FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended March 31, 1995
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Commission File Number 0-10232
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FIRST REGIONAL BANCORP
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(Exact name of registrant as specified in its charter)
California 95-3582843
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State or other jurisdiction of IRS Employer
incorporation or organization Identification Number
1801 Century Park East, Los Angeles, California 90067
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Address of principal executive offices Zip Code
(310) 552-1776
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Registrant's telephone number, including area code
Not applicable
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Former name, former address, and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, No Par Value 2,398,800
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Class Outstanding on May 12, 1995
FIRST REGIONAL BANCORP
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INDEX
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Page
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial
Condition 4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Part II - Other Information
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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The financial statements called for under this item appear on the pages which
immediately follow.
3
FIRST REGIONAL BANCORP AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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(In Thousands)
March 31 December 31,
1995 1994
-------------- ------------
ASSETS (unaudited)
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Cash and due from banks $ 4,972 $ 4,677
Time deposits with other financial
institutions 6,528 6,627
Investment securities 13,665 11,807
Funds sold 9,820 21,300
Loans, net of allowance for losses of
$1,703,000 in 1995 and $1,390,000 in 1994 78,253 76,581
Premises and equipment, net of accumulated
depreciation 153 166
Other real estate owned 1,119 1,163
Accrued interest receivable and other assets 2,394 1,966
-------- --------
Total Assets $116,904 $124,287
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
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Liabilities:
Demand deposits $ 14,338 $ 18,777
Savings deposits 4,977 5,147
Money market deposits 75,601 78,295
Time deposits 10,768 11,447
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Total deposits 105,684 113,666
Securities sold under agreement to repurchase 0 0
Accrued interest payable and other liabilities 478 399
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Total Liabilities 106,162 114,065
Shareholders' Equity:
Common Stock, no par value, 50,000,000 shares
authorized; 2,398,800 shares outstanding in
1995 and 1994, respectively 11,332 11,332
Retained earnings (597) (1,105)
Net unrealized gain (loss) on securities
available for sale 7 (5)
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Total Shareholders' Equity 10,742 10,222
-------- --------
Total Liabilities and Shareholders' Equity $116,904 $124,287
======== ========
The accompanying notes are an integral part of these statements.
4
FIRST REGIONAL BANCORP AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
1995 1994
---- ----
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $2,195 $1,789
Interest on time deposits with
other financial institutions 102 64
Interest on investment securities 194 12
Interest on funds sold 209 145
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Total revenue from earning assets 2,700 2,010
COST OF FUNDS:
Interest on deposits 610 611
Interest on securities sold under
agreements to repurchase 0 0
Total cost of funds ------ ------
610 611
Net revenue from earning assets
before provision for loan losses 2,090 1,399
PROVISION FOR LOAN LOSSES 275 50
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Net revenue from earning assets 1,815 1,349
OPERATING INCOME
Net gains (losses) on sales of investment
securities 0 0
Other revenue 125 400
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Total operating income 125 400
OPERATING EXPENSES:
Salaries and related benefits 521 503
Occupancy expense 83 91
Other expenses 766 999
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Total operating expenses 1,370 1,593
Income before provision for income taxes 570 156
PROVISION FOR INCOME TAXES 63 20
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NET INCOME $ 507 $ 136
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NET INCOME PER SHARE (Note 2) $0.21 $0.06
====== ======
The accompanying notes are an integral part of these statements.
