,178,000 in the second quarter of 2009 from $2,481,000 in the three months ended June 30, 2008. For the first six months of 2009 other operating income also decreased to $4,279,000 from $7,652,000 for the first six months of 2009. During the first quarter of 2008, the Company realized a gain of $2,758,000 on the redemption of restricted stock of Visa Inc. The Bank’s Trust Administration Services division, which provides administrative and custodial services to self-directed retirement plans, had revenue, which decreased to $657,000 for the second quarter of 2009 and $1,223,000 for the six months ended June 30, 2009 in contrast with $670,000 in the second quarter of 2008 and $1,277,000 in the first six months of 2008. The Bank’s Trust Department, that provides trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters, had revenue of $515,000 and $1,076,000 in the three and six months ended June 30, 2009 and revenue of $573,000 and $1,172,000 during three and six months ended June 30, 2008. 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 $426,000 for the second quarter of 2009 and $799,000 for the six months ended June 30, 2009 in contrast with $403,000 for the second quarter of 2008 and $800,000 for the six months ended June 30, 2008. During the first six months of 2009 no gains of or losses on sales of premises and equipment were realized. In contrast, during the first six months of 2008 gains of $3,000 and no losses on sales of premises and equipment were realized. During the first six months of 2008, the Company realized a gain of $2,758,000 on the redemption
23
of restricted stock of Visa Inc. No losses on securities sales were realized in the first six months of 2009 or 2008. During the first six months of 2009, a net gain of $68,000 was realized on the sale of the two OREO properties. No OREO properties were sold during the first six months of 2008.
OTHER OPERATING EXPENSES
Overall operating expenses increased in the first six months of 2009 compared to the same period of 2008. Operating expenses rose to a total of $17,882,000 for the second quarter of 2009 from $14,857,000 for the three months ended June 30, 2008. For the six months ended June 30, 2009 operating expenses totaled $34,372,000, an increase from $27,399,000 for the corresponding period in 2008. Included in other operating expenses during the first quarter of 2008 is a reversal of a litigation accrual of $2,232,000 further described below.
Salary and related benefits decreased by $251,000 (3.0%), declining from a total of $8,487,000 for the second quarter of 2008 to $8,236,000 for the same period in 2009, and for the six months ended June 30, 2009 decreased to $17,052,000 from $17,973,000 for the six month period in 2008. The six-month period decrease in this expense category principally reflects decreases in staffing and also reflects employee incentive adjustments. Occupancy expense rose to $2,022,000 for the six months ended June 30, 2009 from $1,923,000 in the same period of 2008. The increase reflects the rent paid on additional space at the various facilities which house the Bank’s headquarters and many of the regional offices. The total of all other operating expenses rose in 2009 compared to the prior year, increasing from $7,503,000 for the first six months of 2008 to $15,298,000 for the same period of 2009 and increased from $5,416,000 in 2008 to $8,615,000 for the second quarter of 2009.
The FDIC assessment increased to $3,908,000 in the second quarter of 2009, compared to $485,000 in the second quarter of 2008. The FDIC assessment increased to $6,307,000 for the first six months of 2009 compared to $969,000 during the first six months of 2008. On May 22, 2009, the FDIC adopted a rule designed to replenish the deposit insurance fund. This rule establishes a special assessment of five basis points (“bps”) on each FDIC-insured depository institution’s assets minus its Tier 1 capital, with a maximum assessment not to exceed 10 bps of an institution’s domestic deposits. This special assessment was calculated based on asset levels at June 30, 2009 and will be collected on September 30, 2009. Included in the FDIC assessment noted above, the Corporation recorded a charge of $1,000,000 in the second quarter of 2009 in connection with this assessment. Additionally, beginning April 1, 2009, the FDIC increased fees on deposits based on a revised risk-weighted methodology, which increased the base assessment rates. The FDIC has indicated that an additional special assessment of up to five bps may be necessary in the fourth quarter of 2009, but the amount of that assessment, if any, is uncertain.
During the fourth quarter of 2007, the Company recorded a charge of $2,232,000 for its share of contingent liabilities relating to settlement of lawsuits by Visa Inc. This charge was reversed in the first quarter of 2008 after the successful completion of the Visa Inc. initial public offering (“IPO”), where a portion of the proceeds from the IPO funded an escrow account expected to be used for litigation settlement/claims, reducing all other operating expenses.
