Page 1 of 68
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
-----------------------
For the fiscal year ended December 31, 1994 Commission File No. 0-10232
FIRST REGIONAL BANCORP
(Exact name of registrant as specified in its charter)
California 95-3582843
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1801 Century Park East
Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 552-1776
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of class)
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
----- -----
Aggregate market value of Common Stock held by non-affiliates as of March
23, 1995: $3,511,238
Number of shares of Common Stock outstanding at March 23, 1995:
2,398,800.
Documents incorporated by reference and parts of Form 10-K into which
incorporated:
Portions of Proxy Statement for 1995 Annual Meeting of Share- PART III
holders (to be filed within 120 days of fiscal year end)
Annual Report on Form 10-K for the Years Ended December 31, PART IV
1982, 1987, 1988, 1991, and 1993
Registration Statement on Form 10 as Filed with the Commission PART IV
in March, 1982
Registration Statement on Form S-14 Filed with the Commission PART IV
on December 2, 1981 (File Number 2-75140)
2
FORM 10-K
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page
in Incorporation
PART I 10-K by Reference
---- ------------
Item 1. Business........................... 4
-------
Item 2. Properties......................... 31
-------
Item 3. Legal Proceedings.................. 31
-------
Item 4. Submission of Matters to a Vote of
------- Securities Holders................. 31
PART II
Item 5. Market for Registrant's Common Stock
------- and Related Stockholder Matters.... 32
Item 6. Selected Financial Data............ 34
-------
Item 7. Management's Discussion and Analysis
------- of Financial Condition and Results of
Operations......................... 35
Item 8. Financial Statements and Supplement-
------- ary Data........................... 41
Item 9. Disagreements on Accounting and
------- Financial Disclosure............... 41
PART III
Item 10. Directors and Executive Officers of 1995 Proxy
-------- the Registrant..................... 42 Statement
Item 11. Executive Compensation............. 42 1995 Proxy
-------- Statement
Item 12. Security Ownership of Certain 1995 Proxy
-------- Beneficial Owners and Management... 42 Statement
Item 13. Certain Relationships and Related 1995 Proxy
-------- Transactions....................... 42 Statement
3
PART IV
Item 14. Exhibits, Financial Statement
-------- Schedules, and Reports on Form 8-K. 43
SIGNATURES....................................... 44
INDEX TO FINANCIAL STATEMENTS.................... 45
INDEX TO EXHIBITS................................ 67
4
PART I
Item 1. Business
-----------------
Business of First Regional Bancorp
----------------------------------
First Regional Bancorp (the Company) maintains its principal executive
offices at 1801 Century Park East, Los Angeles, California 90067. The Company
was incorporated in California as Great American Bancorp on February 18, 1981
for the purpose of becoming a bank holding company and acquiring all of the
outstanding common stock of First Regional Bank (the Bank), formerly Great
American Bank, a state-chartered bank headquartered in Los Angeles (Century
City), California. The reorganization of the Bank was accomplished on March 8,
1982, under the terms of a Plan of Reorganization and Merger Agreement dated
October 15, 1981, providing for the merger of a Company subsidiary with the
Bank, with the Bank being the surviving entity in the merger. As a result of
the Bank's reorganization, the Bank's outstanding shares were exchanged on a
one-for-one basis for shares of the Company's Common Stock, and the Company
became the sole shareholder of the Bank. Prior to acquiring the Bank, the
Company did not conduct any ongoing business activities. The Company's
principal asset is the stock of the Bank and the Company's primary function is
to coordinate the general policies and activities of the Bank, as well as to
consider from time to time, other legally available investment opportunities.
Both the Company and the Bank changed their names from Great American to First
Regional in 1987 as part of an agreement with another financial institution.
The Company does not anticipate that its operations will be materially
affected as a result of compliance with Federal, State and local environmental
laws and regulations.
Business of First Regional Bank
-------------------------------
The Bank was incorporated under the laws of the State of California on July
10, 1979, and has authorized capital of 5,000,000 shares of no par value Common
Stock. The Bank commenced operations as a California-chartered bank on December
31, 1979. The Bank conducts a business-oriented wholesale banking operation,
with services tailored to the needs of businesses and professionals in its
service area. The Bank's main office is located in the Century City office
complex in Los Angeles, California. The Bank had branch offices in Beverly
Hills, Newport Beach, and downtown Los Angeles which were closed on September 5,
1986 and their deposits and loans consolidated into the Century City office.
The Bank's customers include professionals working in the primary service areas
as well as many business accounts located throughout Los Angeles County. In
distinction from many other independent banks in California, the Bank's deposit
business is generated by a relatively small number of accounts, although most
accounts have a very high average balance.
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 a much smaller portfolio of commercial
loans. The Bank also specializes in construction lending for moderate-size
5
commercial and residential projects. For commercial and industrial borrowers,
the Bank offers equipment financing as well as short-term loans. The Bank also
offers standard banking services for its customers, including telephone
transfers, wire transfers, and travelers checks. The Bank accepts all types of
demand, savings, and time certificates of deposit. The Bank does not currently
offer trust services, but it does make trust services available to its customers
through a correspondent bank. At March 23, 1995 the Bank had 36 equivalent
full-time employees.
Competition
-----------
The banking business in California generally, and in the Los Angeles County
area where the Bank is located, is highly competitive with respect to both loans
and deposits and is dominated by a relatively small number of major banks which
have many offices operating over wide geographic areas. The Bank competes for
deposits and loans principally with these major banks, but also with small
independent banks located in its service areas. Among the advantages which the
major banks have over the Bank are their ability to finance extensive
advertising campaigns and to allocate their investment assets to regions of
highest yield and demand. Many of the major commercial banks operating in the
Bank's service area offer certain services (such as trust and cash management
services) which are not offered directly by the Bank and, by virtue of their
greater total capitalization, such banks have substantially higher lending
limits than the Bank.
Moreover, banks generally, and the Bank in particular, face increasing
competition for loans and deposits from non-bank financial intermediaries such
as savings and loan associations, thrift and loan associations, credit unions,
mortgage companies, insurance companies, and other lending institutions. Money
market funds offer rates competitive with banks, and an increasingly
sophisticated financial services industry continually develops new products for
consumers that compete with banks for investment dollars. In addition, other
entities (both public and private) seeking to raise capital through the issuance
and sale of debt or equity securities compete with banks in the acquisition of
deposits.
Interstate Competition
----------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), enacted on September 29, 1994, repeals the McFadden Act
of 1927, which required states to decide whether national or state banks could
enter their state, and allows banks to open branches across state lines
beginning on June 1, 1997. The Riegle-Neal Act also repeals the 1956 Douglas
Amendment to the Bank Holding Company Act, which placed the same requirements on
bank holding companies. The repeal of the Douglas Amendment now makes it
possible for banks to buy out-of-state banks in any state after September 29,
1995, which may then be converted into interstate branches in 1997.
The Riegle-Neal Act permits interstate banking to begin 12 months after the
enactment of the new law. The amendment of the Bank Holding Company Act permits
bank holding companies to acquire banks in other states provided that the
acquisition does not result in the bank holding company controlling more than 10
percent of the deposits of the United States, or 30 percent of the deposits in
the state in which the bank to be acquired is located. However,
6
the Riegle-Neal Act also provides that states have the authority to waive the
state concentration limit. Individual states may also require that the bank
being acquired be in existence for up to five years before an out-of-state bank
or bank holding company may acquire it.
The Riegle-Neal Act provides that interstate branching and merging of
existing banks is permitted beginning June 1, 1997, provided that the banks are
at least adequately capitalized and demonstrate good management. Interstate
mergers and branch acquisitions are permitted at an earlier time if a state
chooses to enact a law allowing such activity. The states are also authorized
to enact a law to permit interstate banks to branch de novo.
In 1986, California adopted interstate banking legislation permitting
interstate banking on a regional basis (Alaska, Arizona, Colorado, Hawaii,
Idaho, Nevada, New Mexico, Oregon, Texas, Utah, and Washington) beginning July
1, 1987 and on a national basis beginning on January 1, 1991. The California
legislation permits interstate banking only on a reciprocal basis, which
requires that the home state of the bank holding company desirous of entering
California must permit the entrance of California bank holding companies on
substantially the same terms and conditions. While it is anticipated that this
legislation may increase the demand by buyers to acquire California banks, it is
also anticipated that it will increase competitive pressures on existing
California banks, as out-of-state bank holding companies enter the California
market.
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was signed into law. Among other things,
FIRREA allows the acquisition of healthy and failed savings associations by bank
holding companies, and imposes no interstate barriers on such bank holding
company acquisitions. With certain qualifications, FIRREA also allows bank
holding companies to merge acquired savings associations into their existing
commercial bank subsidiaries; however, for a period of five years from the date
of enactment, the acquired savings association must continue as a member of, and
continue to pay premiums to, the Savings Association Insurance Fund, which was
created by FIRREA to replace the Federal Savings and Loan Insurance Corporation
deposit insurance fund, which FIRREA abolished.
Recent legislation and economic developments have favored increased
competition between different types of financial institutions for both deposits
and loans, resulting in increased cost of funds to banks generally and to the
Bank in particular. In order to compete with the other financial institutions
in its service area, the Bank relies principally upon personal contacts by its
officers, directors, founders, employees and shareholders; local promotional
activity including direct mail, advertising in local newspapers and business
journals; and specialized services. The Bank's promotional activities emphasize
the advantages of dealing with a locally-owned and headquartered institution
attuned to the particular needs of the community. In the event that a
customer's loan demands exceed the Bank's lending limits, the Bank attempts to
arrange for such loans on a participation basis with its correspondent banks.
The Bank also assists customers requiring services not offered by the Bank to
obtain these services from its correspondent banks.
7
Supervision and Regulation
--------------------------
The Company
-----------
The Company is a bank holding company registered under the Act, and is
subject to supervision by the Board of Governors of the Federal Reserve System
(the "FRB"). As a bank holding company, the Company is required to file with
the FRB an annual report and such other additional information as the FRB may
require pursuant to the Act. The FRB may also make examinations of the Company
and its subsidiaries.
The Act requires prior approval of the FRB for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
bank or for a merger or consolidation by a bank holding company with any other
bank holding company. The Act also prohibits the acquisition by a bank holding
company or any of its subsidiaries of voting shares or substantially all the
assets of any bank located in a state other than the state in which the
operations of the bank holding company's banking subsidiaries are principally
conducted, unless the statutes of the state, in which the bank to be acquired is
located, expressly authorize such an acquisition, such as enacted by California.
The Company and the Bank are deemed to be affiliates within the meaning of
the Act. Pursuant thereto, a bank can loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a loan
or extension of credit to any person or company or issue a guarantee,
acceptance, or letter of credit on behalf of an affiliate only if the aggregate
amount of the above transactions of the bank and its subsidiaries does not
exceed 10% of the capital stock and surplus of the bank on a per affiliate basis
or 20% of the capital stock and surplus of the bank on an aggregate affiliate
basis. In addition, such transactions must be on terms and conditions that are
consistent with safe and sound banking practices and in particular, a bank and
its subsidiaries generally may not purchase from an affiliate a low-quality
asset, as that term is defined in the Federal Reserve Act. Such restrictions
also prevent a bank holding company and its other affiliates from borrowing from
a banking subsidiary of the bank holding company unless the loans are secured by
marketable collateral of designated amounts.
With certain limited exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or furnishing services to or performing services for its
authorized subsidiaries. A bank holding company may, however, engage or acquire
an interest in a company that engages in activities which the FRB has determined
to be so closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such a determination, the FRB is required
to consider whether the performance of such activities can reasonably be
expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue
8
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The FRB is also empowered to
differentiate between activities commenced de novo and activities commenced by
the acquisition, in whole or in part, of a going concern. Although the future
scope of permitted activities is uncertain and cannot be predicted, some of the
activities that the FRB has determined by regulation to be closely related to
banking are: making or servicing loans; performing certain data processing
services; acting as a fiduciary or investment advisor; leasing personal or real
property; providing limited insurance activities; acting as a commodity trading
and futures commission merchant advisor; providing securities brokerage services
solely as agent for a customer; and real estate and personal property appraisal.
Federal law prohibits a holding company and any subsidiary bank from
engaging in certain tie-in arrangements in connection with the extension of
credit. Thus, the Bank may not extend credit, lease or sell property, or
furnish any services, or fix or vary the consideration for any of the foregoing
on the condition that: (i) the customer must obtain or provide some additional
credit, property or service from or to the Bank other than a loan, discount,
deposit or trust service; or (ii) the customer must obtain or provide some
additional credit, property or service from or to the Company or any other
subsidiary of the Company; or (iii) the customer may not obtain some other
credit, property or service from competitors, except reasonable requirements to
assure soundness of credit extended.