5
FIRST REGIONAL BANCORP AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In Thousands)
(Unaudited)
Three Months Ended
March 31,
------------------
1995 1994
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OPERATING ACTIVITIES
Net Income $ 507 $ 136
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 275 50
Provision for depreciation and
amortization 14 14
Amortization of investment security
premiums 0 0
Accretion of investment security
discounts (151) (11)
Decrease (increase) in interest
receivable (98) 331
Increase (decrease) in interest payable (7) (16)
Increase (decrease) in taxes payable 63 19
Net increase (decrease) in other
liabilities 23 17
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Net cash provided by
operating activities $ 626 $ 540
INVESTING ACTIVITIES
Increase in investments in time
deposits with other financial
institutions $ 99 $ (890)
Increase in investment securities (1,694) (966)
Net decrease (increase) in loans (1,947) 9,954
Decrease (increase) in premises and equipment (1) (6)
Decrease (increase) in other real estate owned 44 (38)
Net decrease (increase) in other assets (330) 22
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Net cash provided by
investing activities $(3,829) $8,076
6
Three Months Ended
March 31,
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1995 1994
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FINANCING ACTIVITIES
Net increase (decrease) in demand
deposits, savings accounts, and
money market accounts $ (7,302) $ (619)
Net increase (decrease) in time deposits (680) (4,415)
Increase (decrease) in securities sold
under agreement to repurchase 0 0
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Net cash provided by
financing activities $ (7,982) $(5,034)
Increase (decrease) in cash and cash
equivalents $(11,185) $ 3,582
Cash and cash equivalents, beginning of
period 25,977 22,971
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Cash and cash equivalents, end of period $ 14,792 $26,553
======== =======
The accompanying notes are an integral part of these statements.
7
FIRST REGIONAL BANCORP AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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March 31, 1995
(Unaudited)
NOTE 1 - The consolidated financial statements include the accounts of First
Regional Bancorp (the Company), a bank holding company, and its
wholly-owned subsidiary, First Regional Bank (the Bank). Certain
amounts in the 1994 financial statements have been reclassified to be
comparable with the classification used in the 1995 financial
statements.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the financial
position as of March 31, 1995 and December 31, 1994 and the results of
operations for the three month periods ended March 31, 1995 and 1994.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the financial
statements and the notes included in the Company's 1994 annual report.
NOTE 2 - Per share information is based on the number of common shares
outstanding, which was 2,398,800 for 1995 and 1994. No adjustment has
been made for outstanding stock options.
NOTE 3 - As of March 31, 1995 the Bank had a total of $334,000 in standby
letters of credit outstanding. No losses are anticipated as a result
of these transactions.
NOTE 4 - The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan," effective
January 1, 1995. This Statement defines an impaired loan as one for
which it is likely that an institution will be unable to collect all
amounts due (that is, all principal and interest) according to the
contractual terms of the loan. The Statement generally requires
impaired loans to be measured at the present value of expected future
cash flows discounted at the effective interest rate of the loan, or,
as an expedient, at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. For the
quarter ended March 31, 1995 the Company had identified loans having
an aggregate average balance of $1,179,977 which it concluded were
impaired under SFAS No. 114. The Company's policy is to discontinue
the accrual of interest income on impaired loans, and to recognize
income on such loans only after the loan principal has been repaid in
full. Pursuant to this policy, the Company had already ceased to
accrue interest on the impaired loans, and had established a general
loss reserve for each of the loans which at March 31, 1995 totalled
$446,239 for the loans as a group. As the loss reserves established
by the Company were greater than those called for under SFAS No. 114,
the adoption of
8
SFAS No. 114 had no effect on the Company's financial statements as of
March 31, 1995.
NOTE 5 - The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Investments in Certain Debt and Equity
Securities," effective January 1, 1994. This Statement supersedes
SFAS No. 12, and significantly amends SFAS No. 65 and SFAS No. 60, the
standards previously used by the Company. The effect of adopting SFAS
No. 115 on the Company's financial statements was to increase
shareholders' equity at March 31, 1995 by $7,000 from the level which
would have existed had SFAS No. 115 not been adopted. Because the
applicable investment securities are classified by the Company as
"available for sale," there was no effect on the Company's income
statement.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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SUMMARY
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First Regional Bancorp did not conduct any significant business activities
independent of First Regional Bank. The following discussion and analysis
relates primarily to the Bank.