The combined effects of the above-described factors resulted in a loss before taxes of $31,142,000 for the three months ended June 30, 2009 compared to a loss of $33,002,000 for the second quarter of 2008. For the six months ended June 30, 2009 the loss before taxes is $37,079,000 compared to a loss of $24,767,000 for the first six months of the prior year. In the second quarter, the Company’s provision for taxes decreased from a tax benefit of $14,489,000 in 2008 to a tax benefit of $13,359,000 in 2009. For the six months ended June 30, 2009, the tax benefit provisions were $16,059,000 compared to $10,989,000 in 2008. The effective tax rate for the six-month periods ended June 30, 2009 and 2008 are 43.3% and 44.4%, respectively. This brought net loss for the second quarter of 2009 to $17,783,000 compared to a net loss of $18,513,000 for the same period in 2008. For the six months ended June 30, net loss in 2009 was $21,020,000, while 2008 net income for the same period was $13,778,000.
INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale as of June 30, 2009 and December 31, 2008 were as follows (dollars in thousands):
24
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
June 30, 2009 |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury Securities |
| $ | 2,248 |
| $ | 1 |
| $ | — |
| $ | 2,249 |
|
U.S. Government sponsored Enterprise debt securities |
| 23,712 |
| 1,041 |
| — |
| 24,753 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 25,960 |
| $ | 1,042 |
| $ | — |
| $ | 27,002 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2008 |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury Securities |
| $ | 249 |
| $ | 1 |
| $ | — |
| $ | 250 |
|
U.S. Government sponsored Enterprise debt securities |
| 23,955 |
| 522 |
| — |
| 24,477 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 24,204 |
| $ | 523 |
| $ | — |
| $ | 24,727 |
|
At June 30, 2009 and December 31, 2008, no securities have been in a continuous unrealized loss position for greater than 12 months.
LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES
The loan portfolio consisted of the following at June 30, 2009 and December 31, 2008:
|
| June 30, |
| December 31, |
| ||
|
| (Dollars in Thousands) |
| ||||
|
|
|
|
|
| ||
Commercial loans |
| $ | 238,230 |
| $ | 276,885 |
|
Real estate construction loans |
| 538,764 |
| 603,866 |
| ||
Land loans |
| 229,135 |
| 249,468 |
| ||
Apartment loans |
| 564,524 |
| 541,330 |
| ||
Other real estate loans |
| 629,497 |
| 647,960 |
| ||
Government guaranteed loans |
| 837 |
| 1,337 |
| ||
Other loans |
| 1,193 |
| 2,601 |
| ||
|
|
|
|
|
| ||
Total loans |
| 2,202,180 |
| 2,323,447 |
| ||
|
|
|
|
|
| ||
Less – Allowances for loan losses |
| (42,101 | ) | (61,336 | ) | ||
– Deferred loan fees |
| (3,504 | ) | (4,632 | ) | ||
Net loans |
| $ | 2,156,575 |
| $ | 2,257,479 |
|
Government guaranteed loans represent loans for which the repayment of principal and interest is guaranteed by the U.S. government. The loans bear contractual interest at various rates tied to national prime lending rates.
The 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 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 tied to Wall Street Journal Prime, adjusting daily and have no prepayment penalties.
25
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 June 30, 2009 and December 31, 2008, the Company had $887,426,000 and $1,042,205,000 of short-and medium-term “mini-perm” first trust deed loans for income properties with interest-only payments that have a balloon payment at loan maturity. The Bank does not offer residential mortgage products, including negative amortization loans, or “option-ARMs”.
Certain customers of the Bank control various separate legal entities representing, in the aggregate, significant borrowing concentrations, including as much as $121,801,000 as of June 30, 2009. While each individual loan is separately and independently underwritten, and while the majority of such loans are secured by commercial real property and are performing, these borrowing concentrations nevertheless present certain risks.
Non-accrual loans, net of charge-offs, totaled $243,230,000 and $92,517,000 at June 30, 2009 and December 31, 2008, respectively. Loans which were past due by 90 days or more but not on non-accrual were $17,727,000 and $18,540,000 at June 30, 2009 and December 31, 2008, respectively. The Bank had $35,341,000 and $0 in troubled debt restructured loans as of June 30, 2009 and December 31, 2008, respectively. These restructured loans were various multifamily and one single family residence loans, and provided for forgiveness of principal and other concessions.