In December, 1988, the FRB adopted risk-based capital adequacy guidelines
for bank holding companies and state member banks. The other bank regulators
have adopted similar guidelines. The FRB's guidelines assign various risk
percentages to different categories of assets, and capital is measured as a
percentage of risk assets. While in many cases total risk assets calculated in
accordance with the guidelines is less than total assets calculated absent the
rating, certain non-balance sheet assets, including loans sold with recourse,
legally binding loan commitments, and standby letters of credit, are treated as
risk assets, with the assigned rate varying with the type of asset. As a
result, it is possible that total risk assets for purposes of the guidelines
exceeds total assets under generally accepted accounting principles, thereby
reducing the capital-to-assets ratio. Under the terms of the guidelines, bank
holding companies are expected to meet capital adequacy guidelines based both on
total assets and on total risk assets. To the extent that holding companies
have favorable capital adequacy ratios based on total risk assets, such banks
are more likely to be permitted to operate at or near the minimum primary
capital to total assets ratios specified in regulatory guidelines. Under the
new guidelines, the Company's capital adequacy ratio at December 31, 1994 was
16.20%. The acceptable capital ratio is 8 percent.
In November, 1992 the Company entered into an agreement with the Federal
Reserve Bank which called for the Company to develop a plan to improve the
financial condition of the Company and its subsidiary, First Regional Bank. The
agreement also requires the Company to obtain Federal Reserve Bank approval
prior to the payment of cash dividends or the addition or replacement of any
director or executive officer of the Company. Under the agreement, the Company
will provide periodic progress reports to the Federal Reserve Bank. The Company
is in full compliance with the agreement, and
9
expects to remain in full compliance.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by and may be required to file reports
with the California Superintendent of Banks (the "Superintendent"). Regulations
have not yet been proposed or adopted or steps otherwise taken to implement the
Superintendent's powers under this statute.
The Financial Accounting Standards Board ("FASB") promulgated a new
standard for income tax accounting (SFAS 109). The standard was implemented by
the Company for the year commencing January 1, 1993. The Company decided to
implement the standard by recording the adjustment for prior years in the income
statement for the year in which the standard was adopted. The cumulative effect
of the implementation of the standard resulted in an increase in net income of
$98,000. While adoption of the standard did not have a material effect on the
Company's financial position, its effect on results of operations for subsequent
years has not yet been determined.
The FASB has also issued SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This statement prescribes that a loan is impaired when it is
probable that a creditor will be unable to collect all principal and interest
amounts due under the terms of the loan agreement. Measurement of the
impairment can be based on the expected future cash flows from the loan
discounted at the loan's effective interest rate, or by reference to an
observable market price (if one exists), or by the fair value of the collateral
for a collateral-dependent loan. Additionally, the statement prescribes
measuring the impairment of a restructured loan by discounting the total
expected future cash flows at the effective interest rate in the original loan
agreement. The impact of initially applying the statement is reported as a part
of bad debt expense. The Company must adopt this standard in 1995, but adoption
is not expected to have a material effect on the Company's financial position.
In addition, the FASB has issued SFAS 115, "Accounting for Investments in
Debt and Equity Securities." This statement addresses the accounting and
reporting of investments in equity securities that have readily determinable
market value, and all investments in debt securities. Under this statement,
debt securities are classified into three categories as follows:
Held to Maturity Securities. Debt securities that the Company has the
---------------------------
positive intent and ability to hold to maturity. These securities are to be
reported at amortized cost.
Trading Securities. Debt and equity securities that are bought and held
------------------
principally for the purpose of selling them in the near term. These
securities are to be reported at fair value with unrealized gains and
losses included in earnings.
Available for Sale Securities. Debt and equity securities not classified
-----------------------------
into either of the above categories. These securities are to be reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity (net of tax
effects).
10
The Company adopted this standard in 1994. There was no material impact on
the consolidated financial statements of the Company due to this adoption.
The Bank
--------
The Bank, as a California state chartered bank whose accounts are insured
by the FDIC up to the maximum legal limits of the FDIC, is subject to
regulation, supervision, and regular examination by the California State Banking
Department and the Federal Deposit Insurance Corporation. The Bank is also
subject to certain regulations issued by the FRB. The regulations of these
various state and federal agencies govern most aspects of the Bank's business,
including reserves against deposits, interest rates payable on certain types of
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices. Supervision, regulation, and examination of
the Bank by the regulatory agencies are generally intended to protect depositors
and are not intended to protect the shareholders of the Company.
From time to time, new legislation is adopted which increases the cost of
doing business, limits permissible activities, or affects the competitive
balance between banks and other financial institutions. For example, in 1980
and 1982 federal legislation resulted in major changes to interest rate
structures and permissible bank powers and changed the competitive relationships
with other financial institutions.
FIRREA has had significant impact on financial institutions. The chief
purposes of this extensive legislation are to promote a safe and stable system
of affordable housing, and to improve the supervision of savings associations.
In this effort, FIRREA contains major regulatory reforms, stronger capital
standards, and stronger civil and criminal enforcement provisions. Certain of
the more significant provisions contained in FIRREA are summarized below.
FIRREA gave the FDIC the duty of insuring the deposits of savings
associations as well as banks. The insurance funds are maintained separately
and have been renamed. The Bank Insurance Fund ("BIF") insures the deposits of
commercial banks and state chartered savings banks, while the Savings
Association Insurance Fund ("SAIF") insures deposits of savings and loans and
federally chartered savings banks. The FDIC is also authorized to act as
conservator or receiver for federally insured banks, and, after a period of
three years from the date of enactment, for insured savings associations that
are chartered under federal or state law.
FIRREA expands, enhances, and clarifies the enforcement powers of the
financial institution regulatory agencies and increases the maximum amount of
civil money penalties for violation of laws and regulations, expands the grounds
for imposing them, and authorizes the various regulatory agencies to take action
to collect them. FIRREA also provides increased insurance assessments for
members of both the Bank Insurance Fund (such as the Bank) and the SAIF, and
expands the federal banking agencies' powers to appoint a conservator or
receiver, including "early intervention."
Although the effects of FIRREA upon the future business, earnings and
growth of the Bank cannot be predicted, management does not believe that the
11
provisions of FIRREA will have a material adverse impact on the Bank.
The Omnibus Budget Reconciliation Act of 1990, designed to address the
Federal budget deficit, increased the insurance assessment rates for members of
the BIF and SAIF over that provided by FIRREA, and eliminated FIRREA's maximum
reserve ratio constraints on the BIF.
The Crime Control Act of 1990 further strengthened the authority of Federal
bank and thrift regulators to enforce capital requirements, increased civil and
criminal penalties for financial fraud, and enacted provisions allowing the FDIC
to regulate or prohibit certain forms of golden parachute benefits and
indemnification payments to officers and directors.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), was signed into law on December 19, 1991. FDICIA recapitalized the
FDIC's Bank Insurance Fund, granted broad authorization to the FDIC to increase
deposit insurance premium assessments and to borrow from other sources, and
continued the expansion of regulatory enforcement powers, along with many other
significant changes. The FDIC has already implemented a risk-based deposit
insurance premium system which effectively raised BIF premiums for most banks,
and, should the condition of the BIF so require, it is possible that premiums
could be increased again in the future.
FDICIA establishes five categories of capitalization: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Effective December 19, 1992, banks will be
prohibited from paying dividends or management fees to controlling persons or
entities if, after making the payment, the bank would be undercapitalized, that
is, the bank fails to meet the required minimum level for any relevant capital
measure. Asset growth and branching restrictions will apply to undercapitalized
banks, which will be required to submit acceptable capital plans guaranteed by
its holding company, if any. Broad regulatory authority is granted with respect
to significantly undercapitalized banks, including forced mergers, growth
restrictions, ordering new elections for directors, forcing divestiture by its
holding company, if any, requiring management changes, and prohibiting the
payment of bonuses to senior management. Even more severe restrictions will be
applicable to critically undercapitalized banks, those with capital at or less
than 2%, including the appointment of a receiver or conservator after 90 days.
FDICIA also grants the regulatory agencies authority to prescribe standards
relating to internal controls, credit underwriting, asset growth, and
compensation, among others, and requires the regulatory agencies to promulgate
regulations prohibiting excessive compensation or fees.
FDICIA further establishes a new truth in savings scheme, providing for
clear and uniform disclosure of terms and conditions on which interest is paid
and fees are assessed on deposits, to be effective upon adoption of implementing
regulations.
FDICIA imposes limits on the acceptance of brokered deposits by other than
well capitalized banks, including notification requirements on deposit brokers.
12
The new legislation also creates restrictions on activities authorized
under state law. FDICIA generally restricts activities through subsidiaries to
those permissible for national banks and provides for a five-year divestiture
period for impermissible investments. Insurance activities are also limited,
except to the extent permissible for national banks.
Real estate lending has been targeted for close supervision. The
regulatory authorities are required to establish uniform credit standards
relating to real estate secured loans.
The foregoing summarizes only the most significant aspects of FDICIA.
Because of the broad scope and complexity of this legislation and the fact that
all implementing regulations have not yet been adopted, it is impossible to
predict at this time the full effect FDICIA will ultimately have on the Bank or
the banking industry.
The Riegle Community Development and Regulatory Improvement Act of 1994
(the "1994 Act"), which has been viewed as the most important piece of banking
legislation since the enactment of the FDICIA, was signed into law on September
23, 1994. In addition to providing funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which will provide
assistance to new and existing community development lenders to help meet the
needs of low- and moderate-income communities and groups, the 1994 Act mandates
changes to a wide range of banking regulations. These changes include
modifications to the present publication requirements for Call Reports, less
frequent regulatory examination schedules for small institutions, small business
and commercial real estate loan securitization, amendments to the money
laundering and currency transactions reporting requirements of the Bank Secrecy
Act, clarification of the coverage of the Real Estate Settlement Procedures Act
for business, commercial and agricultural real estate secured transactions,
amendments to the national flood insurance program, and amendments to the Truth
in Lending Act to provide greater protection for consumers by reducing
discrimination against the disadvantaged.
Title I, Subtitle A of the 1994 Act, designated as the "Community
Development Banking and Financial Institutions Act of 1994," created the Fund in
order to promote economic revitalization and community development through
investment in and assistance to Community Development Financial Institutions
("CDFIs") that provide capital and other resources to economically-depressed
communities. The primary focus of the program will be to aid the country's
urban, rural and native American communities that are facing severe economic
problems due to the lack of economic growth, poverty and the general lack of
employment and other opportunities. Financial institutions may participate in
the assistance program upon approval by the Fund.
In addition to establishing the Fund, Title I also provides funding for the
Bank Enterprise Act ("BEA") of 1991, which will now be administered by the Fund.
Under the BEA, insured financial institutions may be awarded insurance premium
assessment credits where they are involved in providing lifeline deposit
accounts, community lending and other forms of financial assistance in
distressed areas, including investing in CDFIs.
Title I, Subtitle B of the 1994 Act amended the Truth in Lending Act to
13
expand disclosure requirements and expand protections regarding consumer lending
secured by the consumer's principal dwelling.
Title IV of the 1994 Act amended the Bank Secrecy Act by reducing the
reporting requirements imposed on financial institutions for large currency
transactions, expanding the ability of financial institutions to provide
exemptions to the reporting requirements for businesses that regularly deal in
large amounts of currency, and providing for the delegation of civil money
penalty enforcement from the Treasury Department to the individual federal
banking agencies.
The "Paperwork Reduction and Regulatory Improvement Act," Title III of the
1994 Act, requires the federal banking agencies to consider the administrative
burdens that new regulations will impose before their adoption and requires a
transition period in order to provide adequate time for compliance. This Act
also requires the federal banking agencies to work together to establish uniform
regulations and guidelines as well as to work together to eliminate duplicative
or unnecessary requests for information in connection with applications or
notices. This Act reduces the frequency of examinations for well-rated
institutions, simplifies the quarterly financial reporting ("Call Reports") and
eliminates the requirement that financial institutions publish their Call
Reports in local newspapers. This Act also establishes an internal regulatory
appeal process and independent ombudsman to provide a means for review of
material supervisory determinations.
Historically, national banks have been required to have two-thirds of their
directors residents of the state of domicile. The Paperwork Reduction and
Regulatory Improvement Act reduces this requirement to a majority. This Act
also amends the Bank Holding Company Act and Securities Act of 1933 to simplify
the formation of bank holding companies.
Additional titles of the 1994 Act include Title V, the "National Flood
Insurance Reform Act of 1994,", Subtitle A of Title II, the "Small Business Loan
Securitization and Secondary Market Enhancement Act of 1994," and Subtitle B of
Title II, the "Small Business Capital Enhancement Act."
The foregoing summarizes only the most significant aspects of the 1994 Act,
many of the provisions of which have not yet become effective. Therefore, it is
not possible to predict at this time the impact this legislation will have on
the Bank or the banking industry.
In February 1993, the Bank entered into a regulatory agreement with the
Federal Deposit Insurance Corporation (the "FDIC"). The agreement requires the
Bank to reduce the level of its classified assets in accordance with an agreed-
upon schedule, to continue to maintain a strong capital position and an adequate
reserve for loan losses, to develop written policies in a number of areas, and
to furnish periodic progress reports to the FDIC. The agreement also requires
the Bank to obtain FDIC approval prior to the payment of cash dividends or the
replacement of any director or executive officer of the Bank. The FDIC
performed a followup examination in May, 1994 during which it was noted that
the Bank was in full compliance with most provisions of the Order, but that
compliance with certain other provisions had not yet been fully achieved. In
response, management and the Board undertook additional actions to address the
remaining areas of noncompliance with the
14
Order, and management believes the Bank is now in full compliance with all
provisions of the Order.