At March 31, 1995 total assets were $116,904,000 compared to $124,287,000 at
December 31, 1994, an decrease of $7,383,000 or 6%. For the most part, this
shrinkage was the result of a decrease in deposits of $7,982,000, or 7%, to
$105,684,000 on March 31, 1995 from $113,666,000 at December 31, 1994; most of
this reduction took place in demand deposits, although smaller decreases in the
areas of savings deposits, money market deposits, and time deposits were also
experienced. The Company did experience some modest growth in net loans, which
rose by $1,672,000 or 2% to $78,253,000 at March 31 compared to a level of
$76,581,000 at December 31, 1994. The shrinkage in deposits combined with the
loan growth gave rise to a drop in liquid assets, principally funds sold.
The Company earned a profit of $507,000 in the three months ended March 31,
1994, compared to earnings of $136,000 for the first quarter of 1994. The
increase in earnings primarily reflects growth in net interest revenue resulting
from the historically large difference between the Company's yield on average
assets and its cost of funds; lower levels of nonearning assets; a shift towards
higher yielding asset categories; and lower expenses related to the collection
or holding of nonperforming assets.
NET INTEREST INCOME
- -------------------
Total revenue from earning assets rose by $690,000 (34%) for the three months
ended March 31, 1995 compared to the same period in 1994. This revenue increase
came despite the lower level of earning assets which prevailed in 1995 compared
to the prior year, due to the shift in asset composition toward high-yield
assets (such as loans) and away from lower yielding assets (such as funds sold).
In addition, while yields on earning assets have risen steadily over the past
year, the cost of funds has been much more stable, with the result that net
interest margins have grown substantially. Thus, in the first quarter of 1995
revenue from earning assets rose sharply, but interest expense remained
essentially stable. The combined effect of these changes was net revenue from
earning assets of $2,090,000 in the first quarter of 1995 compared to $1,399,000
for the first three months of 1994.
OPERATING INCOME
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Other revenue fell to $125,000 in the first quarter of 1995 compared to $400,000
in the three months ended March 31, 1994. The decrease in this category of
income was largely due to the 1994 receipt of rental income on parcels of other
real estate owned which were acquired by foreclosure. Other income categories
in this area were virtually unchanged from prior year levels. No gains on
securities sales were realized in the first quarter of 1995 or 1994.
10
PROVISION FOR POSSIBLE LOSSES
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The allowance for possible losses in intended to reflect known and inherent
risks in a portfolio. The allowance for possible losses is increased by
provisions for possible losses, and is decreased by net chargeoffs. Management
continues to evaluate the portfolio in light of many factors, including loss
experience and current economic conditions. Management believes the allowance
for possible losses is adequate to provide for losses that might be reasonably
anticipated.
The allowance for possible losses was $1,703,000 and $1,390,000 (or 2.13% and
1.78% of gross outstanding loans) at March 31, 1995 and December 31, 1994
respectively. Reflecting the Company's ongoing analysis of the risks presented
by its loan portfolio, provisions for possible losses were $275,000 for the
three month period ended March 31, 1995 compared to $50,000 for the first
quarter of 1994. For the three months ended March 31, 1995, the Company
generated net recoveries of previous loan chargeoffs of $38,000; by comparison,
in the first quarter of 1994 the Company experienced net loan charge offs of
$524,000.
In addition, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," effective
January 1, 1995. This Statement defines an impaired loan as one for which it is
likely that an institution will be unable to collect all amounts due (that is,
all principal and interest) according to the contractual terms of the loan. The
Statement generally requires impaired loans to be measured at the present value
of expected future cash flows discounted at the effective interest rate of the
loan, or, as an expedient, at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. For the quarter
ended March 31, 1995 the Company had identified loans having an aggregate
average balance of $1,179,977 which it concluded were impaired under SFAS No.