Allowance for unfunded loan commitments and lines of credit is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. The allowance for unfunded loan commitments and lines of credit is included in other liabilities in the accompanying condensed consolidated statements of financial condition. Net adjustments to the allowance for unfunded loan commitments and lines of credit are included in the provision for loan losses. At June 30, 2009 and December 31, 2008, the allowance for unfunded loan commitments and lines of credit was $149,000 and $370,000, respectively.
LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES
The Company’s financial position remains reasonably liquid. Total liquid assets (cash and due from banks, investment securities, federal funds sold and interest bearing deposits in financial institutions) stood at 4.2% of total deposits at June 30, 2009. This level represents a increase from the 4.1% liquidity level, which existed on December 31, 2008. In addition, at June 30, 2009 some $15,837,000 of the Bank’s total assets consisted of government guaranteed assets, which represent a significant source of liquidity due to the active secondary markets which exist for these assets. The ratio of net loans (including government guaranteed loans) to deposits was 107% and 106% as of June 30, 2009 and December 31, 2008, respectively.
The Company utilizes a variety of funding sources in conducting its operations, including the use of “brokered deposits” as defined by banking regulators. Such brokered deposits totaled $760 million at December 31, 2008. As a result of First Regional Bank’s regulatory agreement with the FDIC and the California Department of Financial Institutions, the bank is prohibited from accepting or renewing any brokered deposit, as defined, unless it receives a waiver from the FDIC. The bank has not received a brokered deposit waiver, and has no plans to seek such a waiver at this time. Instead, existing brokered deposits are being allowed to leave the bank as they mature. As of June 30, 2009 the balance of the brokered deposits had been reduced to $518 million; of these, $268 million mature in 2009, $158 million mature in 2010, and $92 million mature in 2011. The bank anticipates that future brokered deposit outflows will be accommodated using the proceeds of loan repayments, which may be supplemented if necessary by borrowing lines, including FHLB, Federal Reserve Discount Window and other lines of credit which the bank maintains.
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 $110,000,000 at June 30, 2009. FHLB borrowings are secured by loans available as collateral at the FHLB. As of June 30, 2009, the Bank has additional borrowing capacity at the Federal Home Loan Bank of $137,657,000. Subsequent to quarter end, the Bank initiated a line at the Federal Reserve Discount Window.
26
Total shareholders’ equity was $129,738,000 and $150,147,000 as of June 30, 2009 and December 31, 2008, respectively. The Company’s and the Bank’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:
|
| June 30, |
| December 31, |
|
|
|
|
|
|
|
Leverage Ratio (Tier 1 Capital to Average Assets |
|
|
|
|
|
Regulatory requirement |
| 4.00 | % | 4.00 | % |
Company |
| 7.09 | % | 8.19 | % |
Bank |
| 9.26 | % | 9.19 | % |
The “regulatory requirement” listed represents the level of capital required for Adequately Capitalized status.
The Bank is also subject to a regulatory order with the FDIC and DFI that calls for the Bank to increase its Tier 1 leverage ratio to 9.5% immediately, and to further increase it to 10% by September 30. For the second quarter of 2009, the Bank’s Tier 1 leverage ratio (based on average assets) was 9.26%, but was 9.5% based on total assets at the end of the quarter. A comprehensive capital plan was developed and adopted, which includes plans to meet the September 30 goal, and at this time that objective is expected to be met without the need to raise additional outside capital. No dividends have been declared by the Bank.
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:
|
| June 30, |
| December 31, |
|
|
|
|
|
|
|
Tier 1 Capital to Risk-Weighted Assets: |
|
|
|
|
|
Regulatory requirement |
| 4.00 | % | 4.00 | % |
Company |
| 7.41 | % | 8.09 | % |
Bank |
| 9.57 | % | 9.08 | % |
|
| June 30, |
| December 31, |
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets: |
|
|
|
|
|
Regulatory requirement |
| 8.00 | % | 8.00 | % |
Company |
| 11.02 | % | 11.28 | % |
Bank |
| 10.85 | % | 10.34 | % |
Other than the Tier 1 leverage ratio requirement in the regulatory order noted above, at June 30, 2009, the Company and the Bank meet all applicable capital ratio standards and believe that they will continue to meet all applicable capital standards.