Future legislation is also likely to impact the Bank's business. Consumer
legislation has been proposed in Congress which may require banks to offer
basic, low-cost financial services to meet minimum consumer needs. Various
proposals to restructure the Federal bank regulatory agencies are currently
pending in Congress, some of which include proposals to expand the ability of
banks to engage in previously prohibited businesses. Further, the regulatory
agencies have proposed and may propose a wide range or regulatory changes,
including the calculation of capital adequacy and limiting business dealings
with affiliates. These and other legislative and regulatory changes may have
the impact of increasing the cost of business or otherwise impacting the
earnings of financial institutions. However, the degree, timing, and full
extent of these proposals cannot be predicted.
As a result of both Federal and California legislation during the 1980's,
there has been a lessening of the historical distinction between the services
offered by banks, savings and loan associations, credit unions, and other
financial institutions. Banks have experienced increased competition for
deposits which can result in increases in their cost of funds. Increased
competition for loans can reduce the yield available.
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest rates on a bank's deposits and
other interest-bearing liabilities and the interest rates on a bank's loans,
securities and other interest-earning assets comprise the major source of a
bank's earnings. These rates are highly sensitive to many factors which are
beyond the control of the Bank and, accordingly, the earnings and growth of the
Bank will be subject to the influence of economic conditions generally, both
domestic and foreign, including inflation, recession, and unemployment, and also
to the monetary and fiscal policies of the United States Government and its
agencies, particularly the FRB. The FRB implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open-market
dealings in the level of reserves for financial institutions subject to reserve
requirements, by placing limitations upon savings and time deposit interest
rates, and through adjustments to the discount rate applicable to borrowings by
banks and other financial institutions from the Federal Reserve. The actions of
the FRB in these areas influence the growth of bank loans, investments, and
deposits and also affect interest rates. The nature and timing of any future
changes in such policies and their impact on the Bank cannot be predicted;
however, depending on the degree to which the Bank's maturities of interest-
earning assets exceed the maturities of interest-bearing liabilities, increases
in interest rates have the temporary effect of increasing the Bank's net
interest margin, while decreases in interest rates have the opposite effect.
Product Development Research
----------------------------
The Company has not engaged in any material research activities relating to
the development of new services or the improvement of existing banking services
during the last three fiscal years. The officers and employees of the Bank are
continually engaged in marketing activities, however, including the evaluation
and development of new services, to enable the Bank to retain
15
a competitive position in the service area.
16
Distribution of Assets, Liabilities and Shareholders' Equity
------------------------------------------------------------
The following table shows the average balances of the Bank's assets,
liabilities, and shareholders' equity for the past two years:
For Period Ended
December 31,
1994 1993
---------- ----------
(Dollars in Thousands)
Assets
Cash and Due From Banks... $ 2,982 $ 4,526
Time Deposits with Other
Financial Institutions.... 7,201 3,483
Investment Securities..... 8,844 6,656
Funds Sold................ 16,709 12,151
Net Loans................. 79,126 107,849
Other Assets.............. 8,975 9,254
-------- --------
Total................ $123,837 $143,919
======== ========
Liabilities & Shareholders' Equity
Deposits:
Demand (non-interest
bearing)............. $ 15,777 $ 15,642
Savings.............. 1,202 1,188
Money Market Accounts 85,092 82,767
Time................. 11,903 30,445
-------- --------
Total Deposits.. 113,974 130,042
Securities Sold Under
Agreements to Repurchase.. 71 764
Other Liabilities......... 416 251
-------- --------
Total Liabilities.... 114,461 131,057
-------- --------
Shareholders' Equity...... 9,376 12,862
-------- --------
Total................ $123,837 $143,919
======== ========
17
Interest Rates and Interest Differential
----------------------------------------
The following table sets forth the average balances outstanding for major
categories of interest earning assets and interest bearing liabilities and the
average interest rates earned and paid thereon:
For Period Ended December 31,
1994 1993
-------------------------- --------------------------
Interest Average Interest Average
Average Income(2)/ Yield/ Average Income(2)/ Yield/
Balance Expense Rate % Balance Expense Rate %
------- --------- ------ ------- --------- ------
(Dollars in Thousands)
Interest Earning
Assets:
Loans(1) $ 80,661 $ 7,662 9.5% $110,948 $ 9,215 8.3%
Time Deposits With
Other Financial
Institutions 7,201 315 4.4% 3,483 135 3.9%
Investment
Securities 8,844 393 4.4% 6,656 181 2.7%
Funds Sold 16,709 670 4.0% 12,151 341 2.8%
-------- ------- -------- -------
Total Interest
Earning Assets $113,415 $ 9,040 8.0% $133,238 $ 9,872 7.4%
======== ======= ======== =======
Interest Bearing
Liabilities:
Savings deposits $ 1,202 $ 27 2.2% $ 1,188 $ 28 2.4%
Money Market
Accounts 85,092 2,002 2.4% 82,767 2,054 2.5%
Time 11,903 405 3.4% 30,445 1,074 3.5%
18
1994 1993
-------------------------- --------------------------
Interest Average Interest Average
Average Income(2)/ Yield/ Average Income(2)/ Yield/
Balance Expense Rate % Balance Expense Rate %
------- --------- ------ ------- --------- ------
(Dollars in Thousands)
Securities sold
under agreements
to repurchase $ 71 $ (2) (2.8)% $ 764 $ 20 2.6%
-------- ------- -------- -------
Total interest
bearing liabilities $ 98,268 $ 2,432 2.5% $115,164 $ 3,176 2.8%
======== ======= ======== =======
__________
(1) This figure reflects total loans, including non-accrual loans, and is not
net of the allowance for possible losses, which allowance had an average
balance of $1,535,000 in 1994 and $3,099,000 in 1993.
(2) Includes loan fees of $415,000 in 1994 and 824,000 in 1993.
19
The following table shows the net interest earnings and the net yield on
average interest earning assets:
1994 1993
---------- ----------
(Dollars in Thousands)
Total interest income (1).................. $ 9,040 $ 9,872
Total interest expense..................... 2,432 3,176
-------- --------
Net interest earnings...................... $ 6,608 $ 6,696
======== ========
Average interest earning assets............ $113,415 $133,238
Net yield on average interest earning
assets..................................... 5.8% 5.0%
__________
(1) Includes loan fees of $415,000 in 1994 and $824,000 in 1993.
20
The following table sets forth changes in interest income and interest
expense. The net change as shown in the column "Net Increase (Decrease)" is
segmented into the change attributable to variations in volume and the change
attributable to variations in interest rates. Non-performing loans are included
in average loans.
Increase (Decrease) Increase (Decrease)
1994 over 1993 1993 over 1992
--------------------------- ----------------------------
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest Income(1)
--------------------
Loans (2) $(3,279) $1,726 $(1,553) $ (947) $(1,223) $(2,170)
Investment
securities 72 140 212 (85) (64) (149)
Funds sold 154 175 329 79 (31) 48
Interest on time
deposits with
other financial
institutions 161 19 180 86 (7) 79
------- ------ ------- ------ -------- -------
Total Interest
Earning Assets $(2,892) $2,060 $ (832) $ (867) $(1,325) $(2,192)
======== ====== ======== ======= ======== ========
Interest Expense (1)
--------------------
Savings $ 0 $ (1) $ (1) $ 11 $ (13) $ (2)
Money market 61 (113) (52) 90 (606) (516)
Time (632) (37) (669) (292) (232) (524)
Securities sold
under agreements
to repurchase (20) (2) (22) (12) (15) (27)
-------- ------ -------- ------- -------- --------
Total interest
bearing liabilities $ (591) $ (153) $ (744) $ (203) $ (866) $(1,069)
======== ======= ======== ======= ======== ========
__________
(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
21
to the relationship of the absolute dollar amounts of the change in each.
(2) Includes loan fees of $415,000 in 1994 and $824,000 in 1993.
22
Investment Securities
---------------------
The following table shows book value of the investment securities portfolio
at December 31, 1994 and 1993:
December 31,
1994 1993
------- -------
(Dollars in Thousands)
U.S. Treasury Securities................... $11,790 $ 996
Obligations of U.S. Government
Agencies and Corporations.................. 0 0
Other Securities........................... 25 25
------- -------
Total................................. $11,815 $ 1,021
======= =======
The maturity schedule and weighted average yields of investment securities at
December 31, 1994 is as follows:
Average
Amount Yield
------- --------
(Dollars in Thousands)
U.S. Treasury Securities
------------------------
One year or less........................... $11,790 5.64%
-------
Category total............................ $11,790 5.64%
Other Securities
----------------
Over one year through five years........... 25 7.50%
-------
Category total............................ $ 25 7.50%
Total Investment Portfolio
--------------------------
One year of less........................... $11,790 5.64%
Over one year through five years........... 25 7.50%
-------
Total..................................... $11,815 5.65%
=======
23
Loan Portfolio
--------------
The loan portfolio consisted of the following at December 31, 1994 and
1993:
1994 1993
-------- --------
(Dollars in Thousands)
Commercial loans...................... $ 5,797 $12,467
Real estate construction loans........ 4,354 11,207
Government guaranteed loans........... 22,852 24,888
Real estate loans..................... 44,842 35,443
Real estate equity line loans......... 0 390
Other loans........................... 616 1,490
------- -------
Total loans...................... $78,461 $85,885
Less - Allowances for loan losses..... 1,390 2,250
- Deferred loan fees............. 490 516
------- -------
Net loans........................ $76,581 $83,119
======= =======
24
Loan Maturities and Interest Rates
----------------------------------
The following table shows the amounts of total loans outstanding as of
December 31, 1994, which, based on remaining scheduled payments of principal,
are due in one year or less, more than one year but less than five years, more
than five years but less than ten years, and ten years or more. The amount due
for each interval is classified according to whether the interest rate floats in
response to changes in interest rates or is fixed.
Aggregate maturities of loan balances
which are due:
In one year or less:
Interest rates are floating or
adjustable....................... $15,430
Interest rates are fixed or
predetermined.................... 145
After one year but within five years:
Interest rates are floating or
adjustable....................... 38,577
Interest rates are fixed or
predetermined.................... 0
After five years but within ten years:
Interest rates are floating or
adjustable....................... 9,745
Interest rates are fixed or
predetermined.................... 0
After ten years or more:
Interest rates are floating or
adjustable....................... 14,564
Interest rates are fixed or
predetermined.................... 0
--------
Total...................................... $ 78,461
========
25
Non-Performing Loans
--------------------
The current policy is to cease accruing interest on commercial, real estate
and installment loans which are past due as to principal or interest 90 days or
more, except that in certain circumstances interest accruals are continued on
loans deemed by management to be fully collectible.
The following table shows the principal amount of nonperforming loans as of
December 31, 1994 and 1993:
December 31,
1994 1993
------ ------
(Dollars in Thousands)
Non-accrual loans
Commercial....................... $1,249 $1,185
Real estate construction loans. 140 2,118
Government guaranteed loans...... 0 0
Equity lines..................... 0 0
Other loans...................... 0 0
------ ------
Total........................... $1,389 $3,303
====== ======
Accruing loans past due more than 90 days
Commercial....................... $ 0 $ 0
Real estate construction loans... 0 0
Government guaranteed loans...... 1,473 2,025
Equity lines..................... 0 0
Other loans...................... 0 0
------ ------
Total........................... $1,473 $2,025
====== ======
Except as may have been included in the above table, at December 31, 1994,
there were no loans, the terms of which had been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration of the
financial position of the borrower or which would be classified as restructured
debt in a troubled loan situation. In addition, at December 31, 1994, there
were no loans then current as to which there were serious doubts as to the
ability of the borrower to comply with the then-present loan repayment terms.
For the non-accrual loans listed in the above table, the Bank would have
realized additional gross interest income
26
of $255,000 in 1994 had the loans been current in accordance with their original
terms.
27
Summary of Loan Loss Experience
-------------------------------
The following table provides information concerning changes in the
allowance for possible loan losses and loans charged off and recovered for 1994
and 1993:
1994 1993
-------- --------
(Dollars in Thousands)
Amount of loans outstanding at end of
period..................................... $ 77,971 $ 85,369
======== ========
Average amount of loans outstanding
before allowance for loan losses........... $ 80,661 $110,948
======== ========
Balance of allowance for loan losses at
beginning of period........................ $2,250 $2,439
Loans charged off:
Commercial............................ 28 2,273
Real estate........................... 1,267 1,880
Government guaranteed loans........... 0 0
Equity lines.......................... 0 0
Other................................. 8 0
------ -------
Total loans charged off.......... 1,303 4,153
Recoveries of loans previously charged off:
Commercial............................ 40 39
Real estate........................... 153 0
Government guaranteed loans........... 0 0
Equity lines.......................... 0 0
Installment........................... 0 0
------ -------
Total loan recoveries............ 193 39
------ -------
Net loans charged off...................... 1,110 4,114
------ -------
Provisions charged to operating expense.... 250 3,925
------ -------
Balance of allowance for possible loan
losses at end of period.................... $ 1,390 $ 2,250
======= ========
The ratio of net loans charged off to average loans outstanding was
1.4% and 3.7% for the two years ended December 31, 1994 and 1993, respectively.
The Bank has historically evaluated the adequacy of its allowance for
possible loan losses on an overall basis rather than by specific categories of
loans. In determining the adequacy of the allowance for possible loan
28
losses, management considers such factors as historical loan loss experience,
known problem loans, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio.