114. The Company's policy is to discontinue the accrual of interest income on
impaired loans, and to recognize income on such loans only after the loan
principal has been repaid in full. Pursuant to this policy, the Company had
already ceased to accrue interest on the impaired loans, and had established a
general loss reserve for each of the loans which at March 31, 1995 totalled
$446,239 for the loans as a group. As the loss reserves established by the
Company were greater than those called for under SFAS No. 114, the adoption of
SFAS No. 114 had no effect on the Company's financial statements as of March 31,
1995.
OPERATING EXPENSES
- ------------------
Operating expenses decreased in the first quarter of 1995 compared to the same
period of 1994, although some categories of expense increased from the levels of
previous periods. Operating expenses fell to a total of $1,370,000 for the
three months ended March 31, 1995 from $1,593,000 for the same period in 1994.
Salary and related benefits increased slightly, rising from a total of $503,000
for the first quarter of 1994 to $521,000 for the same period in 1995, due to
modest increases in staffing which were partially offset due to ongoing
restraint in the hiring and compensation of personnel in the
11
various departments. Reflecting the renegotiation of the Company's premises
leases in mid-1993, occupancy expense fell again, to $83,000 in the first
quarter of 1995 from $91,000 for the same period in 1994. Other operating
expenses fell dramatically in 1995 compared to the prior year, falling to
$766,000 for the first quarter of 1995 from $999,000 for the first three months
of 1994. The major factors in this decrease were the absence of significant
costs of holding and maintaining other real estate owned compared to the prior
year, decreased collection and corporate legal fees, and lower premiums for
deposit insurance.
The combined effects of the above-described factors resulted in income before
taxes of $570,000 for the first quarter of 1995 compared to $156,000 for the
three months ended March 31, 1994. The Company's provision for taxes for the
first quarter rose to $63,000 in 1995 from just $20,000 in 1994. This brought
Net Income for the first quarter of 1995 to $507,000 compared to $136,000 for
the same period in 1994.
LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES
- --------------------------------------------------
The Company's financial position remains liquid. Total liquid assets (cash and
due from banks, time deposits with other financial institutions, investment
securities, and funds sold) stood at 33.1% of total deposits at March 31, 1995.
This level represents an decrease from the 39.1% liquidity level which existed
on December 31, 1994. In addition, however, at March 31, 1995 over $25 million
of the Bank's total loans consisted of government guaranteed loans, which
represent a significant source of liquidity due to the active secondary market
which exists for these assets. The ratio of net loans (including government
guaranteed loans) to deposits was 74.0% and 67.4% as of March 31, 1995 and
December 31, 1994, respectively.
Because customer deposits are the Company's principal funding source outside of
its capital, management has attempted to match rates and maturities of its
deposits with its investment and loan portfolios as part of its liquidity and
asset and liability management policies. The objective of these policies is to
limit the fluctuations of net interest income resulting from interest rate
changes. The table which follows indicates the repricing or maturity
characteristics of the major categories of the Bank's assets and liabilities,
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 cause 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.