At the conclusion of an examination by the Federal Deposit Insurance Corporation (“FDIC”) and Department of Financial Institutions (“DFI”) of the Bank in 2007, the FDIC expressed concern regarding a previously unidentified BSA concern relating to the Bank’s program of providing custodial services to individual retirement accounts (IRAs) administered by non-bank third parties.
In 2008, the FDIC requested that the Bank enter into a cease and desist order, principally addressing the Bank’s BSA duties in connection with such third party administered retirement accounts. While the Bank has questioned the need for such a cease and desist order, the Bank concluded that it was advisable for the Bank to enter into, rather than undertake a formal challenge to, the requested cease and desist order. While the Bank believes it fully complied with this Cease and Desist Order, no assurance can be given that the FDIC will not require further action if the Bank fails to comply with the terms of the cease and desist order or otherwise fails to correct the deficiencies identified.
27
During February 2009, the Bank signed an order to cease and desist with the FDIC and the DFI to further strengthen the Bank’s operations. The agreement between the Bank and its regulators is expected to help guide the Bank in addressing the impacts of today’s challenging economic environment. The agreement formalizes many of the initiatives, which the Bank has already adopted, and provides useful milestones for measuring the Bank’s progress as it moves forward. The agreement includes valuable input from the FDIC and DFI in the development of this program, and also reflects our shared goals of achieving a strong and profitable institution.
The principle components of the agreement, and the status of the Bank’s compliance efforts, are as follows:
· Retain qualified management, and continue the active involvement of the board of directors in managing the Bank’s activities.
The Bank’s existing management remains in place; no changes in management were suggested or required, and none have been made. The board of directors is maintaining its active involvement in the management of the Bank.
· Increase capital by $12 million, increase capital ratios based on a pre-determined schedule, and develop a comprehensive capital plan to assure compliance with that schedule. No dividends may be declared without prior regulatory approval.
The $12 million capital increase called for in the agreement, as well as a subsequent $5 million contribution, was made by First Regional Bancorp in the first quarter of 2009 using its existing cash reserves. The schedule referred to in the agreement calls for the Bank to increase its Tier 1 leverage ratio to 9.5% immediately, and to further increase it to 10% by September 30. For the second quarter of 2009 the Bank’s Tier 1 leverage ratio (based on average assets) was 9.26%, but was 9.5% based on total assets at the end of the quarter. A comprehensive capital plan was developed and adopted, which includes plans to meet the September 30 goal, and at this time that objective is expected to be met without the need to raise additional outside capital. No dividends have been declared by the Bank.
· Eliminate from the books any assets classified loss and a portion of any assets classified doubtful that have not already been charged-off or collected, and develop a comprehensive plan to reduce classified assets based on a pre-determined schedule.
This provision relates solely to the Bank’s classified assets as of June 30, 2008. The assets classified loss and the portion of the assets classified doubtful were eliminated from the Bank’s books by the end of 2008. The Bank developed a written plan to reduce the remaining classified assets, and has implemented it. The schedule referred to in the agreement calls for the Bank to reduce the classified assets from their original level of $218 million to $130 million by June 30, and to $110 million by September 30. As of June 30 the balance of the classified assets had been reduced to $101.5 million, meaning that the Bank has met both the June 30 and the September 30 goals. Naturally, the Bank is continuing its efforts to collect all of the classified assets even though the goals contained in the agreement have already been met.
· Create and implement a plan to increase the diversification of the Bank’s lending activities.
The Bank has adopted and implemented the diversification plan called for in the agreement. Under the plan, over time the Bank will reduce the amount of real estate lending it does, and increase its other types of lending. The Bank has also adopted revised policies reducing the permissible amount of credit that may be extended to individual borrowers and their related interests.
· Create and implement a comprehensive profit plan to improve the Bank’s earnings performance.
The profit plan called for in the agreement has been adopted and implemented. While profits are expected to remain under pressure for a time as the Bank deals with its problem assets, improvement is anticipated in the future.
28
· Update or revise the Bank’s written policies in the areas of credit administration and liquidity management.
Updated policies have been adopted by the board of directors for both of these functional areas and include a comprehensive liquidity contingency plan.
· Correct all violations of laws or regulations, and take action to prevent future violations.
Such violations included certain technical violations, such as regulations requiring a bank to prepare an updated evaluation of real property value, even for a loan extension made with no new money lent. It is believed that all previous violations of laws or regulations have been corrected, and that procedures are in place to prevent future violations.