For the purposes of this report, the allowance for possible loan losses has
been allocated to the major categories of loans as set forth in the following
table. The allocations are estimates based upon historical loss experience and
management judgement. The allowance for possible 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.
1994 1993
--------------------- ---------------------
Allowance Ratio of Allowance Ratio of
for loans to for loans to
possible total possible total
loan losses loans loan losses loans
----------- -------- ----------- --------
Commercial loans... $ 615 7% $1,350 15%
Real estate loans.. 669 63% 870 54%
Gov't guaranteed... 0 29% 0 29%
Equity line loans.. 0 0% 10 1%
Other loans........ 8 1% 10 1%
Unallocated........ 98 0% 10 0%
------ ---- ------ ----
Total......... $1,390 100% $2,250 100%
====== ==== ====== ====
29
Deposits
--------
The average amounts of deposits for the periods indicated are summarized
below.
1994 1993
---------- ----------
(Dollars in Thousands)
Demand Deposits....................... $15,777 $ 15,642
Savings deposits, money market and
time certificates of deposit of less
than $100,000......................... 89,251 101,635
Time certificates of deposit of
$100,000 or more...................... 8,946 12,765
-------- --------
Total............................ $113,974 $130,042
======== ========
The maturity schedule of time certificates of deposit of $100,000 or more at
December 31, 1994 is as follows:
December 31, 1994
-----------------
(Dollars in Thousands)
3 months or less..................... $ 8,336
Over 3 through 6 months.............. 303
Over 6 through 12 months............. 307
Over 12 months....................... 0
-------
Total........................... $ 8,946
=======
30
Selected Financial Ratios
-------------------------
The following table sets forth the ratios of net income to average total
assets and to average shareholders' equity, and average shareholders' equity to
average total assets.
1994 1993
----- -------
Return on assets............. 0.8% (2.9%)
Return on equity............. 10.7% (32.2%)
Dividend payment ratio....... 0.0% 0.0%
Equity to assets ratio....... 7.6% 8.9%
31
Item 2. Properties
-------------------
The Bank's offices are located on the ground and eighth floors of an office
building located at 1801 Century Park East, Los Angeles, California. The Bank
has leased approximately 3,735 square feet of ground floor office space and
approximately 8,256 square feet of eighth floor office space under a lease which
expires on February 28, 2003. The Bank has an option to extend the term of the
lease for an additional five years. The total monthly rental for the premises
is $29,400 for the period from March, 1993 through February, 1998, and $35,280
for the period from March, 1998 through February, 2003, subject to annual
adjustments for increases in property taxes and other operating costs.
Item 3. Legal Proceedings
--------------------------
Litigation
----------
The Bank is a party as plaintiff or defendant to a number of lawsuits that
have arisen in connection with the normal conduct of its banking business. It
is management's opinion, based upon advice of legal counsel, that none of the
pending litigation will have a materially adverse effect on the Company or the
Bank.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
During the fourth quarter of 1994, no matters were submitted to a vote of
the Company's shareholders.
32
PART II
-------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
-----------------------------------------------------------------------------
Securities Activity
-------------------
The common stock of First Regional Bancorp is traded on the over-the-
counter market through the National Association of Securities Dealers Automated
Quotation system (NASDAQ) under the trading symbol FRGB. The following table
summarizes the "bid" and "ask" quotations reported by NASDAQ of First Regional
Bancorp's common stock:
1994 1993
----------------------------- -----------------------------
Bid Ask Bid Ask
------------- ------------- ------------- -------------
1st Quarter 1 - 1 3/4 1 1/2 - 2 2 1/2 - 3 3 - 3 1/2
2nd Quarter 3/4 - 1 1 1/2 - 1 3/4 2 1/4 - 2 1/2 2 3/4 - 3 1/4
3rd Quarter 3/4 - 1 1/4 1 1/2 - 1 7/8 1 7/8 - 2 1/4 2 5/8 - 2 3/4
4th Quarter 1 1/4 - 2 1/4 1 7/8 - 2 3/4 1 3/4 - 2 2 - 2 5/8
Dividends
---------
The Company has not paid any cash dividends and it is the Company's Board
of Directors' intention that no cash dividends be declared by the Company during
this stage of the Company's development. The Board of Directors intends to
increase the Company's capital and to pay cash dividends only when it is prudent
to do so and the Company's performance justifies such action. As mentioned
earlier, the Company has entered into an agreement with the Federal Reserve Bank
which requires the Company to obtain Federal Reserve Bank approval prior to the
payment of cash dividends.
The Company is a legal entity separate and distinct from its subsidiaries,
and has not engaged in any activities other than acting as a holding company.
Accordingly, the Company's principal source of funds, including funds available
for payment of cash dividends to its shareholders, have and will consist of
dividends paid and other funds advanced to the Company by its subsidiaries. As
described below, statutory and regulatory requirements impose limitations on the
amounts of dividends payable by the Bank to the Company and on extensions of
credit by the Bank to the Company.
Holders of the Company's Common Stock are entitled to receive dividends as
and when declared by the Board of Directors out of funds legally available
therefor under the laws of the State of California. Under California law, the
Company would be prohibited from paying dividends unless: (1) its retained
earnings immediately prior to the dividend payment equals or exceeds the amount
of the dividend; or (2) immediately after giving effect to the dividend (i) the
sum of the Company's assets would be at least equal to 125%
33
of its liabilities, and (ii) the current assets of the Company would be at least
equal to its current liabilities, or, if the average of its earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of its interest expense for the two preceding fiscal
years, at least 125% of its current liabilities.
Prior to the consummation of the reorganization of the Bank, the Bank did
not pay any cash dividends to its shareholders. It is the Bank's Board of
Directors' current intention to retain most of the Bank's earnings to increase
its capital, although the Bank may pay cash dividends to the Company as its
current sole shareholder subject to regulation and when deemed prudent. The
Bank did not pay dividends in 1994, 1993, or 1992.
Restrictions on Transfer of Funds to the Company by the Bank
------------------------------------------------------------
The Company is a legal entity separate and distinct from the Bank. It is
anticipated that the Company may eventually receive sufficient income to fund
its operating expenses through the payment of management fees by its
subsidiaries. However, if the Company requires significant amounts of cash,
including funds available for the payment of dividends and extraordinary
operating expenses, such funds initially will be received as dividends paid by
the Bank. Subject to the regulatory restrictions described below, future cash
dividends by the Bank to the Company also will depend upon Management's
assessment of the Bank's future capital requirements, contractual restrictions
and other factors.
As mentioned earlier, the Bank has entered into a regulatory agreement with
the Federal Deposit Insurance Corporation which requires the Bank to obtain FDIC
approval prior to the payment of cash dividends.
In addition, there are statutory and regulatory limitations on the amount
of dividends which may be paid to the Company by the Bank. Under California
law, funds available for cash dividend payments by a bank are restricted to the
lesser of: (i) retained earnings or (ii) the bank's net income for its last
three fiscal years (less any distributions to shareholders made during such
period). Based on the foregoing requirements, as of December 31, 1994 the Bank
is restricted from paying any dividends. Cash dividends may also be paid out of
net income for a bank's last preceding fiscal year upon the prior approval of
the Superintendent of Banks, without regard to retained earnings or net income
for its last three fiscal years. If the Superintendent of Banks finds that the
shareholders' equity of a bank is not adequate or that the payment of a dividend
would be unsafe or unsound for the bank, the Superintendent may order the bank
not to pay any dividend to its shareholders.
Moreover, in a policy statement adopted in November, 1985, the Federal
Reserve Board advised banks and bank holding companies that payment of cash
dividends in excess of current earnings from operations is inappropriate and may
be cause for supervisory action. As a result of this new policy, banks and
their holding companies may find it difficult to pay dividends out of retained
earnings from historical periods prior to the most recent fiscal year or to take
advantage of earnings generated by extraordinary items such as sales of
buildings, other large assets, or business segments in order to generate profits
to enable payment of future dividends.
34
Under the Financial Institutions Supervisory Act, the FDIC also has
authority to prohibit a bank from engaging in business practices which the FDIC
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC could assert
that the payment of dividends or other payments might under some circumstances
be such an unsafe or unsound practice.
In addition, the Bank is subject to certain restrictions imposed by federal
law on any extensions of credit to the Company or other affiliates, investments
in stock or other securities thereof, and taking of such securities as
collateral for loans. Such restrictions prevent the Company and such other
affiliates from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts.
Item 6. Selected Financial Data
--------------------------------
The balances of selected balance sheet components as of December 31 of each
of the past five years were as follows:
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Total assets $124,287 $130,412 $143,822 $136,858 $119,493
Net loans 76,581 83,119 117,298 107,757 76,022
Investment securities 18,434 7,529 4,984 9,994 10,737
Funds sold 21,300 19,470 7,000 6,100 20,000
Total deposits 113,666 120,664 129,072 122,430 106,964
Shareholders' equity 10,222 9,226 13,385 12,033 11,317
Book value per share and $ 4.26 $ 3.85 $ 6.16 $ 5.42 $ 5.07
share equivalent
The Company's operating results are summarized as follows for the twelve-
month periods ending December 31 of each of the following years:
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(Dollars in Thousands except for per share)
Interest income $ 9,040 $ 9,872 $12,064 $12,249 $11,478
Interest expense 2,432 3,176 4,245 5,611 5,424
-------- -------- -------- -------- --------
Net interest income 6,608 6,696 7,819 6,638 6,054
Provision for loan losses 250 3,925 1,359 303 257
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 6,358 2,771 6,460 6,335 5,797
Other income 807 417 601 404 332
Other expense 6,162 7,862 5,770 5,701 4,847
-------- -------- -------- -------- --------
35
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
(Dollars in Thousands except for per share)
Income (loss) before taxes and
effects of accounting change 1,003 (4,674) 1,291 1,038 1,282
Provision (credit) for income
taxes 2 (417) 481 330 502
------- -------- ------- ------- -------
Income (loss) before effects of
accounting change 1,001 (4,257) 810 708 780
Effects of accounting change 0 98 0 0 327
------- ------- ------- ------- -------
Net income (loss) $ 1,001 $(4,159) $ 810 $ 708 $ 1,107
Net income (loss) per share $ 0.42 $ (1.73) $ 0.37 $ 0.32 $ 0.50
Cash dividends declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
The number of shares and share equivalents was 2,398,800 for 1994 and 1993,
2,173,000 for 1992, 2,223,000 for 1991, and 2,232,000 for 1990.
The summary information presented above should be read in conjunction with
the Notes to Consolidated Financial Statements, which accompany the Company's
financial statements as described below.
Item 7. Management's Discussion and Analysis of Financial
----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Summary
-------
First Regional Bancorp (the Company) has not conducted any significant business
activities independent of First Regional Bank (the Bank) since the
reorganization of the Bank on March 8, 1982. Therefore, the following
discussion and analysis relates primarily to the Bank.
The Company's 1994 results represent a significant improvement from the loss
incurred in 1993. The improved profitability was due to the successful sale or
collection of nonperforming loans, other real estate owned, and other nonearning
assets. This success led not only to an increase in revenue due to the
investment of the collected funds, but also eliminated the need for large loan
loss provisions or real estate writedowns. In addition, higher levels of
interest rates on assets coupled with generally stable deposit costs resulted in
stable net interest income despite some shrinkage in overall asset levels. By
comparison, the 1993 loss was largely the result of loan losses which gave rise
to sharply increased provisions to the reserve for loan losses, as well as large
writedowns of other real estate owned and a direct investment in real estate.
In addition, shrinkage in loans and other earning assets that year combined with
lower levels of interest rates resulted in reduced net interest income.
Average assets were $123,837,000 in 1994, compared to $143,919,000 in 1993, and
1992 average assets of $146,791,000. The lower 1994 asset levels are
36
principally due to a further reduction of time deposits from the prior year.
The changes in the 1993 asset level also reflects a reduction in total time
deposits which was partially offset by growth of the deposit relationship with
Transcorp Pension Services. The Company generated net income of $1,001,000 in
1994, in contrast to 1993 when a net loss of $4,159,000 was incurred, and
compared to net income for 1992 of $810,000.
Net Revenue From Earning Assets
-------------------------------
Net revenue from earning assets is the excess of interest income earned on
interest-earning assets over the interest expense incurred on interest-bearing
liabilities. In turn, the two components which determine interest income or
expense are the average volume of interest-bearing assets or liabilities, and
the average rate of interest earned or paid on those assets or liabilities. In
1994, total interest-earning assets dropped from the levels of 1993. Further,
there was a continued reduction in loans, the highest yielding category of
assets, with some modest growth occurring in lower yielding categories such as
investment securities and funds sold. In 1993, interest-earning assets fell
from the levels of the prior year, and in addition the composition of these
assets shifted from higher yielding categories (such as Loans) to lower yielding
components (such as Funds Sold). A partial cause of the 1993 reduction in
interest-earning assets was an increase in non-performing assets, which is
described more fully under "Provision for Losses," below. The result was a
lower level of interest revenue for that year. For 1992, by comparison, the
volume of interest-earning assets rose from the level of the prior year. This
growth, combined with general stability in loan interest rates, resulted in
higher interest income compared with the preceding year. As in the preceding
year, total interest bearing liabilities fell, as a substantial reduction in
time deposits was countered by a modest increase in money market accounts.