One month Six months
Floating Less than but less than but less than
Category Rate one month six months one year
=======================================================================================
Fed funds sold 9,820 0 0 0
Time deposits with other banks 0 1,884 4,347 297
Investment securities 0 0 13,640 0
Subtotal 9,820 1,884 17,987 297
Loans 78,068 0 185 0
Total earning assets 87,888 1,884 18,172 297
Cash and due from banks 0 0 0 0
Premises and equipment 0 0 0 0
Other real estate owned 0 0 0 0
Other assets 0 0 0 0
Total non-earning assets 0 0 0 0
Total assets 87,888 1,884 18,172 297
Funds purchased 0 0 0 0
Repurchase agreements 0 0 0 0
Subtotal 0 0 0 0
Savings deposits 4,977 0 0 0
Money market deposits 75,601 0 0 0
Time deposits 0 6,537 3,450 756
Total bearing liabilities 80,578 6,537 3,450 756
Demand deposits 0 0 0 0
Other liabilities 0 0 0 0
Equity capital 0 0 0 0
Total non-bearing liabilities 0 0 0 0
Total liabilities 80,578 6,537 3,450 756
GAP 7,310 (4,653) 14,722 (459)
Cumulative GAP 7,310 2,657 17,379 16,920
12
One year Non-interest
but less than Five years earning
five years or more or bearing Total
============================================================================================
Fed funds sold 0 0 0 9,820
Time deposits with other banks 0 0 0 6,528
Investment securities 25 0 0 13,665
Subtotal 25 0 0 30,013
Loans 0 0 0 78,253
Total earning assets 25 0 0 108,266
Cash and due from banks 0 0 4,972 4,972
Premises and equipment 0 0 153 153
Other real estate owned 0 0 1,119 1,119
Other assets 0 0 2,394 2,394
Total non-earning assets 0 0 8,638 8,638
Total assets 25 0 8,638 116,904
Funds purchased 0 0 0 0
Repurchase agreements 0 0 0 0
Subtotal 0 0 0 0
Savings deposits 0 0 0 4,977
Money market deposits 0 0 0 75,601
Time deposits 25 0 0 10,768
Total bearing liabilities 25 0 0 91,346
Demand deposits 0 0 14,338 14,338
Other liabilities 0 0 478 478
Equity capital 0 0 10,742 10,742
Total non-bearing liabilities 0 0 25,558 25,558
Total liabilities 25 0 25,558 116,904
GAP 0 0 (16,920) 0
Cumulative GAP 16,920 16,920 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.
The Bank's investment portfolio continues to be composed of high quality, low
risk securities, primarily U.S. Treasury or Agency securities. As mentioned
above, no gains were recorded on securities sales in the first quarter of 1995
or 1994. At March 31, 1995 the Bank's investment portfolio contained gross
unrealized gains of $7,000 and and no gross unrealized losses; similarly, at
March 31, 1994 the portfolio contained no gross unrealized gains and gross
unrealized losses of $2,000. As discussed more fully in Note 5, the Company
adopted SFAS No. 115 in 1994, with the result that the unrealized loss of $2,000
gave rise to a $2,000 reduction in the Company's shareholders' equity. Because
the Company's holdings of securities are intended to serve as a source of
liquidity should conditions warrant, the securities have been classified by the
Company as "available for sale."
The Company continues to enjoy a strong capital position. Total capital was
$10,742,000 and $10,222,000 as of March 31, 1995 and December 31, 1994,
respectively. The Company's capital ratios for those dates in comparison
13
with regulatory capital requirements were as follows:
3-31-95 12-31-94
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Leverage Ratio (Tier I Capital
to Assets):
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 9.13% 8.08%
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 regulatory capital
requirements were as follows:
3-31-95 12-31-94
------- --------
Tier I Capital to Assets:
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 16.32% 14.94%
Tier I + Tier II Capital to Assets:
Regulatory requirement 8.00% 8.00%
First Regional Bancorp 17.59% 16.20%
The Company believes that it will continue to meet all applicable capital
standards.
INFLATION
- ---------
The impact of inflation on the Company differs significantly from other
industries, since virtually all of its assets and liabilities are monetary.
During periods of rising inflation, companies with net monetary assets will
always experience a reduction in purchasing power. Inflation continues to have
an impact on salary, supply, and rent expenses, but the rate of inflation in
general and its impact on these expenses in particular has remained moderate in
recent years.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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Litigation
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The Company 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
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No items were submitted to a vote of the Company's shareholders during the first
quarter of 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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Exhibits
- --------
There are no exhibits to this report.
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed during the first quarter of 1995.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST REGIONAL BANCORP
Date: May 12, 1995 /s/ Jack A. Sweeney
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Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: May 12, 1995 /s/ Thomas McCullough
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Thomas McCullough, Chief Financial Officer
16