As evidenced above, the Bank has made considerable progress thus far in complying with its agreement, and expects to achieve full compliance.
In addition, First Regional Bancorp has entered into a written agreement with the Federal Reserve Bank of San Francisco which became effective on April 21, 2009. The Company is currently in full compliance with the agreement, and expects to remain so. The principle components of this agreement, and the status of the Company’s compliance efforts, are as follows:
· The Company shall not declare or pay dividends without prior regulatory approval
The Company has never declared or paid dividends in its history, and no dividends are anticipated at this time.
· The Company shall not take dividends or other forms of payment from First Regional Bank without prior regulatory approval.
No such payments are being sought at this time, and dividend payments by the Bank are already restricted under the terms of the Bank’s regulatory agreement.
· The Company and its non-bank subsidiaries shall not make any distributions of principal, interest or other sums on subordinated debentures or trust preferred securities without prior regulatory approval.
In accordance with their terms, the Company has deferred payments on its outstanding trust preferred securities and the associated subordinated debentures.
· The Company and its non-bank subsidiaries shall not incur, increase, or guarantee any debt without prior regulatory approval.
No such debt transactions have occurred since the effective date of the agreement, and none are contemplated at this time.
· The Company shall not purchase or redeem stock without prior regulatory approval.
No shares have been purchased or redeemed since the effective date of the agreement, and no further purchases or redemptions are contemplated at this time.
· The Company shall develop and submit a revised written capital plan to maintain sufficient capital on a consolidated and a bank-only basis.
The revised plan has been adopted and implemented.
As just described, the Company expects to achieve and maintain full compliance with its written agreement.
29
In the interest of preserving its remaining cash reserves during a challenging period, the Company intends to defer interest payments on its trust-preferred securities for a period of one year, or until March 2010. The Company has the right to defer interest payments for up to five years under the indentures governing its various trust-preferred securities.
INFLATION
The impact of inflation on the Company differs significantly from other industries, since virtually all of its assets and liabilities are monetary. During periods of rising inflation, companies with net monetary assets will always experience a reduction in purchasing power. Inflation continues to have an impact on salary, supply, and rent expenses, but the rate of inflation in general and its impact on these expenses in particular has remained moderate in recent years.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There were no material changes outside of the ordinary course of business pertaining to contractual obligations during the quarter ended June 30, 2009.
BORROWINGS
Junior Subordinated Deferrable Debentures
During 2007, 2006, 2005, 2004, 2002 and 2001, the Company established First Regional Statutory Trusts I through VIII (collectively, the “Trusts”), statutory business trusts and wholly owned subsidiaries of the Company. The Trusts were formed for the sole purpose of issuing securities and investing the proceeds thereof in obligations of the Company and engaging in certain other limited activities.
During 2007, 2006, 2005, 2004, 2002 and 2001, the Trusts issued Cumulative Preferred Capital Securities (the “Trust Securities”) in private placement transactions, which represent undivided preferred beneficial interests in the assets of the Trusts. Concurrent with the issuance of the Trust Securities, the Trusts purchased Junior Subordinated Deferrable Debentures (the “Debentures”) from the Company, which aggregated $100,517,000 at June 30, 2009 and at December 31, 2008. After each applicable issuance and purchase, the Company invested a substantial majority of the net proceeds from the applicable sale of Debentures in the Bank as additional paid-in capital to support the 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 sheets in accordance with accounting principles generally accepted in the United States of America even though they are treated as capital for regulatory purposes. Holders of the debentures are entitled to receive cumulative cash distributions, payable quarterly in arrears, equal to three-month LIBOR plus an interest factor.
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 June 30, 2009, and thus the relative sensitivity of the Bank’s net interest income to changes in the overall level of interest rates.