Because overall interest rates paid on deposits fell at the same time that
deposit levels were declining, a substantial reduction in interest expense was
experienced in 1994. Interest-bearing liabilities also fell modestly in 1993
compared to 1992, once again with a drop in Time Deposits being partially offset
by growth in Money Market Accounts. This liability reduction, coupled with the
generally lower interest rates which prevailed in 1993, led to a drop in
interest expense for the year. By way of comparison, 1992's modest asset growth
was mirrored in interest-bearing liabilities, although in this case lower
interest rates served to reduce interest expense.
Other Operating Income
----------------------
Other operating income rose substantially in 1994, in marked contrast to the
previous year. Other operating income fell in 1993, reversing the pattern of
recent years in which other operating income rose in 1992 compared to the prior
year. For 1994, other operating income totalled $807,000, compared to 1993's
Other operating income of $417,000, whereas in 1992 the total was $601,000. The
largest single reason for the revenue growth in 1994 was the receipt of $365,000
in rental income on real estate owned in the period prior to its eventual sale.
Higher customer service fees were also a factor in the revenue increase,
reflecting more vigorous assessment of existing service charge schedules. This
source of income fell slightly in 1993 after remaining stable in 1992. The
shrinkage in income for 1993 primarily was due to lower levels of gains on sale
of loans, which totalled $68,000 for the
37
year; in contrast, the growth in 1992 income in large measure reflected gains on
the sale of loans of $232,000; this source of income ceased to be significant in
1994, however, as loan sale gains dropped to just $11,000 for the year.
Provision for Losses
--------------------
The allowance for possible loan losses is intended to reflect the known and
unknown risks which are inherent in a loan portfolio. The adequacy of the
allowance for possible loan losses is continually evaluated in light of many
factors, including loan loss experience and current economic conditions. While
the recent economic recession in California, and in particular its impact on
real estate, has yet to give way to full recovery, its impact on the payment
performance of the Bank's borrowers appears to be moderating. More important,
during 1994 the Bank acted aggressively to collect or otherwise strengthen
nonperforming loans, and to liquidate other real estate owned. As a result,
non-performing assets (loans past due ninety days or more, loans on nonaccrual
status, and other real estate owned) totalled $4,025,000 at December 31,
1994, compared to $15,113,000 at the end of 1993, and $9,557,000 at the end of
1992. Management believes the allowance for possible loan losses as of December
31, 1994 was adequate in relation both to existing and potential risks in the
loan portfolio.
The allowance for possible loan losses is increased by provisions which are
charged to operating expense and is reduced by loan chargeoffs. Any subsequent
recoveries of charged off loans are added back into the allowance. Based on its
ongoing evaluation of loan risks, and reflecting the perceived impact of the
continued California recession on the Bank's borrowers, in 1994 the Bank made
loan loss provisions of $250,000, charged off a total of $1,303,000 in loans,
and recovered $193,000 on loans which had been previously charged off. By
comparison, the Bank made provisions of $3,925,000 to the loan loss reserve in
1993, while charging off loans totalling $4,153,000 and recovering $39,000 on
loans previously charged off. In 1992, by comparison, the Bank made provisions
of $635,000 to the allowance for possible loan losses, while charging off loans
or premiums totalling $577,000 and recovering a total of $118,000 in previously
charged off loans. These transactions brought the balance of the allowance for
possible loan losses at December 31, 1994 to $1,390,000 (or 1.8% of total loans)
compared to $2,250,000 (or 2.6% of total loans) at December 31, 1993.
Operating Expenses
------------------
Total operating expenses reversed the pattern of growth which had characterized
recent years, falling to $6,162,000 in 1994 after rising to $7,862,000 for 1993.
The comparable total for 1992 was $6,494,000. While the total expense figures
have fluctuated over time, many components continue to be moderated by the
effects of an ongoing program of expense control.
Continued control of staffing levels again caused salaries and related benefits
expense to fall, to $1,876,000 in 1994 from a 1993 total of $1,974,000 and
$2,070,000 in 1992. In 1993, the Bank renegotiated the lease governing its
banking premises, and as a result occupancy expense fell to $366,000 as the
first full year of benefits were realized. The revised lease terms did provide
some improvement in 1993, causing occupancy expense to fall
38
to $482,000. This was in contrast to prior years, in which the impact of cost-
of-living adjustments in the Bank's premises lease agreements caused occupancy
expense to rise to $686,000 in 1992. Reflecting the lessening impact of the
recession on the real estate industry and on property values, losses on sales of
real estate fell in 1994 to $515,000. While this level is still high, it is in
sharp contract to recent years in which real estate losses rose significantly,
to $2,099,000 in 1993 from $974,000 in 1992. The 1993 results also included
$707,000 in maintenance, sales, and other carrying costs and $275,000 in
writedowns of previously capitalized interest, and neither of these components
appeared in 1994 or 1992. Other expenses again rose, but at a much slower pace
than in previous years. For 1994, the other expense total was $3,405,000,
compared to a 1993 total of $3,307,000. For 1992, total other expenses were
$2,764,000. As in prior years, the major items which contributed to this
increase were custodial and other services provided to customers, which rose
from $958,000 in 1992 and $1,068,000 in 1993 to a 1994 total of $1,172,000 in
parallel with higher deposit balances of corporate depositors. Most of the
remaining categories of other expense fell slightly or at least remained stable
in 1994: professional services totalled $381,000 in 1994 versus $464,000 in
1993 and a 1992 total of $314,000; FDIC assessments, which fell to $339,000 in
1994 after rising to $354,000 in 1993 from $289,000 in 1992; and other expenses,
which rose to $936,000 for 1994 after a total of $714,000 in 1993 and a 1992
total of $647,000.
Taxes and Effects of Accounting Changes
---------------------------------------
The combined effects of the activity described above resulted in a Income Before
Taxes and Effects of Accounting Change of $1,003,000 in 1994. By comparison, a
Net Loss Before Taxes and Effects of Accounting Change of $4,674,000 was
experienced in 1993, compared to Income Before Taxes and Effects of Accounting
Change of $1,291,000 in 1992. Due to the carryforward of net operating losses
incurred in prior years, a tax provision of but $2,000 was required in 1994.
The 1993 loss resulted in a income tax benefit of $417,000 for the year. At the
end of 1993, the Company had a gross deferred tax asset, representing the
accumulated effects of timing differences between the Company's accounting
records and tax returns, of $1,360,000. Based on an analysis of the portion of
this asset which, more likely than not, will be utilized in the immediate
future, a valuation reserve for deferred income tax assets was established in
the amount of $1,027,000; this amount was netted against the anticipated refund
of previously paid income taxes in determining the income tax benefit for 1993.
For previous years, by comparison, higher income and an absence of tax benefits
led to increased provisions for income taxes, at $481,000 for 1992. In 1993,
the Company realized a gain of $98,000 representing the cumulative effects of a
required change in accounting principle; there were no corresponding items in
1994 or 1992. As a result, the Company generated Net Income of $1,001,000 in
1994, compared to a Net Loss of $4,159,000 in 1993, and Net Income of $810,000
in 1992.
Regulatory Matters
------------------
Following an examination of the Bank in 1992, the FDIC and the Bank entered into
a regulatory agreement under which the Bank agreed, among other things, to (a)
reduce the level of its classified assets in accordance with an
39
agreed-upon schedule, (b) maintain an adequate allowance for loan losses, (c)
maintain a leverage capital ratio of at least 7%, (d) develop written policies
in a number of areas, (e) obtain FDIC approval prior to the payment of cash
dividends or the replacement of any director or executive officer of the Bank,
and (f) furnish periodic progress reports to the FDIC. Primarily as a result of
the findings of the FDIC examination, the Federal Reserve Bank and the Company
entered into a Memorandum of Understanding (the "MOU") under which the Company
agreed to many of the same conditions contained in the Order, and also agreed
not to pay dividends or incur debt without the prior approval of the Federal
Reserve Bank.
The FDIC performed two followup examinations during which it was noted that the
Bank was in full compliance with most provisions of the Order, but that
compliance with certain other provisions had not yet been fully achieved. In
response, management and the Board undertook additional actions to address the
remaining areas of noncompliance with the Order, and management believes that
the Bank is now in full compliance with all provisions of the Order.
Failure to comply with the Order or the MOU or to meet required capital levels
could subject the Company and the Bank to additional regulatory sanctions.
Because of the success of the Bank and the Company in divesting itself of
classified assets in an orderly fashion, returning to profitability, and
otherwise complying with the Order and MOU, the regulatory agreements are not
expected to have a significant adverse impact on financial results.
Liquidity, Sources of Funds, and Capital Resources
--------------------------------------------------
The Bank continues to enjoy a liquid financial position. Total liquid assets
(cash and due from banks, investment securities, and federal funds sold) totaled
$44,411,000 and $30,500,000 (or 39.1% and 25.3% of total deposits) at December
31, 1994 and 1993, respectively. In addition, at December 31, 1994
approximately $23 million of the Bank's total loans represented government
guaranteed loans which represent a significant source of liquidity due to the
active secondary market which exists for these assets; the comparable figure at
the end of 1993 was $25 million. Deposits associated with Transcorp Pension
Services, a corporate customer of the Bank, represented approximately 63% of the
Bank's total deposits as of December 31, 1994, and in recognition of this the
Bank has maintained a large portion of its assets in liquid form from the
inception of the Transcorp relationship. The ratio of net loans to deposits was
67.4% and 68.9% at the end of 1994 and 1993, respectively.
The Bank's management has attempted to match the rates and maturities of its
interest-bearing assets and liabilities as part of its liquidity and asset and
liability management policy. The objective of this policy is to moderate the
fluctuations of net interest revenue which result from changes in the level of
interest rates. The table which follows indicates the repricing or maturity
characteristics of the major categories of the Bank's assets and liabilities,
and thus the relative sensitivity of the Bank's net interest income to changes
in the overall level of interest rates. A positive "gap" for a period indicates
that an upward or downward movement in the level of interest rates would have a
corresponding change in net interest income, while a negative "gap" implies that
an interest rate movement would result in an inverse change in net interest
income.
40
One month Six months One year Non-interest
Floating Less than but less than but less than but less than Five years earning
Category Rate one month six months one year five years or more or bearing Total
-------- --------- --------- ------------- ------------- ------------- ---------- ------------ -----
Fed funds sold 21,300 0 0 0 0 0 0 21,300
Time deposits with other banks 0 1,982 4,645 0 0 0 0 6,627
Investment securities 0 0 11,782 0 25 0 0 11,807
Subtotal 21,300 1,982 16,427 0 25 0 0 39,734
Loans 76,436 0 45 100 0 0 0 76,581
Total earning assets 97,736 1,982 16,472 100 25 0 0 116,315
Cash and due from banks 0 0 0 0 0 0 4,677 4,677
Premises and equipment 0 0 0 0 0 0 166 166
Other real estate owned 0 0 0 0 0 0 1,163 1,163
Other assets 0 0 0 0 0 0 1,966 1,966
Total non-earning assets 0 0 0 0 0 0 7,972 7,972
Total assets 97,736 1,982 16,472 100 25 0 7,972 124,287
Funds purchased 0 0 0 0 0 0 0 0
Repurchase agreements 0 0 0 0 0 0 0 0
Subtotal 0 0 0 0 0 0 0 0
Savings deposits 5,147 0 0 0 0 0 0 5,147
Money market deposits 78,295 0 0 0 0 0 0 78,295
Time deposits 0 6,734 3,744 931 38 0 0 11,447
Total bearing liabilities 83,442 6,734 3,744 931 38 0 0 94,889
Demand deposits 0 0 0 0 0 0 18,777 18,777
Other liabilities 0 0 0 0 0 0 399 399
Equity capital 0 0 0 0 0 0 10,222 10,222
Total non-bearing liabilities 0 0 0 0 0 0 29,398 29,398
Total liabilities 83,442 6,734 3,744 931 38 0 29,398 124,287
GAP 14,294 (4,752) 12,728 (831) (13) 0 (21,426) 0
Cumulative GAP 14,294 9,542 22,270 21,439 21,426 21,426 0 0
As the table indicates, the vast majority of the Company's assets are either
floating rate or, if fixed rate, have extremely 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. For this reason, realized
or unrealized gains or losses are not expected to have any significant impact on
the Company's future operating results or liquidity.
Reflecting its return to profitability, the Company continues to maintain a
strong and prudent capital position. Total shareholders' equity was $10,222,000
and $9,226,000 as of December 31, 1994 and 1993, respectively. The Company's
capital ratios for those dates in comparison with regulatory capital
requirements were as follows:
41
12-31-94 12-31-93
-------- --------
Leverage Ratio (Tier I Capital
to Assets:
First Regional Bancorp 8.08% 7.01%
Regulatory requirement 4.00% 4.00%
The "regulatory requirement" listed represents the level of capital required for
Adequately Capitalized status. Under the terms of an agreement entered into
with bank regulators, the Bank is required to meet a leverage capital ratio
requirement (7.00%) in excess of the regulatory requirement listed. As the
table indicates, the Bank is in full compliance with the regulatory agreement.
In addition, bank regulators have issued new risk-adjusted capital guidelines
which assign risk weighting to assets and off-balance sheet items and place
increased emphasis on common equity. The Company's risk adjusted capital ratios
for the dates listed in comparison with the risk adjusted capital requirements
were as follows:
12-31-94 12-31-93
-------- --------
Tier I Capital to Assets:
First Regional Bancorp 14.94% 11.28%
Regulatory requirement 4.00% 4.00%
Tier I + Tier II Capital to Assets:
First Regional Bancorp 16.20% 12.65%
Regulatory requirement 8.00% 8.00%
The Company believes that it will continue to meet all applicable capital
standards.
Inflation
---------
The impact of inflation on the Company differs significantly from other
industries, since virtually all of its assets and liabilities are monetary.
During periods of inflation, companies with net monetary assets will always
experience a reduction in purchasing power. Inflation continues to have an
impact on salary, supply, and occupancy expenses, but the rate of inflation in
general and its impact on these expenses in particular has remained moderate in
recent years.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K" below for financial statements filed as part of this report.
Item 9. Disagreements on Accounting and Financial Disclosure
-------------------------------------------------------------
The Company has not reported a disagreement with its existing or previous
accountants on any matter of accounting principle or practice on financial
statement disclosure.
42
PART III
--------
Item 10. Directors and Executive Officers of Registrant
--------------------------------------------------------
The information pertaining to directors which is required by this item will
be included in the definitive proxy statement to be filed by the Company within
120 days of fiscal year end pursuant to Section 14 of the Act. Such information
is hereby incorporated by reference in accordance with Rule G of the General
Instructions to the Annual Report on Form 10-K.
Item 11. Executive Compensation
--------------------------------
The information required by this item will be included in the definitive
proxy statement to be filed by the Company within 120 days of fiscal year end
pursuant to Section 14 of the Act. Such information is hereby incorporated by
reference in accordance with Rule G of the General Instructions to the Annual
Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
The information required by this item will be included in the definitive
proxy statement to be filed by the Company within 120 days of fiscal year end
pursuant to Section 14 of the Act. Such information is hereby incorporated by
reference in accordance with Rule G of the General Instructions to the Annual
Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item will be included in the definitive
proxy statement to be filed by the Company within 120 days of fiscal year end
pursuant to Section 14 of the Act. Such information is hereby incorporated by
reference in accordance with Rule G of the General Instructions to the Annual
Report on Form 10-K.
43
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports
--------------------------------------------------------------
on Form 8-K
-----------
List of Documents filed as a part of this report:
(a) Financial Statements and Financial Statement Schedules
See Index to Financial Statements which is part of this Form 10-K.
(b) Exhibits
See Index to Exhibits which is part of this Form 10-K
(Exhibits are listed by numbers corresponding to the Exhibit Table in Item
601 of Regulation S-K)
(c) Reports on Form 8-K
No Form 8-K reports were filed by the Company during the fourth quarter of
1994.
44
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Jack A. Sweeney
--------------------------------------
Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: March 23, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Jack A. Sweeney Director, Chairman March 23, 1995
----------------------- of the Board and Chief
Jack A. Sweeney Executive Officer
/s/ Mark Rubin Director, Vice Chairman March 23, 1995
----------------------- of the Board, and
Mark Rubin President
/s/ Alexander S. Lowy Director March 23, 1995
-----------------------
Alexander S. Lowy
/s/ Frank R. Moothart Director March 23, 1995
---------------------
Frank R. Moothart
/s/ Lawrence Sherman Director March 23, 1995
---------------------
Lawrence J. Sherman
/s/ Steven J. Sweeney Director March 23, 1994
---------------------
Steven J. Sweeney
/s/ Thomas McCullough Director, Chief March 23, 1995
--------------------- Financial Officer and
Thomas E. McCullough Chief Accounting
Officer
45
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Financial Statements Page in Form 10-K
-------------------- -----------------
First Regional Bancorp and Subsidiary:
Report of Independent Accountants......... 47
Consolidated Balance Sheets as of
December 31, 1994 and 1993................ 48
Consolidated Statements of Income for
the years ended December 31, 1994, 1993,
and 1992.................................. 49
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1994,
1993, and 1992............................ 51
Consolidated Statements of Cash Flows for
the years ended December 31, 1994, 1993,
and 1992.................................. 52
Notes to Consolidated Financial Statements 54
First Regional Bancorp (Parent Company):
Note 13 to Consolidated Financial
Statements................................ 65
All other financial statement schedules are omitted because they are not
applicable, not material or because the information is included in the financial
statements or the notes.
46
DELOITTE &
TOUCHE LLP
LOGO
--------------------------------------------------------------------------------
FIRST REGIONAL BANCORP AND
SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1994 AND 1993 AND FOR
EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1994 AND
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
Deloitte Touche
Tohmatsu
International
47
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
First Regional Bancorp and Subsidiary
Century City, California:
We have audited the accompanying consolidated balance sheets of First Regional
Bancorp and subsidiary (the "Company") as of December 31, 1994 and 1993, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Regional Bancorp and its
subsidiary as of December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investment securities in 1994.
Furthermore, the Company had adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," in 1993.
As discussed in Note 14 to the consolidated financial statements, the Company
and First Regional Bank have entered into regulatory agreements which prescribed
that certain actions be taken.
/s/ Deloitte & Touche LLP
Los Angeles, California
February 2, 1995
48
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
--------------------------------------------------------------------------------
ASSETS 1994 1993
Cash and due from banks (Note 7) $ 4,677,000 $ 3,501,000
Federal funds sold 21,300,000 19,470,000
--------------- --------------
Cash and cash equivalents 25,977,000 22,971,000
Investment securities available for sale, at fair value (Note 2) 11,807,000
Investment securities held for investment, at cost (Note 2) 1,021,000
Interest-bearing deposits in financial institutions 6,627,000 6,508,000
Loans, net (Note 3) 53,729,000 58,231,000
Government guaranteed loans (Note 3) 22,852,000 24,888,000
Government guaranteed loans held for sale, at lower of
cost or market, market value of $3,348,000 (Note 3) 3,334,000
Premises and equipment, net (Note 4) 166,000 133,000
Other real estate owned, net (Note 5) 1,163,000 9,785,000
Accrued interest receivable and other assets (Note 6) 1,640,000 3,218,000
Deferred income tax asset, net (Note 6) 326,000 323,000
--------------- --------------
TOTAL $ 124,287,000 $ 130,412,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 9 and 12):
Noninterest bearing $ 18,777,000 $ 16,174,000
Interest bearing:
Time deposits 11,447,000 16,684,000
Money market deposits 78,295,000 82,067,000
Other 5,147,000 5,739,000
--------------- -------------
Total deposits 113,666,000 120,664,000
Accrued interest payable and other liabilities 399,000 522,000
--------------- -------------
Total liabilities 114,065,000 121,186,000
--------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7)
SHAREHOLDERS' EQUITY (Notes 8 and 14):
Common stock, no par value; authorized - 50,000,000 shares;
outstanding - 2,399,000 shares 11,332,000 11,332,000
Accumulated deficit (1,105,000) (2,106,000)
Net unrealized loss on securities available for sale, net of tax (Note 1) (5,000)
--------------- --------------
Total shareholders' equity 10,222,000 9,226,000
--------------- --------------
TOTAL $ 124,287,000 $ 130,412,000
=============== ==============
See notes to consolidated financial statements.
49
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
--------------------------------------------------------------------------------
1994 1993 1992
INTEREST INCOME:
Interest on loans $7,662,000 $9,215,000 $11,385,000
Interest on deposits in financial institutions 315,000 135,000 56,000
Interest on federal funds sold 670,000 341,000 293,000
Interest on investment securities 393,000 181,000 330,000
---------- ---------- -----------
Total interest income 9,040,000 9,872,000 12,064,000
---------- ---------- -----------
INTEREST EXPENSE:
Interest on deposits (Notes 9 and 12) 2,432,000 3,156,000 4,198,000
Interest on other borrowings 20,000 47,000
---------- ---------- -----------
Total interest expense 2,432,000 3,176,000 4,245,000
---------- ---------- -----------
NET INTEREST INCOME 6,608,000 6,696,000 7,819,000
PROVISION FOR LOAN LOSSES (Note 3) 250,000 3,925,000 635,000
---------- ---------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,358,000 2,771,000 7,184,000
---------- ---------- -----------
OTHER OPERATING INCOME (Note 10) 807,000 417,000 601,000
---------- ---------- -----------
OTHER OPERATING EXPENSES:
Salaries and related benefits (Note 7) 1,876,000 1,974,000 2,070,000
Occupancy expenses (Note 4) 366,000 482,000 686,000
Real estate losses (Note 5) 515,000 2,099,000 974,000
Other expenses (Note 11) 3,405,000 3,307,000 2,764,000
---------- ---------- -----------
Total operating expenses 6,162,000 7,862,000 6,494,000
---------- ---------- -----------
See notes to consolidated financial statements.
(Continued)
50
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
--------------------------------------------------------------------------------
1994 1993 1992
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ 1,003,000 $ (4,674,000) $ 1,291,000
PROVISION FOR INCOME TAXES
(BENEFIT) (Note 6) 2,000 (417,000) 481,000
------------- ------------- -----------
INCOME (LOSS) AFTER INCOME TAXES
AND BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 1,001,000 (4,257,000) 810,000
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Notes 1 and 6) 98,000
------------- ------------- -----------
NET INCOME (LOSS) $ 1,001,000 $ (4,159,000) $ 810,000
============= ============= ===========
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 1):
Income (loss) before cumulative effect of
change in accounting principle $ 0.42 $ (1.77) $ 0.37
Cumulative effect of change in accounting
principle 0.04
------------- ------------- -----------
TOTAL $ 0.42 $ (1.73) $ 0.37
============= ============= ===========
See notes to consolidated financial statements.
(Concluded)
51
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
--------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
Retained Securities
Shares Earnings Available
Outstanding Amount (Deficit) for Sale Total
BALANCE, JANUARY 1,
1992 2,158,000 $10,790,000 $ 1,243,000 $12,033,000
Exercise of stock options 241,000 542,000 542,000
Net income for year 1992 810,000 810,000
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1992 2,399,000 11,332,000 2,053,000 13,385,000
Net loss for year 1993 (4,159,000) (4,159,000)
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1993 2,399,000 11,332,000 (2,106,000) 9,226,000
Unrealized loss on securities
available for sale, net of tax $(5,000) (5,000)
Net income for year 1994 1,001,000 1,001,000
--------- ----------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1994 2,399,000 $11,332,000 $(1,105,000) $(5,000) $10,222,000
========= =========== =========== ======= ===========
See notes to consolidated financial statements.
52
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
--------------------------------------------------------------------------------
1994 1993 1992
OPERATING ACTIVITIES:
Net income (loss) $1,001,000 $(4,159,000) $ 810,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for losses on loans 250,000 3,925,000 635,000
Provision for losses on real estate 130,000 1,392,000 974,000
Provision for depreciation 58,000 140,000 111,000
Gain on sale of investment securities, net (6,000)
Gain on sale of real estate (21,000)
(Accretion) amortization of investment securities
premiums and discounts, net (257,000) 35,000 (2,000)
Gain on sale of loans (11,000) (68,000) (232,000)
Amortization of loan premiums, net 519,000 346,000 105,000
Loss on disposal of fixed assets 6,000
Decrease (increase) in interest receivable 79,000 274,000 (157,000)
Increase in interest payable 80,000 8,000
Net change in other liabilities and assets (141,000) (35,000) (37,000)
Deferred income taxes (benefit) 1,007,000 (404,000)
Change in current income taxes payable/receivable 1,513,000 (1,619,000) (421,000)
---------- ----------- -----------
Net cash provided by operating activities 3,141,000 1,303,000 1,384,000
---------- ----------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in other
financial institutions (119,000) (3,555,000)
Net decrease (increase) in loans 11,918,000 5,884,000 (34,755,000)
Proceeds from sale of loans 2,897,000 11,359,000 19,779,000
Purchases of investment securities (23,537,000) (44,325,000) (49,189,000)
Proceeds from maturities of investment securities 13,000,000 45,300,000 54,050,000
Proceeds from sales of investment securities 156,000
Purchases of premises and equipment (91,000) (11,000) (37,000)
Purchase of majority interest on other real estate
owned (100,000)
Net decrease in investment in real estate 298,000 489,000
Proceeds from sale of other real estate owned 2,593,000 4,312,000
---------- ----------- -----------
Net cash provided by (used in)
investing activities 6,859,000 18,964,000 (9,507,000)
---------- ----------- -----------
See notes to consolidated financial statements.
(Continued)
53
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
--------------------------------------------------------------------------------
1994 1993 1992
FINANCING ACTIVITIES:
Net (decrease) increase in time deposits $(5,237,000) $(16,013,000) $ 5,316,000
Net (decrease) increase in noninterest-bearing
deposits and other interest-bearing deposits (1,761,000) 7,605,000 1,326,000
Increase (decrease) in short-term borrowed funds 4,000 (923,000) (593,000)
Issuance of common stock 542,000
----------- ------------ -----------
Net cash (used in) provided by financing
activities (6,994,000) (9,331,000) 6,591,000
----------- ------------ -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,006,000 10,936,000 (1,532,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 22,971,000 12,035,000 13,567,000
----------- ------------ -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $25,977,000 $ 22,971,000 $12,035,000
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH TRANSACTIONS:
Acquisition of other real estate owned through
foreclosure $ 1,289,000 $ 11,516,000 $ 2,561,000
Net transfer of loans (from) to loans held for sale $ (448,000) $ 13,138,000 $ 1,487,000
Loans to facilitate sale of other real estate owned $ 6,990,000
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 2,431,000 $ 3,096,000 $ 4,253,000
Income taxes paid $ 1,600 $ 340,000 $ 1,306,000
See notes to consolidated financial statements.