30
(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 |
| ||||||||
Federal funds sold |
| $ | 18,710 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 18,710 |
|
Interest-bearing deposits in financial institutions |
| 0 |
| 12,004 |
| 2,002 |
| 0 |
| 0 |
| 0 |
| 0 |
| 14,006 |
| ||||||||
Investment securities |
| 0 |
| 0 |
| 3,249 |
| 0 |
| 2,631 |
| 21,122 |
| 0 |
| 27,002 |
| ||||||||
Subtotal |
| 18,710 |
| 12,004 |
| 5,251 |
| 0 |
| 2,631 |
| 21,122 |
| 0 |
| 59,718 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loans, net of allowance for losses |
| 2,006,113 |
| 2,005 |
| 40,035 |
| 72,407 |
| 36,015 |
| 0 |
| 0 |
| 2,156,575 |
| ||||||||
Total earning assets |
| 2,024,823 |
| 14,009 |
| 45,286 |
| 72,407 |
| 38,646 |
| 21,122 |
| 0 |
| 2,216,293 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and due from banks |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 24,065 |
| 24,065 |
| ||||||||
Premises and equipment |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 4,524 |
| 4,524 |
| ||||||||
Other real estate owned |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 22,473 |
| 22,473 |
| ||||||||
Federal Home Loan Bank stock |
| 7,359 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 7,359 |
| ||||||||
Other assets |
| 0 |
| 0 |
| 15,000 |
| 0 |
| 0 |
| 0 |
| 90,279 |
| 105,279 |
| ||||||||
Total non-earning assets |
| 7,359 |
| 0 |
| 15,000 |
| 0 |
| 0 |
| 0 |
| 141,341 |
| 163,700 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total assets |
| $ | 2,032,182 |
| $ | 14,009 |
| $ | 60,286 |
| $ | 72,407 |
| $ | 38,646 |
| $ | 21,122 |
| $ | 141,341 |
| $ | 2,379,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Federal Home Loan Bank advances |
| $ | 110,000 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 110,000 |
|
Federal Funds Purchased |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||||||
Subtotal |
| 110,000 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 110,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other deposits |
| 52,960 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 52,960 |
| ||||||||
Money market deposits |
| 514,028 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 514,028 |
| ||||||||
Time deposits |
| 0 |
| 154,699 |
| 577,027 |
| 178,299 |
| 134,153 |
| 0 |
| 0 |
| 1,044,178 |
| ||||||||
Subordinated debentures |
| 0 |
| 0 |
| 100,517 |
| 0 |
| 0 |
| 0 |
| 0 |
| 100,517 |
| ||||||||
Total interest bearing liabilities |
| 676,988 |
| 154,699 |
| 677,544 |
| 178,299 |
| 134,153 |
| 0 |
| 0 |
| 1,821,683 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Demand deposits |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 399,433 |
| 399,433 |
| ||||||||
Other liabilities |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 29,139 |
| 29,139 |
| ||||||||
Shareholders’ equity |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 129,738 |
| 129,738 |
| ||||||||
Total non-interest bearing liabilities and shareholders’ equity |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 558,310 |
| 558,310 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total liabilities and shareholders’ equity |
| $ | 676,988 |
| $ | 154,699 |
| $ | 677,544 |
| $ | 178,299 |
| $ | 134,153 |
| $ | 0 |
| $ | 558,310 |
| $ | 2,379,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
GAP |
| $ | 1,355,194 |
| $ | (140,690 | ) | $ | (617,258 | ) | $ | (105,892 | ) | $ | (95,507 | ) | $ | 21,122 |
| $ | (416,969 | ) | $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cumulative GAP |
| $ | 1,355,194 |
| $ | 1,214,504 |
| $ | 597,246 |
| $ | 491,354 |
| $ | 395,847 |
| $ | 416,969 |
| $ | 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, including U.S. Treasury or Government Sponsored Enterprises debt securities. The balance of the Bank’s investment portfolio contains investments that qualify for CRA investment status. No gains or losses on securities sales were realized in the first six months of 2009. By comparison, during the first six months of 2008, the Company realized a gain of $2,758,000 on the redemption of restricted stock of Visa Inc., and no losses were recorded on securities sales in the first six months of 2008. As of June 30, 2009 the Bank’s investment portfolio contained $1,042,000 gross unrealized gains and no gross unrealized losses, a net gain of $1,042,000, for unrealized gains of $604,000 net of tax benefit. By comparison, at June 30, 2008 the Company’s investment portfolio contained
31
$158,000 gross unrealized gains and gross unrealized losses of $186,000, for net unrealized losses of $16,000 net of tax benefit. 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,” 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 June 30, 2009. 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 June 30, 2009 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
32
ITEM 1. LEGAL PROCEEDINGS
Litigation
In the ordinary course of business, the Company and the Bank are involved in litigation. Management does not expect the ultimate outcome of any pending legal proceedings to have a material effect on the 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 First Regional’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, 2008. 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, 2008, and updated in the quarterly report on Form 10-Q for the period ended March 31, 2009.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 21, 2009.