(Concluded)
54
FIRST REGIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Regional Bancorp, a bank holding
company (the "Company"), and its subsidiary, First Regional Bank, a California
state-chartered bank (the "Bank"), conform with generally accepted accounting
principles and general practices within the banking industry. The following are
descriptions of the more significant of these policies:
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the Bank. All significant intercompany transactions
and accounts have been eliminated.
Investment Securities - On January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Debt
and Equity Securities." The effect of adoption was not material to the
Company's financial position. In accordance with provisions of the new
standard, the Company reclassified all of its investment securities as available
for sale. Securities were previously classified as held for investment.
Investment securities available for sale are reported in the accompanying
consolidated balance sheets at fair value, and the net unrealized gain or loss
on such securities (unless other than temporary) is reported as a separate
component of shareholders' equity. Premiums and discounts on debt securities
are amortized or accreted as adjustments to interest income using the level-
yield method. Realized gains and losses on sales of securities are determined
on a specific identification basis and reported in earnings. Investment
securities classified as held for investment prior to adoption of SFAS No. 115
were reported at amortized cost.
Loans - Loans are carried at face amount less payments collected, unearned fees
and allowances for loan losses. Interest on loans is accrued monthly on a
simple interest basis. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions and
collection efforts, that the borrowers' financial condition is such that
collection of interest is doubtful. Loan origination fees and commitment fees,
net of related costs, are deferred and recognized over the contractual life of
the loan as a yield adjustment.
Premiums on purchases of government guaranteed loans are amortized on a level
yield method over the estimated lives of the loans, considering prepayments.
Loans are classified as held for sale when a decision is made to sell them.
Loans held for sale are carried at the lower of cost or market value.
Unrealized losses, if any, are charged to current income.
The allowance for loan losses is maintained at a level considered adequate by
management to provide for losses that might be reasonably anticipated. The
allowance is increased by provisions charged to earnings and reduced by net
charge-offs. Management's estimates of the allowance for loan losses are
inherently uncertain and depend on the outcome of future events. Such estimates
are based on previous loan loss experience; current economic conditions; volume,
growth, and composition of the loan portfolio; the value of collateral and other
relevant factors.
55
Other Real Estate Owned - Other real estate owned is carried at the lower of
cost or fair value. Reductions in value at the time of foreclosure are charged
against the allowance for loan losses. Allowances are recorded to provide for
estimated declines in fair value and costs to sell subsequent to the date of
acquisition.
Premises and Equipment - Premises and equipment are carried at cost, less
accumulated depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets, which range
from 5 to 15 years. Amortization is computed on the straight-line method over
the estimated useful lives of the leasehold improvements or the term of the
lease, whichever is shorter.
Income Taxes - In 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes." Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A deferred tax asset is
recorded to the extent that management believes it is more likely than not to be
realized. A valuation allowance is recognized for the remaining portion of the
deferred tax asset.
Earnings per Share - The earnings per common and common equivalent share
information was computed based on 2,399,000 shares outstanding in 1994 and 1993,
and 2,173,000 shares, including common stock equivalents of 2,500 shares,
outstanding in 1992.
Cash and Cash Equivalents - Cash and cash equivalents include cash and due from
banks and federal funds sold. Generally, federal funds are sold for one-day
periods.
New Accounting Pronouncements - In 1995, the Company will be required to comply
with the provisions of several new accounting pronouncements: SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," and
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments."
Concerning the requirements of SFAS No. 107, the fair values of certain
financial instruments held by the Company, such as investment securities, are
disclosed in the following notes to the consolidated financial statements. Fair
values of other financial instruments, such as loans and interest-bearing
deposits, may differ from carrying amounts recorded in the accompanying balance
sheets but have not been determined by the Company and are not currently
disclosed. Concerning the requirements of SFAS No. 119, the Company has no
derivative financial instruments for which disclosures are required, except
certain commitments to lend that are appropriately disclosed in Note 7 under
requirements of other accounting standards. SFAS No. 114, as amended by SFAS
No. 118, applies to the accounting by creditors for impairment of loans,
including loans that are restructured in a troubled debt restructuring. A loan
is impaired when it is probable that a creditor will be unable to collect all
amounts due (principal and interest) according to the contractual terms of the
loan agreement. SFAS No. 114 requires that impairment be measured based on the
present value of the expected future cash flows of an impaired restructured
loan, which are to be discounted at the loan's effective interest rate, or be
measured by reference to an observable market price, if one exists, or the fair
value of the collateral for a collateral-
56
dependent loan. The effective interest rate is the contractual interest rate
adjusted for any deferred loan fees, premiums or discounts that existed at the
time the loan was originated or acquired. Creditors may select the measurement
method on a loan-by-loan basis, except that collateral-dependent loans for which
foreclosure is probable must be measured at the fair value of the collateral.
The adoption of SFAS No. 114 is not expected to have a material effect on the
Company's financial position.
Reclassifications - Certain amounts in the 1993 and 1992 financial statements
have been reclassified to be comparable with the classification used in the 1994
financial statements.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale as
of December 31, 1994 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities $11,790,000 $ - $8,000 $11,782,000
Other securities 25,000 25,000
----------- ------ ------ -----------
$11,815,000 $ - $8,000 $11,807,000
=========== ====== ====== ===========
The amortized cost and estimated fair values of securities held for investment
as of December 31, 1993 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities $ 996,000 $ - $ - $ 996,000
Other securities 25,000 25,000
----------- ------ ------ -----------
$ 1,021,000 $ - $ - $ 1,021,000
=========== ====== ====== ===========
All debt securities held at December 31, 1994 mature within one year, except one
$25,000 security maturing in 1998.
Securities carried at $1,400,000 and $600,000 were pledged as of December 31,
1994 and 1993, respectively, to secure current or future public deposits and for
other purposes required or permitted by law.
There were no sales of debt securities in the years ended December 31, 1994 and
1993. Proceeds from the sale of debt securities, gross realized gains and gross
realized losses for the year ended December 31, 1992 were $156,000, $6,000 and
$0, respectively.
57
3. LOANS
The loan portfolio consisted of the following at December 31, 1994 and 1993:
1994 1993
Real estate loans $44,842,000 $35,443,000
Commercial loans 5,797,000 12,467,000
Real estate construction loans 4,354,000 11,207,000
Other loans 616,000 1,490,000
Equity lines 390,000
----------- -----------
55,609,000 60,997,000
Allowance for loan losses (1,390,000) (2,250,000)
Deferred loan fees, net (490,000) (516,000)
----------- -----------
Loans, net $53,729,000 $58,231,000
=========== ===========
Government guaranteed loans, including premiums
on loans of $1,463,000 and $1,889,000 at
December 31, 1994 and 1993, respectively $22,852,000 $24,888,000
=========== ===========
Loans held for sale -
Government guaranteed loans $ - $ 3,334,000
=========== ===========
An analysis of the activity in the allowance for loan losses for the years ended
December 31, 1994, 1993 and 1992 is as follows:
1994 1993 1992
Balance, beginning of year $ 2,250,000 $ 2,439,000 $1,900,000
Provision for loan losses 250,000 3,925,000 635,000
Loans charged off (1,303,000) (4,153,000) (214,000)
Recoveries on loans previously
charged off 193,000 39,000 118,000
----------- ----------- ----------
Balance, end of year $ 1,390,000 $ 2,250,000 $2,439,000
=========== =========== ==========
The Bank's lending is concentrated in real estate in Southern California, which
has recently experienced adverse economic conditions, including declining real
estate values. These factors have adversely affected borrowers' ability to
repay loans. Although management believes the allowance for loan losses as of
December 31, 1994 is adequate to absorb losses inherent in the loan portfolio,
rising interest rates and/or additional decline in the local economy or in real
estate values may result in increased losses that cannot reasonably be predicted
at this date. Management's estimates of the allowance are subject to potential
adjustment by the Federal Deposit Insurance Corporation (the "FDIC") and the
California State Banking Department upon subsequent examination of the Bank by
such authorities.
Nonaccrual loans and yearly foregone interest totaled $1,389,000 and $255,000,
respectively, at December 31, 1994 and $3,303,000 and $209,000, respectively, at
December 31, 1993.
58
Government guaranteed loans represent loans for which the repayment of principal
and interest is guaranteed by the U.S. government. Those loans are secured by
real estate and are due in amortizing installments over periods of up to 40
years. The loans bear contractual interest at various rates above national
prime lending rates and were generally purchased at premiums.
In the ordinary course of business, the Bank grants loans to its directors and
executive officers. Following is a summary of such loans for the years ended
December 31, 1994 and 1993:
1994 1993
Balance, beginning of year $208,000 $ 527,000
Loans granted or renewed 70,000 308,000
Repayments (40,000) (627,000)
-------- ---------
Balance, end of year $238,000 $ 208,000
======== =========
4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 1994 and
1993:
1994 1993
Furniture, fixtures and equipment $ 1,429,000 $ 1,338,000
Leasehold improvements 518,000 518,000
----------- -----------
1,947,000 1,856,000
Accumulated depreciation and amorization (1,781,000) (1,723,000)
----------- -----------
Premises and equipment, net $ 166,000 $ 133,000
=========== ===========
Rental expense for premises included in occupancy expenses for 1994, 1993 and
1992 was approximately $348,000, $392,000 and $622,000, respectively.
The future minimum rental commitments, primarily representing noncancelable
operating leases for premises, were as follows at December 31, 1994, excluding
the effect of future cost-of-living increases provided for in the leases,
deferred lease concessions, and net of sublease income:
Minimum Rental
Commitments
1995 $ 352,800
1996 352,800
1997 352,800
1998 411,600
1999 423,360
Thereafter 1,340,640
----------
Total $3,234,000
==========
59
At the end of 1994, the Bank had elected to apply the unused tenant improvement
allowance of $224,000 against its future lease payments. Payment of the
allowance will be made to the Bank over a 15-month period beginning February 1,
1995. Management intends to defer recognition of the amount and amortize it
evenly over the lease term, which expires in February 2003.
5. OTHER REAL ESTATE OWNED
Other real estate owned consists of the following at December 31, 1994 and 1993:
1994 1993
Properties acquired through foreclosure $ 978,000 $ 9,440,000
Investment in real estate 397,000 695,000
---------- -----------
1,375,000 10,135,000
Allowance for real estate losses (212,000) (350,000)
---------- -----------
Other real estate owned, net $1,163,000 $ 9,785,000
========== ===========
The investment in real estate was originated as an acquisition and development
loan secured by land. The Bank has a limited partnership interest in the real
estate venture.
Real estate losses of $515,000, $2,099,000 and $974,000 in the consolidated
statements of operations for the years ended December 31, 1994, 1993 and 1992,
respectively, consist of:
1994 1993 1992
Direct write-downs and provisions for
losses on real estate $130,000 $1,117,000 $974,000
Real estate expenses, net 385,000 707,000
Charge-off of capitalized interest 275,000
-------- ---------- --------
Real estate losses $515,000 $2,099,000 $974,000
======== ========== ========
6. INCOME TAXES
In 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The
cumulative effect of the adoption of SFAS No. 109 reduced net loss by $98,000
and is reported separately in the statement of operations.
60
Income tax expense (benefit) for the years ended December 31, 1994, 1993 and
1992, net of valuation adjustments, consists of the following:
1994 1993 1992
Current provision (benefit):
Federal $(1,328,000) $ 617,000
State $2,000 2,000 268,000
------ ----------- ---------
2,000 (1,326,000) 885,000
------ ----------- ---------
Deferred provision (benefit):
Federal 751,000 (312,000)
State 158,000 (92,000)
------ ----------- ---------
909,000 (404,000)
Total ------ ----------- ---------
$2,000 $ (417,000) $ 481,000
====== =========== =========
Income tax assets (liabilities) consisted of the following at December 31, 1994
and 1993:
1994 1993
Income taxes currently receivable
(payable), included in other assets:
Federal $ 40,000 $ 1,500,000
State 66,000 119,000
----------- -----------
106,000 1,619,000
----------- -----------
Deferred income tax asset (liability):
Federal 783,000 777,000
State 739,000 573,000
Valuation allowance (1,196,000) (1,027,000)
----------- -----------
326,000 323,000
----------- -----------
Total $ 432,000 $ 1,942,000
=========== ===========
61
The components of the net deferred income tax asset at December 31 are
summarized as follows:
1994 1993
Federal
Deferred tax liabilities:
Prepaid expenses $ (26,000) $ (32,000)
Other (646,000) (196,000)
----------- -----------
Gross liabilities (672,000) (228,000)
----------- -----------
Deferred tax assets:
Loan and real estate loss allowances 328,000 680,000
Deferred compensation 71,000 55,000
Depreciation 15,000 19,000
Federal net operating loss carryforward 490,000 168,000
State franchise tax 1,000 1,000
Tax credits 337,000
Unrealized loss on securities 3,000
Other 210,000 82,000
----------- -----------
Gross assets 1,455,000 1,005,000
----------- -----------
Net deferred tax asset - federal 783,000 777,000
----------- -----------
State
Deferred tax liabilities:
Prepaid expenses (9,000) (10,000)
Other (3,000) (1,000)
----------- -----------
Gross liabilities (12,000) (11,000)
----------- -----------
Deferred tax assets:
Loan and real estate loss allowances 595,000 247,000
Deferred compensation 24,000 19,000
State net operating loss carryforward 61,000 288,000
Depreciation 1,000 4,000
Other 70,000 26,000
----------- -----------
Gross assets 751,000 584,000
----------- -----------
Net deferred tax asset - state 739,000 573,000
----------- -----------
Net deferred tax asset before valuation
allowance 1,522,000 1,350,000
Valuation allowance (1,196,000) (1,027,000)
----------- -----------
Net deferred tax asset $ 326,000 $ 323,000
=========== ===========
62
The provision for income taxes (benefit) for the years ended December 31, 1994,
1993 and 1992 varied from the federal statutory tax rate for the following
reasons:
1994 1993 1992
-------------------- ---------------------- ------------------
Amount Rate Amount Rate Amount Rate
Tax expense (benefit)
at statutory rate $ 351,000 35.0 % $(1,636,000) 35.0 % $439,000 34.0 %
State franchise taxes
net of federal
income tax benefit 1,000 0.1 99,000 (2.1) 116,000 9.0
Valuation allowance 169,000 17.0 1,027,000 (22.0)
Dividend received
deduction (57,000) (4.4)
Tax credits resulting
from loss carryback (511,000) (51.5)
Other, net (8,000) (0.4) 93,000 (2.0) (17,000) (1.3)
--------- ----- ----------- ----- -------- ----
Total $ 2,000 0.2 % $ (417,000) 8.9 % $481,000 37.3 %
========= ===== =========== ===== ======== ====
As of December 31, 1994, the Company has net operating loss carryforwards, for
federal income tax purposes and state income tax purposes, of approximately
$2,368,000 and $1,441,000, respectively, expiring in 2008 and 1998,
respectively. Under current California tax law, only 50% of the net operating
loss may be carried forward, while no carryback is allowed.
7. COMMITMENTS AND CONTINGENCIES
As of December 31, 1994, the Bank had the following commitments and contingent
liabilities:
Undisbursed loans $3,825,000
Standby letters of credit 300,000
Lines of credit 276,000
The Bank uses the same standards of credit underwriting in entering into these
commitments to extend credit and, therefore, does not anticipate any losses as a
result of these transactions. Also, commitments may expire unused, and
consequently the above amounts do not necessarily represent future cash
requirements. The majority of the commitments above carry variable interest
rates.
The Bank sponsors a defined contribution 401(k) plan benefiting substantially
all employees. At the discretion of the Board of Directors, the Bank matches
employee contributions. Currently, the Bank provides 25% matching on the first
3% of wages contributed by an employee, and 75% matching on the next 3% of wages
contributed by an employee. Bank contributions are used to buy the Bank's
common stock on the open market for allocation to the employees' accounts in the
plan. The Bank contributed approximately $18,000, $16,000 and $17,000 for the
years ended December 31, 1994, 1993 and 1992, respectively.
63
As of December 31, 1994, the Bank had unused lines of credit with other
depository institutions of $5,500,000.
Regulations of the Federal Reserve Board require depository institutions to
maintain a portion of their deposits in the form of either cash or deposits with
the Federal Reserve Bank that are noninterest bearing and which are not
available for investment purposes. The average Federal Reserve balances
required to be maintained to meet these requirements were approximately $153,000
and $253,000 at December 31, 1994 and 1993, respectively.
In the normal course of business, the Company and the Bank are involved in
litigation. Management does not expect the ultimate outcome of any pending
litigation to have a material effect on the Company's financial position or
results of operations.
8. SHAREHOLDERS' EQUITY
The Federal Reserve Bank and the Federal Deposit Insurance Corporation ("FDIC")
require minimum capital adequacy ratios and minimum leverage for the Company and
the Bank, respectively. Following is a table showing the minimum capital ratios
required for the Bank and the Bank's actual capital ratios at December 31, 1994
(the Company's ratios are substantially the same):
Minimum First
Regulatory Regional
Requirement Bank
Total capital to risk-weighted assets 8.00% 16.20%
Tier 1 capital to risk-weighted assets 4.00% 14.94%
Leverage - Tier 1 capital to average total assets (Note 14) 7.00% 8.08%
The Company has a nonqualified employee stock option plan that authorizes the
issuance of up to 350,000 shares of its common stock and expires in 2000.
Options may be granted at a price not less than the fair market value of the
stock at the date of grant, are exercisable and expire as determined by the
Board of Directors.
During 1994, the Board of Directors authorized cancellation of the outstanding
options under the plan of 275,000 shares at an exercise price of $2.75 per
share. These options were subsequently reissued at an exercise price of $2.00
per share, vesting over a five-year period, and expiring on January 1, 2000. In
addition, additional options were granted during the year to officers and Board
members for an aggregate of 40,000 shares.
At December 31, 1994 and 1993, the Company had options outstanding granted under
the plan for 315,000 shares and 275,000 shares at exercise prices of $2.00 per
share and $2.75 per share, respectively.
At December 31, 1994, the Company has no longer any options outstanding granted
under a prior plan. The remaining outstanding option for 5,000 shares at $3.25
per share expired during the year. No additional options will be granted under
the prior plan.
64
9. INTEREST EXPENSE
A summary of interest expense on deposits for the years ended December 31, 1994,
1993 and 1992 is as follows:
1994 1993 1992
Money market savings/NOW account deposits $2,000,000 $2,054,000 $2,569,000
Time deposits under $100,000 149,000 637,000 556,000
Time deposits of $100,000 or more 256,000 437,000 1,043,000
Savings deposits 27,000 28,000 30,000
---------- ---------- ----------
$2,432,000 $3,156,000 $4,198,000
========== ========== ==========
The aggregate amount of time deposits in denominations of $100,000 or more
outstanding as of December 31, 1994 and 1993 was approximately $8,946,000 and
$7,569,000, respectively.
10. OTHER OPERATING INCOME
Included in other operating income for the years ended December 31, 1994, 1993
and 1992 are the following items:
1994 1993 1992
Customer service fees $424,000 $345,000 $360,000
Gain on sale of loans 11,000 68,000 232,000
Gain on sale of investment securities 6,000
Income from real estate owned 365,000
Other 7,000 4,000 3,000
-------- -------- --------
Total $807,000 $417,000 $601,000
======== ======== ========
11. OTHER OPERATING EXPENSES
Included in other operating expenses for the years ended December 31, 1994, 1993
and 1992 are the following items:
1994 1993 1992
Custodial and other services provided
for customers $1,172,000 $1,068,000 $ 958,000
Professional services 381,000 464,000 314,000
FDIC assessment 339,000 354,000 289,000
Data processing fees 281,000 248,000 243,000
Litigation 150,000
General insurance 126,000 104,000 108,000
Directors' fees 87,000 103,000 108,000
Equipment expense 83,000 102,000 97,000
Other 936,000 714,000 647,000
---------- ---------- ----------
Total $3,405,000 $3,307,000 $2,764,000
========== ========== ==========
65
12. RELATED PARTY TRANSACTIONS
Transcorp Pension Services, Inc. ("Transcorp"), a corporate customer of the
Bank, is an administrator of self-directed Individual Retirement Account and
Simplified Employee Pension retirement plans for which the Bank provides
custodial and other services. Deposits of custodial clients of the plans
Transcorp administers represent approximately 63% and 62% of the Bank's total
deposits as of December 31, 1994 and 1993, respectively. The deposit and
service relationships with Transcorp are governed by an agreement that requires,
among other things, not less than one year's prior notice of intent by either
party to terminate the relationships.
For the years ended December 31, 1994, 1993 and 1992, the Bank paid interest of
$1,733,000, $1,727,000 and $2,036,000, respectively, on deposits of Transcorp
custodial clients, and paid $1,105,000, $1,054,000 and $949,000, respectively,
in administrative fees to Transcorp on behalf of its custodial clients.
In 1992 the Bank entered into an agreement with a director under which the Bank
receives management and consulting services for properties. Total payments in
1994 and 1993 to the director under the agreement were $71,000 and $38,000,
respectively. In the opinion of the Bank, the terms of the agreement are no
less favorable to the Bank than could have been obtained in a similar
transaction with a person unaffiliated with the Bank.
13. FINANCIAL INFORMATION REGARDING FIRST REGIONAL BANCORP
As of December 31, 1994 and 1993, the Company's investment in the Bank was
recorded on the equity method at $10,034,000 and $9,139,000, respectively. The
Company's cash balance was $54,000 and $73,000 as of December 31, 1994 and 1993,
respectively. There were no other significant assets or liabilities recorded on
the Company's balance sheets. The Company's significant operations consist
solely of the recognition of its equity in the income or loss of the Bank.
There were no dividends paid by the Bank to the Company in 1994, 1993 or 1992.
Federal law restricts the Bank from extending credit to the Company since any
such extensions of credit are subject to strict collateral requirements.
14. REGULATORY MATTERS
The Bank's principal regulators are the FDIC and the California State Department
of Banking, and the Company is regulated by the Federal Reserve Bank. At
periodic intervals, these agencies examine the Bank and the Company as part of
their legally prescribed oversight responsibilities.
Following an examination of the Bank in 1992, the FDIC and the Bank entered into
a regulatory agreement (an Order to Cease and Desist - the "Order") in February
1993. Under the Order, the Bank agreed, among other things, to: (a) reduce the
level of its classified assets in accordance with an agreed-upon schedule, (b)
maintain an adequate allowance for loan losses, (c) maintain a leverage capital
ratio of at least 7%, (d) develop written policies in a number of areas, (e)
obtain FDIC approval prior to the payment of cash dividends or replacement of
any director or executive officer of the Bank, and (f) furnish periodic progress
reports to the FDIC. Primarily as a result of the findings of the FDIC
examination, the Federal Reserve Bank and the Company entered into a Memorandum
of Understanding (the "MOU") under which the Company agreed to many of the same
conditions contained in the Order and also agreed not to pay dividends or incur
debt without the prior approval of the Federal Reserve Bank.
66
The FDIC performed its most recent follow-up examination as of May 9, 1994,
during which it was noted that the Bank had made substantial progress in
complying with the provisions of the Order but that full compliance had yet to
be achieved. The FDIC acknowledged that concerted efforts had been made by both
management and the Board of Directors in improving the Bank's condition.
Management believes that the Bank is now substantially in compliance with all
provisions of the Order, and actions are being taken by the Bank's management
and the Board of Directors to ensure that the remaining areas of noncompliance
are addressed. Failure to comply with the Order or the MOU or to meet required
minimum capital levels could subject the Company and the Bank to additional
regulatory sanctions.
* * * * * *
67
INDEX TO EXHIBITS
-----------------
Exhibit No.
-----------
3.1 Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-14, File No. 2-75140 filed December
2, 1981 and incorporated herein). Certificate of Chairman and Chief Executive
Officer and Assistant Secretary evidencing amendment of Articles of
Incorporation by written consent of shareholders on November 24, 1987 and filed
with the Secretary of State of the State of California on December 7, 1987
(filed as Exhibit 3.1 to the Company's Annual Statement on Form 10-K for the
year ended December 31, 1987 and incorporated herein). Certificate of Chairman
and Chief Executive Officer and Assistant Secretary evidencing amendment of
Articles of Incorporation adopted at Annual Shareholders Meeting on May 19, 1988
and filed with the Secretary of State of the State of California (filed as
Exhibit 3.1 to the Company's Annual Statement on Form 10-K for the year ended
December 31, 1988 and incorporated herein).
3.2 Bylaws, as amended (filed as Exhibit 3(b) to the Company's
Registration Statement on Form 10, File No. 0-10232 filed in March, 1982 and
incorporated herein). Certificate of Assistant Secretary evidencing amendment
adopted at Annual Shareholders Meeting on May 16, 1985 (filed as Exhibit 3.2 to
the Company's Annual Statement on Form 10-K for the year ended December 31, 1985
and incorporated herein).
10.1 1982 Stock Option Plan and Agreement, as amended (filed as Exhibit
10.1 to Company's Annual Statement on Form 10-K for the year ended December 31,
1982 and incorporated herein).
10.2 1991 Stock Option Plan and Agreement (filed as Exhibit 10.4 to
Company's Annual Statement on Form 10-K for the year ended December 31, 1991 and
incorporated herein).
10.3 Lease for ground and eighth floor premises at 1801 Century Park East,
Los Angeles, California (filed as Exhibit 10.3 to Company's Annual Statement on
Form 10-K for the year ended December 31, 1993 and incorporated herein).
11 Statement regarding computation of per share earnings (see Note 1 of
the Notes to Consolidated Financial Statements at page 55 of this report on Form
10-K
22 Subsidiary of Registrant
27 Financial Data Schedule Article 9