Election of Directors
Three Class 1 Directors were elected as follows (Class 2 Directors serve until the 2010 Annual Meeting):
Class 1 |
| Votes For |
| Votes Against |
|
|
|
|
| �� |
|
Gary M. Horgan |
| 10,023,678 |
| 1,442,408 |
|
Thomas E. McCullough |
| 10,058,584 |
| 1,407,502 |
|
Richard E. Schreiber |
| 11,093,051 |
| 373,035 |
|
The term of office of all Class 2 Directors continues until the next annual meeting of shareholders, scheduled for May of 2010. The Class 2 Directors are H. Anthony Gartshore, Lawrence J. Sherman, Fred M. Edwards and Marilyn Sweeney.
Approval to Amend and Restate the Company’s 2005 Stock Option Plan
The Company’s 2005 Stock Option Plan was amended and restated to increase the number of shares of common stock reserved for issuance thereunder from 600,000 to 800,000 shares.
Votes For |
| Votes Against or Abstained |
|
|
|
|
|
7,228,788 |
| 1,701,669 |
|
Authorization to Issue Preferred Stock Option
Approval of an amendment to the Company’s Articles of Incorporation authorizing the Company to issue up to ten million (10,000,000) shares of preferred Stock Option
Votes For |
| Votes Against |
|
|
|
|
|
6,284,754 |
| 2,645,703 |
|
33
ITEM 6. EXHIBITS
The following is a table of exhibits to this Quarterly Report on Form 10-Q.
Exhibit No. |
| Description |
|
|
|
3.1 |
| Certificate of Amendment of Articles of Incorporation, dated July 6, 2009, of First Regional Bancorp |
|
|
|
3.2 |
| Certificate of Amendment of Articles of Incorporation, dated July 31, 2006, of First Regional Bancorp |
|
|
|
3.3 |
| Certificate of Amendment of Articles of Incorporation, dated November 24, 1987, of First Regional Bancorp |
|
|
|
3.4 |
| Certificate of Amendment of Articles of Incorporation, dated September 21, 1981, of First Regional Bancorp (formerly known as Great American Bancorp) |
|
|
|
3.5 |
| Articles of Incorporation, dated February 18, 1981, of First Regional Bancorp (formerly known as Great American Bancorp) |
|
|
|
31.1 |
| Certification of the Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes—Oxley Act |
|
|
|
31.2 |
| Certification of the Corporate Secretary furnished pursuant to Section 302 of the Sarbanes—Oxley Act |
|
|
|
31.3 |
| Certification of the Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes—Oxley Act |
|
|
|
32 |
| Certification furnished pursuant to Section 906 of the Sarbanes—Oxley Act |
Items 3 and 5 of Part II of Form 10-Q are not applicable and have been omitted.
34
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 14, 2009 | /s/ H. Anthony Gartshore | |
| H. Anthony Gartshore, | |
| President & Chief Executive Officer | |
|
|
|
|
|
|
Date: August 14, 2009 | /s/ Thomas E. McCullough | |
| Thomas E. McCullough, Corporate Secretary | |
|
|
|
|
|
|
Date: August 14, 2009 | /s/ Elizabeth Thompson | |
| Elizabeth Thompson, Principal Accounting Officer |
35
Exhibit Index
Exhibit No. |
| Description | |
|
|
| |
3.1 |
|
| Certificate of Amendment of Articles of Incorporation, dated July 6, 2009, of First Regional Bancorp |
|
|
|
|
3.2 |
|
| Certificate of Amendment of Articles of Incorporation, dated July 31, 2006, of First Regional Bancorp |
|
|
|
|
3.3 |
|
| Certificate of Amendment of Articles of Incorporation, dated November 24, 1987, of First Regional Bancorp |
|
|
|
|
3.4 |
|
| Certificate of Amendment of Articles of Incorporation, dated September 21, 1981, of First Regional Bancorp (formerly known as Great American Bancorp) |
|
|
|
|
3.5 |
|
| Articles of Incorporation, dated February 18, 1981, of First Regional Bancorp (formerly known as Great American Bancorp) |
|
|
|
|
31.1 |
|
| Certification of the Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
|
31.2 |
|
| Certification of the Corporate Secretary furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
|
31.3 |
|
| Certification of the Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
|
32 |
|
| Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act |
36